UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

The Shaw Group Inc.

225-932-2500

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

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

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

Common stock, no par value, 61,183,489 shares outstanding as of April 13, 2004.

FORM 10-Q

TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

ITEM 1. — FINANCIAL STATEMENTS

THE SHAW GROUP INC. AND SUBSIDIARIES

(Continued)

The accompanying notes are an integral part of these statements.

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THE SHAW GROUP INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these statements.

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THE SHAW GROUP INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these statements.

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THE SHAW GROUP INC. AND SUBSIDIARIES

The accompany notes are an integral part of these statements.

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THE SHAW GROUP INC. AND SUBSIDIARIES

Note 1 — General Information

The accompanying unaudited condensed consolidated financial statements and financial information have been prepared in accordance with the interim reporting requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with generally accepted accounting principles have been condensed or omitted. Readers of this report should, therefore, refer to the consolidated financial statements and the notes included in Amendment No. 1 to our Annual Report on Form 10-K/A for the fiscal year ended August 31, 2003, of The Shaw Group Inc. filed with the Securities and Exchange Commission on November 12, 2003.

The financial information of The Shaw Group Inc. and its wholly-owned subsidiaries as of February 29, 2004 and for the three and six month periods ended February 29, 2004 and February 28, 2003, was not audited by our independent auditors. However, management believes it has made all adjustments (consisting of normal recurring adjustments) which are necessary to fairly present the results of operations for such periods. Results of operations for the interim periods are not necessarily indicative of results of operations that will be realized for the fiscal year ending August 31, 2004.

The preparation of unaudited condensed consolidated financial statements in conformity with Generally Accepted Accounting Principles (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and costs during the reporting periods. Actual results could differ materially from those estimates. On an ongoing basis, we review our estimates based on information that is currently available, and changes in facts and circumstances may cause us to revise these estimates.

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

Our foreign subsidiaries maintain their accounting records in their local currency (primarily British pounds, Australian and Canadian dollars, Venezuelan Bolivars and the Euro). 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 Statement of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation,” and SFAS No. 130, “Reporting Comprehensive Income.” Foreign currency transaction gains or losses are credited or charged to income.

During the three and six months ended February 29, 2004, we recognized foreign currency transaction losses of $2.6 million and $4.3 million primarily due to U.S. dollar denominated cash accounts held by our foreign subsidiaries whose functional currency strengthened against the U.S. dollar. Although these foreign currency transaction losses are reflected in the statements of operations, substantially all of these losses were unrealized and did not directly impact our cash position on a consolidated basis. Foreign currency transaction gains (losses) were gains of $0.1 million and losses of $0.1 million for the three and six months ended February 28, 2003, respectively.

Note 2 — Stock-Based Compensation

SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, allows companies to account for stock-based compensation by either recognizing an expense for the fair value of stock-based compensation upon issuance or by the intrinsic value method prescribed in Accounting Principles Board Opinion (“APB”) No. 25 and related interpretations. Our stock-based compensation consists of the issuance of stock options and restricted stock.

We account for our stock-based compensation under APB No. 25, which provides that no stock-based compensation expense is recognized if stock options are granted at an exercise price equal to the market value of the underlying stock at the date of grant.

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In addition, APB No. 25 provides that compensation expense related to restricted stock grants be measured at the market price of the stock on the date the restricted stock is granted, with no discount provided for the restrictions. The compensation expense is recognized over the periods benefited from the employees’ services which we believe is the period over which the restrictions lapse.

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 (loss) and earnings (loss) per common share would have approximated the pro forma amounts below (in thousands, except per share amounts):

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The fair value of each stock option was estimated on the date of the grant using the Black-Scholes option pricing model with the following weighted average assumptions:

The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options. The Black-Scholes model requires the use of highly subjective assumptions including the expected volatility of the underlying stock price. Changes in these subjective assumptions can materially affect the fair value estimates of our stock options. In addition, the Black-Scholes model does not consider specific vesting restrictions of the stock options and assumes that the stock options are fully transferable. The characteristics of traded options under the Black-Scholes model differ from the characteristics of stock options issued under our stock option plans. In addition, SFAS No. 123 provides no discount for the restriction placed on restricted stock grants.

We believe that existing option pricing models do not provide a reliable single measure of the fair value of our stock options and that the above pro forma disclosures under SFAS No. 123 do not necessarily reflect the effects on reported earnings for future years as options vest over several years and new awards are typically made.

Restricted Stock

Our 1993 Employee Stock Option Plan and 2001 Employee Incentive Compensation Plan allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. If termination of employment occurs prior to the lapse of these restrictions, the shares must be returned to us. During the six months ended February 29, 2004, we granted 380,773 shares of restricted stock under the 2001 Employee Incentive Compensation Plan to certain employees including our Chief Executive Officer, Chief Financial Officer and our President and Chief Operating Officer. In addition, we agreed to issue future restricted stock awards under this employee stock plan totaling 98,000 shares to our Chief Executive Officer and our President and Chief Operating Officer. We recorded unearned stock-based compensation as a component of shareholders’ equity totaling $5.4 million related to these restricted stock grants which is being amortized to compensation expense over the period the restrictions lapse (from 2 to 4 years). For the six months ended February 29, 2004, $0.5 million of stock-based compensation expense is included in general and administrative expenses on the accompanying statement of operations related to these restricted stock grants.

Note 3 — Capital Stock Transactions

On October 29, 2003, we issued 23 million shares of common stock, no par value per share, at $10 per share with related transaction costs of approximately $12.5 million, generating net proceeds of $217.5 million. Approximately $194.7 million of the net proceeds were used to repurchase a portion of our outstanding Liquid Yield Option^TM Notes or LYONs (see Note 8). The remaining net proceeds of $22.8 million plus interest earned is included in escrowed cash at February 29, 2004, and these proceeds, together with cash on hand are expected to be used to repurchase the LYONs as of May 1, 2004 in accordance with the terms of the LYONs Indenture (see Note 8).

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Note 4 — Acquisitions

The operating results of acquisitions are included in our consolidated financial statements from the applicable dates of the transactions. Pro forma information has not been disclosed for the fiscal year 2004 and 2003 acquisitions as the impact on an individual and aggregate basis is not deemed significant for the periods presented. During fiscal year 2003 and 2004, we completed five acquisitions that were accounted for as purchases. The purchase price allocation for certain acquisitions is preliminary and subject to revision up to one-year subsequent to the acquisition date. The following is a brief description of each acquisition.

Energy Delivery Services, Inc.

Effective December 31, 2003, we acquired all of the common stock of Energy Delivery Services, Inc. (EDS) from Duke Energy Global Markets, Inc. for a total purchase price, including direct acquisition costs, of approximately $22.7 million of which $18.7 million was paid in cash and $4.0 million was paid through transfer of the ownership of a portion of EDS’s receivables to the seller. EDS, renamed Shaw EDS, provides a full line of vertical services to utility companies seeking to upgrade, install and maintain their power grids and has been included in our Engineering, Construction & Maintenance (ECM) segment. Our preliminary purchase price allocation included approximately $11.1 million of goodwill, $11.9 million in accounts receivables, $6.0 million of equipment, $1.0 million in other assets and $7.3 million of liabilities.

Coastal Engineering and Environmental Consultants, Inc.

In October 2003, we acquired certain assets and the workforce of Coastal Engineering and Environmental Consultants, Inc. (Coastal) for a cost of $1.2 million in cash. Coastal specializes in engineering and consulting for Coastal Erosion and Wetlands Restoration projects. Coastal has been integrated into our Environmental & Infrastructure (E&I) segment. Approximately $1.1 million of goodwill was recorded related to this transaction.

Badger Technologies

On April 17, 2003, we acquired substantially all of the assets of Badger Technologies from Washington Group International, Inc. for approximately $17.7 million in cash subject to a working capital adjustment that could reduce the total purchase price. Badger Technologies develops, commercializes and licenses proprietary petrochemical and petroleum refining-related technologies. Badger Technologies was integrated into our ECM segment. We recorded approximately $8.0 million in goodwill and approximately $7.5 million in intangible assets related to certain process technologies acquired in the acquisition.

Envirogen, Inc.

On March 26, 2003, we acquired all of the common stock of Envirogen, Inc. for a purchase price of approximately $3.7 million in cash. Envirogen, previously a publicly traded company, specializes in remediation of complex contaminants in soil and groundwater and has been integrated into our E&I segment. Approximately $4.5 million of goodwill was recorded related to this transaction.

LFG&E Acquisition

On November 14, 2002, our E&I segment acquired certain assets of LFG&E International, Inc. (LFG&E) for cash of approximately $1.2 million. Approximately $0.4 million of goodwill was recorded related to this transaction. LFG&E provides gas well-drilling services to landfill owners and operators. On September 30, 2003, we acquired certain additional assets and assumed certain liabilities of LFG&E for cash of approximately $2.2 million. As of February 29, 2004, an additional $1.3 million in goodwill has been recorded in our preliminary allocation of purchase price.

Note 5 — Goodwill and Other Intangible Assets

Goodwill

The following table reflects the changes in the carrying value of goodwill from August 31, 2003 to February 29, 2004. Refer to Note 4 for a more detailed discussion of the accounting related to these acquisitions (in thousands).

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Preliminary determinations of goodwill associated with the EDS, Coastal, Badger Technologies, Envirogen and LFG&E acquisitions were recorded as of February 29, 2004. These purchase price allocations may change for up to one-year subsequent to the acquisition date, as we have not obtained all of the appraisals of the property and equipment and intangible assets purchased, nor have we completed all of our review and valuation procedures of the assets acquired and the liabilities assumed. We had deductible goodwill of approximately $176.7 million and $184.5 million as of February 29, 2004 and August 31, 2003, respectively.

We completed our annual impairment test for fiscal 2003 during the third quarter of fiscal 2003 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” and determined that goodwill was not impaired. However, certain of our businesses are subject to competitive pressures, cyclicality of operations, and may experience a protracted downturn in activity. As discussed in “Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations,” during the three and six months ended February 29, 2004, our ECM and Fabrication, Manufacturing & Distribution segment revenues and gross margins continued to be negatively impacted by a weakened demand for services in the domestic power and process industries which began in fiscal 2001. However, during the three and six months ended February 29, 2004, we have experienced an increase in demand for services in the domestic power and process industries. To the extent these weakened market conditions continue, the goodwill values of our businesses could be adversely impacted in the future and a goodwill impairment adjustment, which would reduce our earnings and our shareholders’ equity and could affect certain of our debt covenants, could occur. We will continue to evaluate the markets that drive our businesses and seek ways to profitably capitalize on changing market conditions.

Other Intangible Assets

At February 29, 2004 and August 31, 2003, identifiable intangible assets, other than contract adjustments, consisted of proprietary ethylene technology acquired in the Stone & Webster transaction in fiscal 2000, certain petro-chemical process technologies acquired in the Badger Technologies acquisition in fiscal 2003 (both of which are being amortized over fifteen years on a straight-line basis) and patents acquired in the IT Group transaction in fiscal 2002 (which are being amortized over ten years on a straight-line basis). Additionally, we recorded a customer relationship intangible related to the IT Group transaction, which is being amortized over ten years on a straight-line basis.

The gross carrying values and accumulated amortization of these identifiable intangible assets as of August 31, 2003, November 30, 2003 and February 29, 2004 are presented below (in thousands):

The annual amortization for the identifiable intangible assets is expected to be approximately $2.4 million related to proprietary technologies and patents and approximately $0.2 million related to customer relationships.

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Contract Adjustments and Accrued Contract Loss Reserves

The construction contract adjustments and contract loss reserves established in purchase accounting (related to the IT Group and Stone & Webster transactions) reduce direct costs as costs are incurred on the related contracts.

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

The increases and decreases in the contract liability (asset) adjustments and accrued contract loss reserves for the three and six months ended February 29, 2004 and February 28, 2003 represent allocation period adjustments related to the Stone & Webster and IT Group transactions. Contract asset adjustments are included in other current assets in the accompanying condensed consolidated balance sheet.

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Other Long Lived Assets

During the first quarter of fiscal 2004, we recorded accelerated amortization of $29.4 million on certain software assets as a result of a successful implementation of new software systems, including the conversion of historical financial and operating data, which had not previously been contemplated. In August 2002, we had developed a preliminary plan to convert certain of our operating units to new software systems. As a result, at that time, we accelerated the amortization of certain software assets that would be replaced based on the projected implementation plan and anticipated future use of the assets. During fiscal 2003, we reevaluated our preliminary plan based on the reorganization of our operating segments and developed a more aggressive conversion strategy that included implementation of new systems for substantially all of our significant operations during the first quarter of fiscal 2004. Our conversion to the new software systems, including the development of certain new software packages, was completed earlier and was more substantial than originally planned. Because implementation was substantially complete by November 30, 2003, we concluded that we should completely abandon our previous software platform. As a result, we accelerated the amortization of certain software assets that were replaced and recorded the aforementioned amortization expense of $29.4 million to general and administrative expenses in the consolidated statements of operations in the first quarter of fiscal 2004.

Note 6 - Inventories

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

Note 7 - Investment in Unconsolidated Entities

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Earnings (losses) from unconsolidated entities are summarized as follows (dollars in thousands):

Shaw-Nass Middle East, W.L.L. (“Shaw-Nass”) is one of our Fabrication, Manufacturing & Distribution segment’s joint ventures located in Bahrain. Advances to and receivables from Shaw-Nass relate primarily to inventory and equipment sold to the joint venture.

Our EntergyShaw L.L.C. (“EntergyShaw”) joint venture was created in fiscal 2001 to focus on the construction of power plants in North America and Europe. EntergyShaw is currently in the dissolution process which is expected to occur before the end of fiscal 2004. We may be required to make additional contributions to the joint venture prior to its final dissolution.

During fiscal 2002, our Fabrication, Manufacturing & Distribution segment invested approximately $3.1 million to acquire a 49% interest in a new pipe fabrication joint venture in China. The China joint venture became operational in late January 2004 and prior to that time, the losses recognized related primarily to start-up costs associated with the joint venture.

In connection with the IT Group transaction, we acquired an investment in the Stennis joint venture in our E&I segment. We have a 45% equity interest in this joint venture which provides facility management services to the Stennis Space Center in Mississippi.

During fiscal 2003, our E&I segment contributed $3.2 million to the PFH Management L.L.C., for a 30% equity interest. This joint venture was established to undertake the privatization of military housing for primarily Air Force personnel and their families at Patrick Air Force Base, Florida, under a design, build and rental housing contract.

We acquired a 19% equity interest in Nordic for an investment of $1.9 million in fiscal 2000. As our equity interest is less than 20% and we do not exercise any significant influence over the management of the operations, we do not recognize any income from this operation other than cash distributions in accordance with the cost method of accounting. No such distributions have been made since our initial investment.

In addition, we have executed certain contracts jointly with third parties through other joint ventures, limited partnerships and limited liability companies in connection with our operations. These investments generally represent our cash contributions and undistributed earnings (losses). These other joint ventures are not considered material on an individual basis.

In connection with certain housing privatization joint ventures, we are scheduled to make equity contributions of approximately $10.8 million in the next twelve months; however, the exact timing of these equity contributions is uncertain, as they are dependent on the progress of the underlying projects which may be delayed for various reasons.

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Note 8 — Debt

Credit Facility

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. On October 17, 2003, we amended our Credit Facility to increase the credit limit from $250 million to $300 million and to amend certain of the covenants contained therein.

The Credit Facility provides for both revolving credit loans and letters of credit within the $300 million limit. We have previously used the Credit Facility to provide working capital and to fund fixed asset purchases and acquisitions.

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) the base rate to 2.50% over the base rate. On February 29, 2004, the interest rate on the Credit Facility would have been either 5.0% (if the prime rate index had been chosen) or 3.60% (if the LIBOR rate index had been chosen). On February 29, 2004, we did not have outstanding borrowings under the Credit Facility but had outstanding letters of credit of approximately $206.8 million.

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 million that are not used to purchase a similar asset or for a like business purpose within 90 days of the receipt thereof. Further, we are required to obtain the consent of the lenders to prepay or amend the terms of the 10.75% Senior Notes due 2010.

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 (including equipment and real estate which was added as collateral pursuant to the Third Amendment described below).

Effective January 30, 2004, we received approval from our bank lenders for a third amendment to our Credit Facility (Third Amendment) to amend various financial covenants and certain other terms in our Credit Facility and to address the impact of the net loss we reported in the first quarter of fiscal 2004 and the impact that loss would have had on our financial covenants in the future. In particular, the Third Amendment lowered the minimum level of EBITDA required and added a minimum working capital requirement. The Third Amendment also provides for a first lien on certain property, including equipment and real estate as collateral. The Third Amendment also increased our ability to obtain unsecured performance letters of credit outside of the Credit Facility from $50 million to $150 million. The Third Amendment did not change the interest rates or the total capacity to borrow or obtain letters of credit under the Credit Facility.

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The Credit Facility, as amended, contains certain financial covenants, including:

	•		a minimum leverage ratio of 3.5x through May 31, 2004 and 3.0x thereafter;
	•		a minimum fixed charge coverage ratio of 2.0x;
	•		a minimum net worth as defined by the Credit Facility;
	•		a defined minimum earnings before interest expense, income taxes, depreciation and amortization (EBITDA). EBITDA, as defined in the Credit Facility, is adjusted for certain non-cash items and for the pro forma impact of acquisitions (Adjusted EBITDA). The Third Amendment lowered the minimum Adjusted EBITDA covenant from a trailing twelve month $120 million to $15 million for the fiscal quarter ending February 29, 2004, $42.5 million for the two fiscal quarters ending May 31, 2004, $75 million for the three fiscal quarters ending August 31, 2004 and $110 million thereafter on a rolling twelve month basis; and
	•		a minimum working capital ratio requirement, as defined by the Credit Facility, of 1.0 to 1.0.

As of February 29, 2004, we were in compliance with the covenants contained in the Credit Facility.

The Credit Facility permits us to repurchase our LYONs obligations if, after giving effect to the repurchases, we have at least $50 million in availability under the Credit Facility and $75 million of cash and cash equivalents. 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 February 29, 2004, we had outstanding LYONs with an amortized value of $57.9 million and held $23.2 million in escrowed cash for the repurchase of LYONs (see Note 3).

As of February 29, 2004 and August 31, 2003, our foreign subsidiaries had short-term revolving lines of credit permitting borrowings totaling approximately $20.8 million and $17.3 million, respectively. These subsidiaries had outstanding borrowings under these lines of approximately $3.5 million and $1.3 million, respectively, at a weighted average interest rate of approximately 4.25% and 4.25%, respectively, at February 29, 2004 and August 31, 2003. These subsidiaries also had outstanding letters of credit under these lines of $3.3 million and $4.2 million, respectively, at February 29, 2004 and August 31, 2003, leaving $14.0 million of availability under these lines at February 29, 2004.

Senior Notes

On March 17, 2003, we issued and sold $253.0 million aggregate principal amount at maturity of 10.75% 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 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.

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In addition, we were required to register the Senior Notes with the Securities and Exchange Commission by September 13, 2003. The Senior Notes were not registered on that date, and, as a result, we incurred additional interest expense of 0.25% (approximately $0.1 million) until the registration statement became effective on December 2, 2003. In connection with the issuance of the Senior Notes, we recorded approximately $8.8 million of deferred debt issuance costs.

During the three and six months ended February 29, 2004 and February 28, 2003, we recognized, $1.1 million and $2.4 million and $2.3 million and $4.6 million, 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 February 29, 2004 and August 31, 2003, total unamortized deferred financing fees related to the LYONs, Senior Notes, and Credit Facility were $12.8 million and $14.1 million, respectively.

LYONs Convertible Securities

Effective May 1, 2001, we issued and sold $790.0 million (including $200.0 million to cover over-allotments) of 20-year, zero-coupon, unsecured, convertible debt, Liquid Yield Option™ 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 $490.0 million.

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 $256.7 million and an aggregate principal value of $384.6 million for a cost of $248.1 million. The purchase, after expenses and the write-off of unamortized debt issuance costs of $6.6 million, resulted in a net gain of $2.0 million. We used the total net proceeds, after fees, from the sale of the 10.75% Senior Notes due 2010 of $241.0 million and internal funds of $7.1 million to affect this repurchase.

During the fourth quarter of fiscal 2003, we repurchased additional LYONs with an amortized value of $21.5 million and an aggregate principal value of $32.0 million for a cost of $20.6 million. The purchase, after the write-off of unamortized debt issuance costs of $0.1 million, resulted in a net gain of $0.8 million.

In November 2003, pursuant to a tender offer which commenced on October 20, 2003, we completed the purchase of LYONs with an amortized value of $189.8 million and aggregate principal value of $280.4 million for a total cost of $189.3 million. Pursuant to a private purchase completed on November 26, 2003, we purchased additional LYONs with an amortized value of $5.4 million and aggregate principal value of $8.0 million for a total cost of $5.4 million. The two LYONs purchases, after expenses and the write-off of unamortized debt issuance costs of $1.7 million, resulted in a loss of $1.2 million reflected in the Loss on LYONs repurchase line item of the consolidated statement of operations for the six months ended February 29, 2004. These repurchases were funded with cash raised from our offering of 23 million shares of common stock, which closed on October 29, 2003 and generated net proceeds of $217.5 million (see Note 3). The remaining proceeds of $22.8 million from the common stock offering plus accrued interest are in escrowed cash on the balance sheet as of February 29, 2004.

The holders of the remaining LYONs, $57.9 million of amortized value as of February 29, 2004, 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 ($58.1 million at May 1, 2004). 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.

In addition, on April 2, 2004, we filed a Schedule TO (Tender Offer) with the Securities and Exchange Commission offering to purchase any or all of the outstanding LYONs that are submitted to us for purchase by the holders thereof. As of April 1, 2004, there was $85.0 million aggregate principal amount at maturity of LYONs outstanding, with an aggregate accreted value as of that date of approximately $58.0 million. We plan to fund the purchases of the tendered LYONs on May 1, 2004 using cash on hand. Depending on the amount of cash necessary to

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fund the repurchases of LYONs, we seek additional sources to fund the repurchases, including accessing the capital markets and, to the extent permitted under its terms, borrowings under our revolving credit facility, which would require the consent of our lenders.

Subsequent to the repurchase on May 1, 2004, any remaining holders also have the right to require us to repurchase the debt in cash, at the then-accreted value, if there is a change in control, as defined in the LYONs Indenture, 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.

Note 9 - Comprehensive Income (Loss)

Comprehensive income (loss) for a period encompasses net income (loss) and all other changes in our shareholders’ equity other than changes from transactions with our investors. Comprehensive income (loss) was comprised of the following for the periods indicated (in thousands):

The foreign currency translation adjustments relate to the varying strength of the U.S. dollar in relation to the British pound, Venezuelan Bolivar, Australian and Canadian dollars and the Euro. The gains in 2004 and 2003 are primarily the result of the strengthening of the British pound and the Euro in relation to the U.S. dollar.

As of February 28, 2003, we recorded a $6.3 million net of tax liability for our Canadian defined benefit retirement plan and one of our United Kingdom (U.K.) 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 shareholders’ equity and is, therefore, reflected, net of tax, as a component of accumulated other comprehensive income (loss) on the accompanying condensed consolidated balance sheets as of February 29, 2004 and February 28, 2003. Our hedging activities were not material.

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Note 10 - Business Segments

We segregate our business activities into three operating segments: Engineering, Construction & Maintenance (ECM) segment, Environmental & Infrastructure (E&I) segment, and Fabrication, Manufacturing & Distribution segment.

The following table presents information about segment results of operations and assets for the periods indicated (in thousands):

Segment income (loss) before income taxes does not include any Corporate management charges. Corporate management charges to segments were $13.6 million and $27.5 million and $12.8 million and $23.0 million for the three and six months ended February 29, 2004 and February 28, 2003, respectively. In fiscal 2003, Corporate began allocating certain depreciation to its segments; however, such assets remain at the Corporate level. The total depreciation allocated is as follows (in thousands):

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

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Note 11 - Earnings (Loss) Per Common Share

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

Weighted-average incremental shares that were excluded from the calculation of diluted income (loss) per share because they were antidilutive follow (in thousands):

On April 2, 2004, we filed a Schedule TO (Tender Offer) with the Securities and Exchange Commission offering to repurchase any or all outstanding LYONs that are submitted to us for purchase by the holders on May 1, 2004 (see Note 16).

Note 12 - Claims on Major Projects

We include in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts, claims representing the estimated recovery of costs incurred on contracts to the extent it is probable that such claims will result in additional contract revenue and the amount that such additional revenues can be reliably estimated. Summarized below is a discussion of claims on major projects as of February 29, 2004.

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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 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 their 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, 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. 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 which was assigned by them to their lenders.

During fiscal 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 fiscal 2003.

For the first quarter ended November 30, 2003, we recorded an additional loss on these two projects of $39.3 million ($4.8 million of which was reversal of profit recognized prior to fiscal 2004). Approximately $34.5 million represents actual and estimated increased costs to complete the Covert project primarily due to the failure of installed equipment, required rework and vendor and subcontractor delays. The $39.3 million loss was net of additional expected claims recovery of approximately $1.2 million.

During the first quarter of fiscal 2004, we notified the owner of substantial completion on two of the three power island units on Covert and communicated that the remaining unit would achieve substantial completion in January 2004. We also communicated that the total facility would achieve substantial completion in February 2004. We notified the owner of substantial completion on the Harquahala facility on December 24, 2003.

While we previously demonstrated substantial completion on all six units, the owners did not accept our various unit and facility completion dates and continued to assess liquidated damages. The owner accepted substantial completion on the six units on both projects, but has not accepted facility completion on either project, and continues to assess liquidated damages on both projects. We firmly disagree with this position and believe we will ultimately prevail on this issue. We estimate the owners will claim approximately $53.1 million in liquidated damages in total on the two projects, although the assessment could be higher. As of February 29, 2004, the owners have withheld $35.7 million from milestone payments due us as an offset to their assessment of liquidated damages. On March 29, 2004, we filed liens against both projects and expect to initiate arbitration regarding our claims.

On February 20, 2004, we were notified by the lenders of the Harguahala project of their intention to draw $18.7 million under the existing $32.5 million letter of credit for assessed liquidated damages. We sought an injunction in the Supreme Court of the State of New York to preclude them from drawing under the letter of credit and as a result of these legal proceedings, the lenders have agreed not to draw on the letter of credit unless they are successful in arbitration on the underlying claims. We have commenced arbitration which is expected to conclude in approximately eighteen months.

Based on our evaluation and advice of legal counsel, we believe we have defenses to the owners’ claims of liquidated damages. We intend to vigorously contest the assessment. Additionally, we believe the delays were primarily caused by our vendors, subcontractors and equipment manufacturers from whom we may collect delay and related damages and we are pursuing these actions. For these reasons, our revenue and cost estimates reflect our expectation that we will not incur liquidated damages in excess of amounts we believe would be recoverable from others. However, there can be no assurance that delay damages will not have to be paid. If we are required to pay the

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owners delay damages that we cannot recover from subcontractors, vendors or equipment manufacturers, that amount will be recorded as a loss.

Unrelated to the claims for delay damages discussed above, we have recorded approximately $34.4 million in claims receivable from the owners, vendors, subcontractors, equipment manufacturers and insurance. Based on our evaluation of the contractual terms, our claims documentation, and the advice of legal counsel, we believe we have a strong basis for these claims (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; but we have only recorded a claim receivable for the portion that we estimate will ultimately be collected. Recovery of the claims is dependent upon our negotiations, arbitration and litigation with the owners and their lenders, several subcontractors, vendors and equipment manufacturers. Due to the uncertainties surrounding litigation or arbitration of this nature, we cannot provide assurances to you as to the outcome of these claims or their collectibility.

If we collect amounts different than the amounts that we have recorded as claims receivable of $34.4 million, that difference will be recognized as income or loss. Timing of collection is uncertain at this time, but is not expected in the next twelve months unless a settlement occurs or the disputes are resolved through the dispute resolution process pursuant to the contract.

The following table summarizes contract amounts due from the owners and claims recorded on these projects, excluding claims related to liquidated damages (in millions):

(1)

Claims from subcontractors and others were reduced in March 2004 as we drew $25.6 million on a letter of credit posted by the turbine manufacturer on the Covert project (see discussion below).

The above amounts are recorded in the following balance sheet accounts at February 29, 2004 (in millions):

In March 2004, we drew the entire amount available under a letter of credit posted by the turbine manufacturer on the Covert project for $25.6 million. The turbine manufacturer disputes the draw under the letter of credit and has initiated arbitration. We believe we will prevail in this matter and believe the draw under the letter of credit is in accordance with the terms of the contract. The turbine manufacturer has also filed a demand for arbitration for approximately $2.7 million in alleged unpaid technical assistance services.

In addition, the owners of the two projects have asserted that we are required, under the terms of the contract, to post a conditional letter of credit of approximately $43.1 million for basic warranty work needed subsequent to facility acceptance of the two projects. Until all outstanding disputes are resolved, we do not intend to post a letter of credit.

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Although NEG, the parent of the project entities, 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 to these projects.

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, which are ongoing, and the results of litigation. We cannot assure you as to the timing or outcome of these negotiations or results of litigation. In addition, we hold liens against the projects in connection with our claims under the contract. We cannot provide assurances to you of the value of such liens or our ability to execute on such liens in a timely manner.

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 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 March 2005. Unless we reach a settlement prior to the trial date, we would not expect recovery of disputed amounts due from AES before 2005. As of February 29, 2004, there have been no significant changes with regard to this project when compared to August 31, 2003.

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 ($3.5 million of which we have collected) that we expect to recover from insurance proceeds related to the fire and backcharges from subcontractors and vendors. The $3.5 million includes a $1.5 million draw under a letter of credit posted by Parsons for liquidated damages assessed by us. Parsons disputes our claims and has filed a counterclaim alleging payments due of $1.9 million and the return of the $1.5 million letter of credit draw.

Of the original $99.0 million contract price, AES has not paid $21.5 million of billed milestones and $7.1 million of retention. In addition, $13.6 million of milestones remain unbilled related to final completion and acceptance, which we expect to occur during our third fiscal quarter of 2004. Under the terms of the EPC contract, AES, at its option, may pay up to $27.7 million of the contract price in subordinated notes or cash. The subordinated notes, $14.7 million of which we consider as issued as of August 31, 2003 for payment of billed milestones, bear interest at prime plus 4% and mature in October 2009. There have been no additional milestone billings on this project for the six months ended February 29, 2004. 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. In August and September 2003, AES drew the full amount of the letters of credit in two draws of $13.9 million and $14.1 million, respectively. We have recorded an additional receivable of $28.0 million from AES for reimbursement of these draws which remained outstanding as of February 29, 2004. We recorded revenue of $43.1 million and a loss of $2.3 million from this contract for the year ended August 31, 2003. For the three and six months ended February 29, 2004, no gross margin has been recorded from this contract.

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The following table summarizes contract amounts due from AES and claims recorded on the project (in millions):

(1)

Of the total milestones unbilled at February 29, 2004, $13.0 million could be paid by AES in Subordinated Notes.

The above amounts are all recorded in costs and estimated earnings in excess of billings on uncompleted contracts including claims on the condensed consolidated balance sheet at February 29, 2004.

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 others of $3.7 million, the difference would be recognized as income or loss.

AES has assessed and billed us approximately $40.0 million in 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 recognized a reduction of revenue of approximately $4.3 million of liquidated damages billed to us in the fourth quarter of fiscal 2003. Of the remaining $35.7 million of liquidated damages, we have excluded $17.8 million from our cost estimates and we have recorded recoveries of approximately $17.9 million from subcontractors and vendors, including the turbine manufacturer. In the first quarter of fiscal 2004, we drew down $15.0 million from a letter of credit posted by the turbine manufacturer. The turbine manufacturer disputes the letter of credit draw and has initiated arbitration through a counterclaim for the return of the $15.0 million letter of credit draw and has asserted additional claims of $12.7 million for equipment, parts and services allegedly provided.

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

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If we are required to pay liquidated damages to AES of more than the $8.0 million that we recorded in the fourth quarter of fiscal 2003 and are unable to recover that excess amount from our subcontractors or vendors, then that difference would be recognized as a loss.

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, which are ongoing, and the results of litigation. We cannot assure you as to the timing or outcome of these negotiations or 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. We cannot provide assurances to you of the value of such lien or our ability to execute on such lien in a timely manner.

Accounts Receivable

In addition to claims on major projects, accounts receivable on the accompanying consolidated balance sheets as of February 29, 2004 and August 31, 2003 included the following:

Unbilled accounts receivables become billable according to the contract terms which vary significantly but usually consider the passage of time, achievement of certain milestones or completion of the project. We believe that substantially all such unbilled amounts will be billed and collected over the next twelve months. Retainage represents amounts that are typically withheld from progress billings by our customers until the completion of a project and, in some instances, for even longer periods. Retainage may also be subject to specific restriction conditions such as performance or fulfillment guarantees (see Note 15).

Note 13 - Assets Held for Sale

During the second quarter of fiscal 2004, we began actively marketing for sale two fabrication facilities in an effort to consolidate operations and reduce costs within our Fabrication, Manufacturing & Distribution segment. The operations of these two facilities have been absorbed by other fabrication facilities with no expected impact to revenue or gross margin. In addition, we also began actively marketing for sale certain investment real estate property.

The total carrying value of these assets held for sale is approximately $6.3 million which is included in prepaid expenses and other current assets on the accompanying condensed balance sheet as of February 29, 2004. No gain or loss has been recognized for the three and six months ended February 29, 2004 as the estimated fair value less costs to sell of each property exceeds its carrying value.

Note 14 - New Accounting Pronouncements

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Series Interpretation No. (FIN) 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

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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 FIN 46 apply immediately to variable interest entities created after January 31, 2003 and existing variable interest entities at the end of the period ending after March 15, 2004 (May 31, 2004 for us). There was no impact to our consolidated financial statements as of February 29, 2004 and for the three and six months ended February 29, 2004 for entities created after January 31, 2003.

Common in the engineering, procurement and construction industries, we enter into joint ventures and limited partnerships which are generally created to conduct operating activities on our behalf as well as other third parties. As of February 29, 2004, we have investments and advances to approximately 65 unconsolidated entities. The ownership interest and terms of each joint venture and limited partnership agreement are different but may include financing from third party lenders and committed funding level requirements. In addition, we may be the managing partner for some of these entities where we may have the ability to exercise significant influence over operating and financial policies. We continue to evaluate the applicability of FIN 46 to these joint ventures and limited partnerships created prior to January 31, 2003; however, we have not yet finalized our analysis of each unconsolidated entity at this time.

Note 15 - Contingencies and Commitments

Guarantees

In the ordinary course of business, 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 the letters of credit. At February 29, 2004, the amount of outstanding letters of credit was approximately $206.8 million.

During the six months ended February 29, 2004, we were required to reimburse our lenders $14.1 million for draws under these letters of credit. No reimbursements were made for the three months ended February 29, 2004 and for the three and six months ended February 28, 2003.

On a limited basis, performance assurances are extended to customers, primarily in our power and process divisions within our ECM segment, which guarantee certain performance measurements upon completion of a project. If performance assurances are extended to customers, our maximum potential exposure would be the remaining cost of the work to be performed by or on behalf of third parties under engineering and construction contracts with potential recovery from third party vendors and subcontractors for work performed in the ordinary course of contract execution. As a result, the total costs of the project would exceed our original cost estimates and we could experience reduced gross profit or possibly a loss for that project. In some cases, where we fail to meet certain performance standards, we may be subject to contractual liquidated damages.

We also provide financial guarantees to certain of our joint ventures which are reported under the equity method and are not consolidated on our balance sheet. At February 29, 2004, we had guaranteed approximately $8.0 million of bank debt or letters of credit and $49.3 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 February 29, 2004.

In January 2003, our subsidiary, Stone & Webster, Inc., we were awarded a subcontract to perform engineering services for a company (the “Related Company”) for whom an executive officer and a significant owner is the brother to our Chief Executive Officer for total consideration of approximately $2 million. In connection with the services agreement, we entered into a guaranty agreement with the Related Company under which we agreed, under certain circumstances, to guarantee the payment of certain sums which may be owed by the Related Company to its client under a performance-based services and equipment contract. That guaranty, by its terms, may be assigned by the Related Company to its client. We also entered into an indemnification and fee agreement between us and the Related Company pursuant to which, among other things, the Related Company must pay us an annual fee in consideration for our entering into the guaranty agreement. The amount of the annual fee varies, but totals approximately $0.8 million over the 20-year term. Although we believe the probability we will have to make any payments under the guaranty agreement is remote, FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” requires us to recognize on our consolidated balance sheet a liability for such a guarantee and to disclose certain information, even though the likelihood of our having to make payments thereunder is remote. The guaranty is recorded at its fair value which we believe is $0.3 million. We have the right, but not the obligation, to take over all of the Related Company’s rights and obligations under its contract with the customer, if a demand by the customer under the contract with the Related Company ever

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occurs and remains unsatisfied. Although we believe that we will not be required to make any payments under the guaranty agreement, we believe that the maximum potential amount of future payments (undiscounted) we could be required to make would be approximately $13 million over the 20-year term of the contract.

Other

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 such legal proceedings cannot be predicted and no assurances can be provided, we believe that, based upon information currently available, the likelihood of an adverse determination in the now pending legal proceedings is remote, and are not expected to have a material adverse effect on our financial position or results of operations either individually or in the aggregate. However, we cannot guarantee such a result.

Note 16 - Subsequent Events

On April 2, 2004, we filed a Schedule TO (Tender Offer) with the Securities and Exchange Commission offering to purchase any or all of the outstanding LYONs that are submitted to us for purchase by the holders thereof. As of April 1, 2004, there was $85.0 million aggregate principal amount at maturity of LYONs outstanding, with an aggregate accreted value as of that date of approximately $58.0 million. We plan to fund the purchases of the tendered LYONs on May 1, 2004 using cash on hand. Depending on the amount of cash necessary to fund the repurhcases of LYONs, we may seek additional sources to fund the repurchases, including accessing the capital markets and, to the extent permitted under its terms, borrowings under our revolving credit facility, which would require the consent of our lenders.

Note 17 - Unaudited Condensed Consolidating Financial Information

The following presents unaudited condensed consolidating financial information with respect to our financial position as of February 29, 2004 and August 31, 2003 and the results of our operations for the three and six months ended February 29, 2004 and February 28, 2003 and cash flows for the six months ended February 29, 2004 and February 28, 2003.

In connection with our sale on March 17, 2003 of our seven year, 10.75% Senior Notes due March 15, 2010, our material wholly-owned domestic subsidiaries issued joint and several guarantees of the Senior Notes. These subsidiaries are referred to as the Guarantor Subsidiaries in the unaudited condensed consolidating financial information which is presented below. Our subsidiaries which have not issued guarantees for the Senior Notes (primarily foreign subsidiaries) are referred to as the Non-Guarantor Subsidiaries.

The unaudited condensed consolidating financial information has been prepared pursuant to the rules and regulations for condensed financial information and does not include all disclosures included in annual financial statements, although we believe that the disclosures made are adequate to make the information presented not misleading. Certain reclassifications were made to conform all of the condensed consolidating financial information to the presentation of the consolidated financial statements. The principal eliminating entries eliminate investment in subsidiaries, intercompany balances and intercompany revenues and expenses.

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The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
As of February 29, 2004
(Unaudited)
(in thousands)