Foster Wheeler (FWLT) 10-Q 2004 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 10-Q

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

For the quarterly period ended March 26, 2004

OR

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

For the transition period from .......... to ..........

Commission File Number 001-31305

FOSTER WHEELER LTD.
(Exact name of registrant as specified in its charter)

BERMUDA	22-3802649
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Perryville Corporate Park, Clinton, NJ	08809-4000
(Address of principal executive offices)	(Zip Code)

(908) 730-4000
(Registrant’s telephone number, including area code)

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 40,771,560 shares of the Company’s common stock ($1.00 par value) were outstanding as of March 26, 2004.

FOSTER WHEELER LTD.

INDEX

Part I	Financial Information
		Item 1 –	Financial Statements (Unaudited):	3
			Condensed Consolidated Balance Sheet at March 26, 2004 and December 26, 2003	3
			Condensed Consolidated Statement of Operations and Comprehensive Loss for the Three Months Ended March 26, 2004 and March 28, 2003	4
			Condensed Consolidated Statement of Cash Flows for the Three Months Ended March 26, 2004 and March 28, 2003	5
			Notes to Condensed Consolidated Financial Statements	6
		Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations	58
		Item 3 –	Quantitative and Qualitative Disclosures about Market Risk	81
		Item 4 –	Controls and Procedures	81
Part II	Other Information
		Item 1 –	Legal Proceedings	85
		Item 6 –	Exhibits and Reports on Form 8-K	85
Signatures				87

2

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FOSTER WHEELER LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands of dollars, except share data and per share amounts)
(Unaudited)

	March 26, 2004			December 26, 2003
ASSETS
Current Assets:
Cash and cash equivalents	$	375,614		$	364,095
Short-term investments		5,128			13,390
Accounts and notes receivable, net		522,442			556,414
Contracts in process and inventories		127,184			173,293
Prepaid, deferred and refundable income taxes		30,663			37,160
Prepaid expenses		31,965			30,024
Total current assets		1,092,996			1,174,376
Land, buildings and equipment		622,172			622,729
Less accumulated depreciation		318,566			313,114
Net book value		303,606			309,615
Restricted cash		73,021			52,685
Notes and accounts receivable — long-term		6,280			6,776
Investments and advances		88,786			98,651
Goodwill, net		50,993			51,121
Other intangible assets, net		70,308			71,568
Prepaid pension cost and related benefit assets		7,131			7,240
Asbestos-related insurance recovery receivable		480,786			495,400
Other assets		184,536			182,151
Deferred income taxes		60,500			56,947
TOTAL ASSETS	$	2,418,943		$	2,506,530
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Current installments on long-term debt	$	20,945		$	20,979
Bank loans		—			121
Accounts payable		207,395			305,286
Accrued expenses		377,867			381,376
Estimated costs to complete long-term contracts		578,049			552,754
Advance payments by customers		67,865			50,248
Income taxes		60,729			62,996
Total current liabilities		1,312,850			1,373,760
Corporate and other debt less current installment		332,348			333,729
Special-purpose project debt less current installments		115,735			119,281
Capital lease obligations		62,295			62,373
Deferred income taxes		11,164			9,092
Pension, postretirement and other employee benefits		303,961			295,133
Asbestos-related liability		502,287			526,200
Other long-term liabilities and minority interest		119,229			124,792
Subordinated Robbins exit funding obligations less current installment		112,003			111,589
Convertible subordinated notes		210,000			210,000
Mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures		—			175,000
Deferred accrued mandatorily redeemable preferred security distributions of subsidiary trust		—			38,021
Subordinated deferrable interest debentures		175,000			—
Deferred accrued interest on subordinated deferrable interest debentures		42,813			—
Commitments and contingencies		—			—
TOTAL LIABILITIES		3,299,685			3,378,970
Shareholders’ Deficit:
Preferred Stock
No par value; authorized — 1,500,000 shares; issued — none outstanding		—			—
Common stock
$1.00 par value; authorized — 160,000,000 shares; issued — 40,771,560 shares		40,772			40,772
Paid-in capital		201,841			201,841
Accumulated deficit		(815,352	)		(811,054	)
Accumulated other comprehensive loss		(308,003	)		(303,999	)
TOTAL SHAREHOLDERS’ DEFICIT		(880,742	)		(872,440	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	2,418,943		$	2,506,530

See notes to condensed consolidated financial statements.

3

FOSTER WHEELER LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands of dollars, except per share amounts)
(Unaudited)

	Three Months Ended
	March 26, 2004			March 28, 2003
Revenues and other income:
Operating revenues	$	666,359		$	784,092
Other income		35,949			26,776
Total revenues and other income		702,308			810,868
Costs and expenses:
Cost of operating revenues		591,147			727,129
Selling, general and administrative expenses		57,184			51,740
Other deductions		18,417			21,244
Minority interest		982			1,323
Interest expense		20,640			17,422
Mandatorily redeemable preferred security distributions of subsidiary trust		—			4,372
Interest expense on subordinated deferrable interest debentures		4,792			—
Total costs and expenses		693,162			823,230
Earnings/(loss) before income taxes		9,146			(12,362	)
Provision for income taxes		13,444			7,458
Net loss		(4,298	)		(19,820	)
Other comprehensive loss:
Foreign currency translation adjustments		(4,004	)		(815	)
Net comprehensive loss	$	(8,302	)	$	(20,635	)
Loss per share:
Basic	$	(0.10	)	$	(0.48	)
Diluted	$	(0.10	)	$	(0.48	)
Shares outstanding (in thousands):
Basic: weighted-average number of shares outstanding		41,055			41,035
Diluted: effect of share options		—			—
Total diluted		41,055			41,035

See notes to condensed consolidated financial statements.

4

FOSTER WHEELER LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
(Unaudited)

	Three Months Ended
	March 26, 2004			March 28, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net cash provided/(used) by operating activities	$	29,568		$	(16,970)
CASH FLOWS FROM INVESTING ACTIVITIES
Change in restricted cash		(20,700	)		(3,697	)
Capital expenditures		(1,759	)		(3,613	)
Proceeds from sale of assets		127			72,918
Decrease in investments and advances		—			3,718
Decrease/(increase) in short-term investments		8,309			(2	)
Net cash (used)/provided by investing activities		(14,023	)		69,324
CASH FLOWS FROM FINANCING ACTIVITIES
Partnership distributions to minority shareholders		(2,663	)		(2,879	)
Decrease in short-term debt		(121	)		(503	)
Proceeds from long-term debt		—			18
Repayment of long-term debt		(4,826	)		(13,603	)
Net cash used by financing activities		(7,610	)		(16,967	)
Effect of exchange rate changes on cash and cash equivalents		3,584			4,414
INCREASE IN CASH AND CASH EQUIVALENTS		11,519			39,801
Cash and cash equivalents at beginning of period		364,095			344,305
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	375,614		$	384,106

See notes to condensed consolidated financial statements.

5

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of dollars, except per share amounts)
(Unaudited)

1. Going Concern

The accompanying condensed consolidated financial statements of Foster Wheeler Ltd., hereinafter referred to as “Foster Wheeler” or the “Company,” are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern. The realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to continue to generate cash flows from operations, asset sales and collections of receivables to fund its obligations including those resulting from asbestos related liabilities, as well as the Company maintaining credit facilities and bonding capacity adequate to conduct its business. The Company has incurred losses for the three months ended March 26, 2004 and in each of the years in the three-year period ended December 26, 2003 and has a shareholders’ deficit of $880,700 as of March 26, 2004. The Company has substantial debt obligations including its Senior Credit Facility and during 2002, it was unable to comply with certain debt covenants under the previous revolving credit agreement. As described in more detail below, the Company received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the new Senior Credit Facility was amended to provide covenant relief of up to $180,000 of gross pretax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pretax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003, the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum earnings before interest expense, taxes, depreciation and amortization (“EBITDA”) and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. There is no assurance that the Company will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2004. Management’s current forecast indicates that the Company will be in compliance with financial covenants throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that the Company will not violate the covenants.

The Company’s U.S. operations, which include the corporate functions, are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including costs related to the Company’s indebtedness, obligations to fund U.S. pension plans, and other expenses related to corporate overhead.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs and unused credit line availability. The Company’s current cash flow forecasts indicate that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2004. However, there can be no assurance that sufficient cash will be available in 2004.

As of March 26, 2004, the Company had aggregate indebtedness of approximately $1,000,000. The corporate debt must be funded primarily with distributions from the Company’s foreign subsidiaries. As of March 26, 2004, the Company had cash and cash equivalents, short-term investments, and restricted cash totaling $453,800 compared to $430,200 as of December 26, 2003. Of the $453,800 total at March 26, 2004, approximately $355,800 was held by foreign subsidiaries. The Company is sometimes required to cash collateralize bonding or certain bank facilities. The amount of restricted cash at March 26, 2004 was $73,000, of which $61,200 related to the non-U.S. operations.

6

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

1. Going Concern — (Continued)

The Company requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs. The Company’s current 2004 forecast assumes cash repatriation from its non-U.S. subsidiaries from royalties, management fees, intercompany loans, debt service on intercompany loans, and dividends of approximately $61,000. In 2003, the Company repatriated approximately $100,000 from its non-U.S. subsidiaries.

There can be no assurance that the forecasted foreign cash repatriation will occur as there are significant legal and contractual restrictions on the Company’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit the Company’s ability to continue as a going concern.

Commercial operations under a domestic contract retained by the Company in the Foster Wheeler Environmental Corporation (“Environmental”) asset sale, as described further below under “Sale of Certain Business Assets” in the Notes to Condensed Consolidated Financial Statements, commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). The Company funded the plant’s construction costs and operates the facility. The majority of the Company’s invested capital is expected to be recovered during the early stages of processing the waste materials. This project’s performance exceeded expectations during the first quarter of 2004 and successfully processed sufficient materials to fully recover the forecasted 2004 capital recovery amount. The original forecast expected to recover the capital over the first three quarters of 2004. At March 26, 2004 the project generated a year to date net cash flow of approximately $32,400. The net cash flow forecast for 2004 from this project remains in excess of $40,000.

On February 26, 2004, the California Public Utilities Commission approved certain changes to Pacific Gas & Electric’s rates. As relevant to the Company’s subsidiary’s Martinez Project, the E-20T rate has been decreased by approximately 15% retroactive to January 1, 2004, having a negative effect on the subsidiary’s 2004 cash flow and earnings. This rate change has been reflected in the Company’s liquidity forecast.

As part of its debt restructuring plan described below, the Company and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on April 12, 2004 and on May 4, 2004, relating to an exchange offer for all of the existing $175,000 trust preferred securities, $210,000 Convertible Subordinated Notes (“Convertible Notes”), $113,700 Subordinated Robbins Exit Funding Obligations (“Robbins Bonds”), and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005.

On February 5, 2004, the Company announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing in a private transaction to the Company to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, the Company has discontinued its previously announced plans to divest one of its European operating units.

7

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

1. Going Concern — (Continued)

The total amount of debt and preferred trust securities subject to the proposed exchange offer that is part of the Company’s planned restructuring is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. The Company expects to offer a mix of equity as well as debt with longer maturities in exchange for these securities. The Company anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, the Company may not complete the exchange offer on acceptable terms, or at all.

Failure by the Company to achieve its cash flow forecast or to complete the components of the restructuring plan on acceptable terms would have a material adverse effect on the Company’s financial condition. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

In August 2002, the Company finalized a Senior Credit Facility with its lender group. This facility included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility, which expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts and also retains a 50% share of the balance. With the Company’s sale of the Environmental net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $1,250 and $11,800 were made on the term loan in the first quarter of 2004 and during the full year of 2003, respectively.

The financial covenants in the Senior Credit Facility include a senior leverage ratio and a minimum EBITDA defined in the agreement, as amended. Compliance with these covenants is measured quarterly. The EBITDA covenant compares the actual average rolling four quarter EBITDA, as adjusted in the Senior Credit Facility, to minimum EBITDA targets. The senior leverage covenant compares actual average rolling EBITDA, as adjusted in the Senior Credit Facility, to total senior debt. The resultant multiple of debt to EBITDA must be less than maximum amounts specified in the Senior Credit Facility. Management’s current forecast indicates that the Company will be in compliance with these covenants throughout 2004.

Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pretax charges recorded by the Company in the third quarter of 2002. The amendment further provides that up to an additional $63,000 in pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred. As of December 26, 2003, $31,000 of the contingency risks was favorably resolved, and additional project reserves were established for $32,000 leaving a contingency balance of $0.

Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modifies (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA, and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment of the Credit Agreement, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.

Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offer described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. The terms of the amendment called for the Company to pay a fee equal to 5% of the lenders’ credit exposure since it had not made a required prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company paid the required fee of $13,600 on March 31, 2004.

8

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

1. Going Concern — (Continued)

The annual interest rate on borrowings under the Senior Credit Facility has increased and will continue to increase an additional 0.5% each quarter until the Company repays $100,000 of indebtedness under the Senior Credit Facility. The fee was included in Foster Wheeler’s liquidity forecast for 2004.

Holders of the Company’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the revolving portion of the Senior Credit Facility. As permitted by the Indenture, the Term Loan and the obligations under the letter of credit facility (collectively approximating $155,200 as of March 26, 2004) have priority to the Senior Notes in these assets while the security interest of the Senior Notes ranks equally and ratably with $69,000 of revolving credit borrowings under the Senior Credit Facility.

The Company finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to the Company, for an initial non-cancelable period of 20 years. The proceeds from the sale/leaseback were sufficient to repay the balance outstanding under a previous operating lease arrangement of $33,000 for a second corporate office building. The long-term capital lease obligation of $44,200 as of March 26, 2004 is included in capital lease obligations in the accompanying condensed consolidated balance sheet. The Company entered into a binding agreement in the first quarter 2004 to sell a second corporate office building. The sale closed in the second quarter 2004 and generated net cash proceeds of $16,400. Of this amount, 50% has been repaid to the Senior Credit Facilities’ lenders in the second quarter 2004.

In the third quarter of 2002, the Company entered into a receivables financing facility that matures on August 15, 2005 and is secured by a portion of certain of the Company’s domestic trade receivables. The facility operates through the use of a wholly owned, special- purpose subsidiary, Foster Wheeler Funding II LLC (“FW Funding”) as described below. FW Funding is included in the condensed consolidated financial statements of the Company.

FW Funding is a party to a Purchase, Sale and Contribution Agreement (“PSCA”) with six of the Company’s wholly owned domestic subsidiaries. Pursuant to PSCA, FW Funding is obligated to purchase eligible trade receivables, as defined in the PSCA, from these companies and these companies are obligated to contribute as capital their ineligible trade accounts receivable as defined in the PSCA. FW Funding simultaneously entered into a Loan and Security Agreement with Foothill Capital Corporation and Ableco Finance Corporation LLC. Under this agreement, FW Funding has the ability to borrow up to a maximum of $40,000 using eligible trade accounts receivable as collateral. FW Funding pays 10% interest on all outstanding borrowings. In addition, FW Funding pays a monthly fee on the unused line equal to 0.5% per annum of the maximum available amount less the average daily amount of borrowings during the preceding month. The facility is subject to covenant compliance. The financial covenants commenced at the end of the first quarter of 2003 and include a senior leverage ratio and a minimum EBITDA level. Noncompliance with the financial covenants allows the lender to terminate the arrangement and accelerate any amounts then outstanding.

No borrowings were outstanding under this facility as of March 26, 2004 or December 26, 2003. As of March 26, 2004, FW Funding held $63,600 of trade accounts receivable, net of allowances, which are included in the condensed consolidated balance sheet.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional revolving loans available to provide working capital which may be required by these subsidiaries as they seek

9

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

1. Going Concern — (Continued)

to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 26, 2004, the facility remained undrawn.

The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that the Company will be in compliance with the debt covenants throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that the Company will not violate the covenants. If the Company violates a covenant under the Senior Credit Facility, the sale/leaseback arrangement, or receivables financing arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default under the following agreements: the Senior Notes, the Convertible Notes, the Subordinated Deferrable Interest Debentures, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities, which would allow such debt to be accelerated as well. The total amount of the Company debt that could be accelerated, including the amount outstanding under the Senior Credit Facility, is $915,000 as of March 26, 2004. The Company would not be able to repay amounts borrowed if the payment dates were accelerated. The debt covenants and the potential payment acceleration requirements raise substantial doubts about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

On November 14, 2003, Foster Wheeler was de-listed from the New York Stock Exchange (“NYSE”) because the Company ceased to meet NYSE continued listing criteria. The Company’s common stock and 9.00% FW Preferred Capital Trust I securities are quoted and traded on the Over-the-Counter Bulletin Board (“OTCBB”).

Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler has relied on an exemption from this rule provided to NYSE-listed companies. Due to the Company being de-listed, this exemption is no longer available. To address this issue, the Company obtained the consent of the BMA to transfers between non-residents for so long as the Company’s shares continue to be quoted in the Pink Sheets or on the OTCBB. The Company believes that this consent will continue to be available.

2. Summary of Significant Accounting Policies

The condensed consolidated balance sheet as of March 26, 2004 and December 26, 2003 and the related condensed consolidated statements of operations and comprehensive loss and cash flows for the three-month periods ended March 26, 2004 and March 28, 2003, are unaudited. In the opinion of management, all adjustments necessary for a fair presentation of such financial statements have been included. Such adjustments only consisted of normal recurring items. Interim results are not necessarily indicative of results for a full year.

The financial statements and notes are presented in accordance with the requirements of Form 10-Q and do not contain certain information included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 26, 2003 (“2003 Form 10-K”) filed with the SEC on March 12, 2004 and the Company’s Current Report on Form 8-K filed with the SEC on April 12, 2004. The condensed consolidated balance sheet as of December 26, 2003 has been derived from the audited consolidated balance sheet included in the 2003 Form 10-K. A summary of the Company’s significant accounting policies is presented

10

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

2. Summary of Significant Accounting Policies — (Continued)

below. There has been no material change in the accounting policies followed by the Company during the first quarter of 2004.

Principles of Consolidation — The condensed consolidated financial statements include the accounts of Foster Wheeler and all significant domestic and foreign subsidiary companies. All significant intercompany transactions and balances have been eliminated.

Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. Actual results could differ from those estimates. Changes in estimates are reflected in the periods in which they become known. Significant estimates are used when accounting for long- term contracts including customer and vendor claims, depreciation, employee benefit plans, taxes, asbestos litigation and expected recoveries and contingencies, among others.

As of March 26, 2004 and December 27, 2003, the Company had recorded commercial claims of approximately $2,300 and $0, respectively. The increase is due to claims recorded in accordance with AICPA Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts” (“SOP 81-1”), as discussed under “Revenue Recognition on Long-Term Contracts.” The claims were recorded in the Company’s European operations.

Revenue Recognition on Long-term Contracts — Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

Revenues and profits on cost reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.

Contracts in progress are stated at cost, increased for profits recorded on the completed effort or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.” The Company has numerous contracts that are in various stages of completion. Such contracts require estimates to determine the appropriate cost and revenue recognition. However, current estimates may be revised as additional information becomes available. If estimates of costs to complete long-term contracts indicate a loss, provision is made currently for the total loss anticipated. The elapsed time from award of a contract to completion of performance may be up to four years.

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from customers or others 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. The Company records claims in accordance with paragraph 65 of SOP 81-1. This statement of position states that recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. Those two requirements are satisfied by the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor’s performance; costs associated with the claim are identifiable or otherwise determinable and are

11

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

2. Summary of Significant Accounting Policies — (Continued)

reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded only to the extent that contract costs relating to the claim have been incurred. Costs attributable to claims are treated as costs of contract performance as incurred. Such claims are currently in various stages of negotiation, arbitration and other legal proceedings.

Certain special-purpose subsidiaries in the Energy Group are reimbursed by customers for their costs, including amounts related to principal repayments of non-recourse project debt, for building and operating certain facilities over the lives of the non-cancelable service contracts. The Company records revenues relating to debt repayment obligations on these contracts on a straight-line basis over the lives of the service contracts, and records depreciation of the facilities on a straight-line basis over the estimated useful lives of the facilities, after consideration of the estimated residual value.

Cash and Cash Equivalents — Cash and cash equivalents include highly liquid short-term investments purchased with original maturities of three months or less. Cash and cash equivalents of approximately $289,500 are maintained by foreign subsidiaries as of March 26, 2004. These subsidiaries require a substantial portion of these funds to support their liquidity and working capital needs, as well as required minimum capitalization and contractual restrictions. Accordingly, these funds may not be readily available for repatriation to U.S. entities.

Restricted Cash — Restricted cash at March 26, 2004 consists of approximately $13,200 held primarily by special purpose entities and restricted for debt service payments, approximately $54,500 that was required to collateralize letters of credit and bank guarantees, and approximately $5,300 of client escrow funds. Domestic restricted cash totals approximately $11,800, which relates to funds held primarily by special purpose entities and restricted for debt service payments and client escrow funds. Foreign restricted cash totals approximately $61,200 is comprised of cash collateralized letters of credit and bank guarantees and client escrow funds.

Restrictions on Shareholders’ Dividends — The Board of Directors of the Company discontinued the common stock dividend in July 2001. The Company is currently prohibited from paying dividends under the Senior Credit Facility, as amended. Accordingly, the Company paid no dividends on common shares during 2004 and 2003 and does not expect to pay dividends on the common shares for the foreseeable future.

Restricted Net Assets — One of the Company’s subsidiaries has entered into a bonding arrangement with a bank, which contains covenants limiting its ability to make distributions to the Company. The covenants include a restriction on the distribution of dividends to 75% of statutory earnings and the requirement to maintain an equity ratio (calculated as equity divided by the sum of the equity and total liabilities) of at least 30%. In addition, the subsidiary is not permitted to make intercompany loans to the Company. As a result, the net assets of the subsidiary can only be distributed annually through dividends after the subsidiary’s statutory financial statements have been issued.

Short-term Investments — Short-term investments consist primarily of bonds of foreign governments and are classified as available for sale under Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities.” Realized gains and losses from sales are based on the specific-identification method.

Accounts and Notes Receivable, Net — In accordance with terms of long-term contracts, certain percentages of billings are withheld by customers until completion and acceptance of the contracts. Final payments of all such amounts withheld may not be received within a one-year period. However, in conformity with industry practice, the full amount of accounts receivable, including such amounts withheld, has been included in current assets.

12

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

2. Summary of Significant Accounting Policies — (Continued)

Trade accounts receivable are continually evaluated in accordance with corporate policy. Provisions are established on a project specific basis when there is an issue associated with the client’s ability to make payments or there are circumstances where the client is not making payment due to contractual issues. Customer payment history, trends within the various markets served and general economic trends are also evaluated when considering the necessity of a provision.

The current portion of the asbestos-related insurance recovery receivables discussed in Note 3 and foreign refundable value-added tax are included within the Accounts and Notes Receivable line item.

Land, Buildings and Equipment — Depreciation is computed on a straight-line basis using composite estimated lives ranging from 10 to 50 years for buildings and from 3 to 35 years for equipment. Expenditures for maintenance and repairs are charged to operations. Renewals and betterments are capitalized. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gains or losses are reflected in earnings.

The Company recorded an impairment loss of $15,100 on a corporate office building in the third quarter of 2003 in anticipation of a sale, in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The loss was recorded in other deductions on the condensed consolidated statement of operations and comprehensive loss. The carrying value of the building is included in land, buildings, and equipment on the condensed consolidated balance sheet.

Investments and Advances — The Company uses the equity method of accounting for investment ownership of between 20% and 50% in affiliates unless significant economic considerations indicate that the cost method is appropriate. The equity method is also used for investments in which ownership is greater than 50% when the Company does not have a controlling financial interest. Investment ownership of less than 20% in affiliates is carried at cost. Currently, all of the Company’s significant investments in affiliates are recorded using the equity method.

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 the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Investment tax credits are accounted for by the flow-through method whereby they reduce income taxes currently payable and the provision for income taxes in the period the assets giving rise to such credits are placed in service. To the extent such credits are not currently utilized on the Company’s tax return, deferred tax assets, subject to consideration of the need for a valuation allowance, are recognized for the carryforward amounts.

Provision is made for Federal income taxes which may be payable on foreign subsidiary earnings to the extent that the Company anticipates they will be remitted.

Foreign Currency — Assets and liabilities of foreign subsidiaries are translated into U.S. dollars at month-end exchange rates and income and expenses and cash flows at monthly weighted-average rates.

The Company enters into foreign exchange contracts in its management of foreign currency exposures related to commercial contracts. Changes in the fair value of derivative contracts that qualify as designated cash flow hedges are deferred until the hedged forecasted transaction affects earnings. Amounts receivable (gains) or payable (losses) under foreign exchange hedges are recognized as deferred gains or losses and are included in either contracts in process or estimated costs to complete long-term contracts. The Company

13

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

2. Summary of Significant Accounting Policies — (Continued)

utilizes foreign exchange contracts solely for hedging purposes, whether or not they qualify for hedge accounting under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” At March 26, 2004 and March 28, 2003, the Company did not meet the requirements for deferral under SFAS No. 133 and recorded approximately a $40 and $1,200 after tax loss, respectively.

Contracts in Process and Estimated Costs to Complete Long-term Contracts — In accordance with terms of long-term contracts, amounts recorded in contracts in process and estimated costs to complete long-term contracts may not be realized or paid, respectively, within a one-year period. In conformity with industry practice, however, the full amount of contracts in process and estimated costs to complete long-term contracts have been included in current assets and current liabilities, respectively.

Inventories — Inventories, principally materials and supplies, are stated at the lower of cost or market, determined primarily on the average-cost method.

Intangible Assets — Intangible assets consist principally of the excess of cost over the fair value of net assets acquired (goodwill), trademarks and patents. Patents and trademarks are being amortized on a straight-line basis over periods of 12 to 40 years.

The Company tests for impairment at the reporting unit level as defined in SFAS No. 142, “Goodwill and Other Intangible Assets.” Goodwill was allocated to the reporting units based on the original purchase price allocation. This test is a two-step process. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value, which is based on future cash flows, exceeds the carrying amount, goodwill is not considered impaired. If the carrying amount exceeds the fair value, the second step must be performed to measure the amount of the impairment loss, if any. The second step compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. In the fourth quarter of each year, the Company evaluates goodwill on a separate operating unit basis to assess recoverability, and impairments, if any, are recognized in earnings. An impairment loss would be recognized in an amount equal to the excess of the carrying amount of the goodwill over the implied fair value of the goodwill. SFAS No. 142 also requires that intangible assets with determinable useful lives be amortized over their respective estimated useful lives and reviewed annually for impairment in accordance with SFAS No. 144.

As of March 26, 2004 and December 26, 2003, the Company had unamortized goodwill of $50,993 and $51,121, respectively. The decrease in goodwill of $128 resulted from foreign currency exchange losses. All of the goodwill at March 26, 2004 related to the Energy Group. In 2003, the fair value of the reporting units exceeded the carrying amounts.

As of March 26, 2004 and December 26, 2003, the Company had unamortized identifiable intangible assets of $70,308 and $71,568, respectively. The following table details amounts relating to those assets.

	As of March 26, 2004					As of December 26, 2003
	Gross Carrying Amount		Accumulated Amortization			Gross Carrying Amount		Accumulated Amortization
Patents	$	36,576	$	(14,265	)	$	36,703	$	(13,802	)
Trademarks		61,744		(13,747	)		61,943		(13,276	)
Total	$	98,320	$	(28,012	)	$	98,646	$	(27,078	)

Amortization expense related to patents and trademarks for the three months ending March 26, 2004 and March 28, 2003 was $934 and $911, respectively. Amortization expense is expected to approximate $3,500 each year in the next five years.

14

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

2. Summary of Significant Accounting Policies — (Continued)

Earnings per Share — Basic per share data has been computed based on the weighted-average number of shares of common stock outstanding. The weighted average of shares of common stock outstanding includes shares credited under The Directors Deferred Compensation and Stock Award Plan (the “Plan”). Under the Plan, each non-management director is credited annually with share units of the Company’s common stock. In addition, each non-management director may elect to defer receipt of compensation for services rendered as a director, which deferred amount is credited to his or her account in the form of share units. The Company makes a supplemental contribution equal to 15% of the deferred amount. Additional share data is presented below:

	March 26,			March 28,
	2004			2003
Directors Deferred Compensation
Beginning shares		274,535			245,942
Shares credited in participants’ accounts		16,731			30,450
Shares delivered to participants		(2,070	)		—
Incremental shares		14,661			30,450
Shares included in the calculation of basic earnings per share		289,196			276,392

Diluted per share data has been computed based on the weighted-average number of shares of common stock outstanding, including shares credited under the Plan, adjusted for the incremental dilution, if any, of outstanding stock options and convertible securities.

Options to purchase shares of common stock not included in the computation of diluted earnings per share due to their antidilutive effect	568,304	—
Options to purchase shares of common stock not included in the computaton of diluted earnings per share because the options’ exercise price was greater than the average market price	7,677,925	8,623,432
Shares on convertible subordinated notes not included in the computation of diluted earnings per share due to their antidilutive effect	13,085,751	13,085,751

Stock Option Plans — The Company has two fixed option plans, which reserve shares of common stock for issuance to executives, key employees, and directors. The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock Based Compensation – Transition and Disclosure.” The Company continues to account for stock options granted to employees and directors using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.”

15

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

2. Summary of Significant Accounting Policies — (Continued)

	Three Months Ended
	March 26, 2004			March 28, 2003
Net loss — as reported	$	(4,298	)	$	(19,820	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for awards net of taxes of $0		—			—
Net loss — pro forma	$	(4,298	)	$	(19,820	)
Loss per share — as reported
Basic	$	(0.10	)	$	(0.48	)
Diluted		(0.10	)		(0.48	)
Loss per share — pro forma
Basic		(0.10	)		(0.48	)
Diluted		(0.10	)		(0.48	)

As of March 26, 2004, a total of 8,618,667 shares of common stock were reserved for issuance under the various stock option plans; 622,438 shares were available for grant.

Recent Accounting Developments — In January 2003, the FASB issued FASB Interpretation (“FIN”) 46, “Consolidation of Variable Interest Entities.” This interpretation requires consolidation by business enterprises of variable interest entities which have one or both of the following characteristics:

• The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; and

• The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; and c) the right to receive expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected loss.

FIN 46 applied immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, the effective date of FIN 46 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 was deferred until the end of the first interim or annual period ending after March 15, 2004.

The Company adopted the provisions of this interpretation in the first quarter of 2004. The adoption did not result in the consolidation of any previously unconsolidated variable interest entities. However, the adoption did result in the de-consolidation of a subsidiary trust which issued mandatorily redeemable preferred securities. This had no impact on the Company’s consolidated debt as the intercompany debt to the subsidiary became third party debt upon de-consolidation.

In December 2003, the FASB issued SFAS No. 132R “Employers’ Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires the following disclosures: (1) the dates on which plan’s assets and obligations are measured, (2) reporting entities must segregate data on the market values of plan assets into broad asset categories, (3) a narrative description of the investment policy of plan assets, (4) a narrative description for the basis for the development of the expected long-term rate of return of plan assets, (5) expected contributions to be made to the plan on a cash basis over the next fiscal year and (6) expected benefit payments for each of the next ten fiscal years. These changes are effective for fiscal years ending after

16

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

2. Summary of Significant Accounting Policies — (Continued)

December 15, 2003, with the exception of (1) expected benefit payments and (2) foreign plans which are delayed until fiscal years ending after June 15, 2004. SFAS No. 132R requires disclosure of two items in quarterly interim reports. These requirements are the net benefit cost and contribution made during the fiscal year. The Company adopted the disclosure requirements of this standard, including the foreign plans.

On January 12, 2004, the FASB issued FASB Staff Position (“FSP”) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003.” FSP No. 106-1 permitted employers that sponsor postretirement benefit plans that provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”). Without FSP No. 106-1, plan sponsors would have been required under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions,” to account for the effects of the Act in the fiscal period that includes December 8, 2003, the date President Bush signed the Act into law. On March 12, 2004, the FASB issued proposed FSP No. 106-b, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003.” Proposed FSP No. 106-b would supercede FSP No. 106-1. In accordance with proposed FSP No. 106-b, the accumulated postretirement benefit obligation (“APBO”) or net periodic postretirement benefit cost in the condensed consolidated financial statements or accompanying notes do not reflect any amounts associated with the subsidy because the Company is unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act. The provisions of proposed FSP No. 106-b would be effective for the Company’s first interim period ending September 30, 2004. The Company is currently assessing the impact of the Act and whether its postretirement plan should be amended in consideration of the new legislation.

3. Litigation and Uncertainties

Some of the Company’s U.S. subsidiaries, along with many other companies, are codefendants in numerous asbestos-related lawsuits and out-of-court informal claims pending in the United States. Plaintiffs claim damages for personal injury alleged to have arisen from exposure to or use of asbestos in connection with work allegedly performed by the Company’s subsidiaries during the 1970s and prior. A summary of claim activity for the three months ended March 26, 2004, December 26, 2003 and March 28, 2003 is as follows:

	Number of Claims			Number of Claims			Number of Claims
	First Quarter 2004			Fourth Quarter 2003			First Quarter 2003
Balance at beginning of quarter *		170,860			172,700			139,800
New claims		3,900			6,160			15,600
Claims resolved		(3,280	)		(8,000	)		(4,300	)
Balance at end of quarter *		171,480			170,860			151,100

* Includes approximately 24,500 claims on inactive court dockets.

The overall average combined indemnity and defense cost per closed claim since 1993 was approximately $1.9. In view of the many uncertainties associated with asbestos bodily injury claims, the Company believes that the average cost may increase in the future.

The amount spent for the three months ended March 26, 2004 and March 28, 2003 on asbestos litigation defense and case resolution, substantially all of which was reimbursed or will be reimbursed from insurance coverage, was $23,900 and $13,800, respectively. The payments in 2004 were funded from settlements with insurance companies, as discussed below.

17

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

3. Litigation and Uncertainties — (Continued)

The Company has recorded assets of $540,800 relating to probable insurance recoveries of which approximately $60,000 is recorded in accounts and notes receivables, and $480,800 is recorded as long-term. The asset is an estimate of recoveries from insurers based upon assumptions relating to cost allocation and resolution of pending proceedings with certain insurers, as well as recoveries under settlements with other insurers. The total liability recorded is comprised of an estimated liability relating to open (outstanding) claims of approximately $348,300 and an estimated liability relating to future unasserted claims of approximately $214,000. Of the total, $60,000 is recorded in accrued expenses and $502,300 is recorded in asbestos-related liability on the condensed consolidated balance sheet. These estimates are based upon the following information and/or assumptions: number of open claims; forecasted number of future claims; estimated average cost per claim by disease type; and the breakdown of known and future claims into disease type. The total estimated liability includes both the estimate of forecasted indemnity amounts and forecasted defense expenses. Total estimated defense costs and indemnity payments are expected to be incurred over the next fifteen years during which period new claims are expected to decline from year to year. Recently received claims also suggest that the percentage of claims to be closed without payment of indemnity costs should increase as claims are resolved during the next few years. The Company believes that it is likely that there will be new claims filed after 2018, but in light of uncertainties inherent in long-term forecasts, the Company does not believe that it can reasonably estimate defense and/or indemnity costs which might be incurred after 2018. Nonetheless, the Company plans to update its forecasts periodically to take into consideration its future experience and other considerations such as legislation to continuously update its estimate of future costs and expected insurance recoveries. Historically, defense costs have represented approximately 23% of total costs. Through March 26, 2004, total indemnity costs paid, prior to insurance recoveries, were approximately $375,100 and total defense costs paid were approximately $112,000.

As of March 26, 2004, $257,500 was contested by the subsidiaries’ insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the subsidiaries’ various insurers and the subsidiaries as self-insurers. The Company believes that any amounts that its subsidiaries might be allocated as self-insurer would be immaterial. Based on the nature of the litigation and opinions received from outside counsel, the Company also believes that the possibility of not recovering the full amount of the asset is remote.

In July 2003, several subsidiaries of the Company and Liberty Mutual Insurance Company (“Liberty Mutual”), one of their insurers, entered into a settlement and release agreement that resolves the coverage litigation between the subsidiaries and Liberty Mutual in both state courts in New York and New Jersey. The agreement provides for a buy-back of insurance policies and the settlement of all disputes between the subsidiaries and Liberty Mutual with respect to asbestos-related claims. The agreement requires Liberty Mutual to make payments over a nineteen-year period, subject to annual caps, which payments decline over time, into a special account, established to pay the subsidiaries’ indemnity and defense costs for asbestos claims. These payments, however, would not be available to fund the subsidiaries’ required contributions to any national settlement trust that may be established by future federal legislation. In July 2003, the subsidiaries received an initial payment under the agreement of approximately $6,000, which was used to pay asbestos-related defense and indemnity costs.

In September 2003, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and certain London Market and North River Insurers. This agreement provides for a cash payment of $5,900, which has been received by the subsidiaries, and additional amounts which have been deposited in a trust for use by the subsidiaries for defense and indemnity of asbestos claims.

18

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

3. Litigation and Uncertainties — (Continued)

The Company recorded a charge of $68,100 in the fourth quarter 2003 to increase the valuation allowance for insurance claims receivable. The 2003 non-cash asbestos charge was due to the Company receiving a somewhat larger number of claims in 2003 than had been expected, which resulted in an increase in the projected liability related to asbestos and because of the insolvency of an insurance carrier in the fourth quarter of 2003.

In January 2004, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and Hartford Accident and Indemnity Company and certain of its affiliates. This agreement provides for a cash payment of $5,000, which has been received by the subsidiaries, an additional amount which has been deposited in a trust for use by the subsidiaries and a further amount to be deposited in that trust in 2005.

In March 2004, the Company’s subsidiaries and two asbestos insurance carriers entered into settlement and release agreements that resolve coverage litigation between the subsidiaries and the insurance carriers. The agreements provide for a buy-back of insurance policies and the settlement of all disputes between the subsidiaries and the insurance carriers with respect to asbestos-related claims. The agreements resulted in the insurance carriers making payments into a trust, established to pay the subsidiaries’ indemnity and defense costs for asbestos claims. As a result of these settlements, the Company reversed $11,700 of the $68,100 non-cash charge recorded in the fourth quarter of 2003. The Company projects that it will not be required to fund any asbestos liabilities from its cash flow for at least six years.

The pending litigation and negotiations with other insurers is continuing.

The Company’s management, after consultation with counsel, has considered the ongoing proceedings with insurers and the financial viability and legal obligations of its insurers, and believes that except for those insurers that have become or may become insolvent for which a reserve has been provided, the insurers or their guarantors will continue to adequately fund claims and defense costs relating to asbestos litigation. It should be noted that the estimate of the assets and liabilities related to asbestos claims and recovery is subject to a number of uncertainties that may result in significant changes in the current estimates. Among these are uncertainties as to the ultimate number of claims filed, the amounts of claim costs, the impact of bankruptcies of other companies with asbestos claims, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, as well as potential legislative changes. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with asbestos claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

A subsidiary of the Company in the U.K. has also received a limited number of claims alleging personal injury arising from exposure to asbestos. None of these claims have resulted in material costs to the Company.

The Company retained from the Environmental sale a long-term contract with a government agency that is to be completed in four phases. The first phase was for the design, permitting and licensing of a spent fuel facility. This phase was completed for a price of $66,700. The first phase of this project was profitable, but the close out of this phase resulted in increased costs. An $11,900 charge was recorded in 2003. Approximately $7,900 and $2,000 of this charge was expended in 2003 and the first quarter 2004, respectively, and the remaining $2,000 of the charge will be expended throughout the balance of 2004. The Company is in the process of submitting requests for equitable adjustment related to this contract and, at March 26, 2004 and December 26, 2003, the Company’s financial statements reflect anticipated collection of $0 from these requests for equitable adjustment.

19

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

3. Litigation and Uncertainties — (Continued)

The second phase of the contract is billed on a cost plus fee basis and is expected to conclude in 2004. In this phase, the Company must respond to any questions regarding the initial design included in phase one. Phase three, which is for the construction, start-up and testing of the facility for a fixed price of $114,000, subject to escalation, is scheduled to commence in late 2004. This phase will begin with the purchase of long lead items followed in 2005 by the construction activities. Construction is expected to last two years and requires that a subsidiary of the Company fund the construction cost. Foster Wheeler USA Corporation, the parent company of Environmental, provided a performance guarantee on the project. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. The Company and the government agency have commenced discussions about possibly restructuring or terminating subsequent phases of the contract. If the project were to proceed, the Company intends to seek third party financing to fund the majority of the construction costs, but there can be no assurance that the Company will secure such financing on acceptable terms, or at all. There also can be no assurance that the Company will be able to obtain the required surety bond. If the Company cannot obtain third party financing or the required surety bond, the Company’s participation would be uncertain. This could have a material adverse effect on the Company’s financial condition, results of operations, and cash flow. No claims have been raised by the government agency against the Company. The ultimate potential liability to the Company would arise in the event that the government agency terminates the contract (for example, due to the Company’s inability to continue with the contract) and re-bids the contract under its exact terms and the resulting cost to the government agency is greater than it would have been under the existing terms with the Company. The Company does not believe a claim is probable and is unable to estimate the possible loss that could occur as a result of any claims. Additionally, the Company believes that it has good legal defenses should the government agency decide to pursue an action.

In 1997, the United States Supreme Court effectively invalidated New Jersey’s long-standing municipal solid waste flow rules and regulations. The immediate effect was to eliminate the guaranteed supply of municipal solid waste to the Camden County Waste-to-Energy Project (the “Project”) with its corresponding tipping fee revenue. As a result, tipping fees have been reduced to market rate in order to provide a steady supply of fuel to the Project. Those market-based revenues have not been, and are not expected to be, sufficient to service the debt on outstanding bonds which were issued to construct the Project and to acquire a landfill for Camden County’s use.

The Company’s project subsidiary, Camden County Energy Recovery Associates, LP (“CCERA”), has filed suit against the involved parties, including the State of New Jersey, seeking among other things to void the applicable contracts and agreements governing the Project. (Camden County Energy Recovery Assoc. v. N.J. Department of Environmental Protection, et al., Superior Court of New Jersey, Mercer County, L-268-98). Since 1999, the State of New Jersey has provided subsidies sufficient to ensure the payment of each of the Project’s debt service payments as it became due. In January 2002, the State of New Jersey enacted legislation providing a mechanism for state-supported refinancing of bond debt on solid waste facilities located within the state. The legislation expired on December 31, 2002, without any refinancing having been accomplished. Press reports indicated that it is unlikely that any state-supported refinancing will occur in the near future, but those same reports included statements by state officials that the State will continue to ensure that debt service payments are made when due.

The bonds outstanding on the Camden Project are public debt, not debt of either the Company or CCERA, and the bonds are not guaranteed by the Company. If the State were to fail to subsidize the debt service, and there were to be a default on a debt service payment, the bondholders might proceed to attempt to exercise their remedies.

20

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

3. Litigation and Uncertainties — (Continued)

At this time, management cannot determine the ultimate outcome of the foregoing and the potential effects on CCERA and the Project. However, management believes that pending the conclusion of the foregoing litigation, the Project will continue to operate at full capacity receiving market rates for waste disposal and generating sufficient revenues to pay CCERA its service fee. Because the debt outstanding on the Camden Project is not CCERA’s, and is not secured by CCERA’s plant, the Company’s management does not believe that an attempt by the bondholders to exercise their remedies would have a material adverse effect on CCERA or the Company.

Under U.S. Federal statutes, such as the Resource Conservation and Recovery Act, Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”), the Clean Water Act, the Clean Air Act, and similar state and local laws, the current owner or operator of real property and the past owners or operators of real property (if disposal or release took place during such past ownership or operation) may be jointly and severally liable for the costs of removal or remediation of toxic or hazardous substances on or under their property, regardless of whether such materials were released in violation of law or whether the owner or operator knew of, or was responsible for, the presence of such substances, and are subject to additional liabilities if they do not comply with applicable laws regulating such hazardous substances. In either case, such liabilities can be substantial. Moreover, under CERCLA and similar state laws, persons who arrange for the disposal or treatment of hazardous or toxic substances may also be jointly and severally liable for the costs of the removal or remediation of such substances at a disposal or treatment site, whether or not such site was owned or operated by such person (“off-site facility”). Liability at such off-site facilities is typically allocated among all of the viable responsible parties based on such factors as the relative amount of waste contributed to a site, toxicity of such waste, relationship of the waste contributed by a party to the remedy chosen for the site, and other factors.

The Company currently owns and operates industrial facilities and has also transferred its interests in industrial facilities that it formerly owned or operated. It is likely that as a result of its current or former operations, such facilities have been impacted by hazardous substances. The Company is not aware of any conditions at its currently owned facilities in the United States that it expects will cause the Company to incur material costs which have not been accrued.

The Company also may receive claims, pursuant to indemnity obligations from owners of recently sold facilities that may require the Company to incur costs for investigation and/or remediation. Based on the available information, the Company does not believe that such costs will be material. No assurance can be provided that the Company will not discover environmental conditions at its currently owned or operated properties, or that additional claims will not be made with respect to formerly owned properties, requiring the Company to incur material expenditures to investigate and/or remediate such conditions.

The Company had been notified that it was a potentially responsible party (“PRP”) under CERCLA or similar state laws at three off-site facilities, excluding sites as to which the Company has resolved its liability. At each of these sites, the Company’s liability should be substantially less than the total site remediation costs because the percentage of waste attributable to the Company compared to that attributable to all other PRPs is low. The Company does not believe that its share of cleanup obligations at any of the off-site facilities as to which it has received a notice of potential liability will exceed $500 in the aggregate.

The Company’s project claims have increased as a result of the increase in lump-sum contracts between the years 1992 and 2000. Project claims are claims brought by the Company against project owners for costs exceeding the contract price or amounts not included in the original contract price. These claims typically arise from changes in the initial scope of work or from owner-caused delays. These claims are often subject to lengthy arbitration or litigation proceedings. The costs associated with these changes or owner-caused delays include additional direct costs, such as labor and material costs associated with the performance of the

21

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

3. Litigation and Uncertainties — (Continued)

additional work, as well as indirect costs that may arise due to delays in the completion of the project, such as increased labor costs resulting from changes in labor markets. The Company has used significant additional working capital in projects with cost overruns pending the resolution of the relevant project claims. The Company cannot assure that project claims will not continue in the future.

As of March 26, 2004 and December 27, 2003, the Company had recorded commercial claims of approximately $2,300 and $0. The increase is due to claims recorded in accordance with SOP 81-1, as discussed under “Revenue Recognition on Long-Term Contracts.” The claims were recorded in the Company’s European operations. The Company established a provision for the balance of outstanding commercial claims as of December 27, 2002 to bring the net book value of such claims to $0. At that time, the Company revised its estimates of claim revenues to reflect recent adverse recovery experience due to management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. The Company continues to pursue these claims, but there can be no assurance that it will recover the full amount of the claims, or anything at all.

The Company also faces a number of counterclaims brought against it by certain project owners in connection with several of the project claims described above. If the Company were found liable for any of these counterclaims, it would have to incur write-downs and charges against earnings to the extent a reserve is not established. Failure to recover amounts under these claims and charges related to counterclaims could have a material adverse impact on the Company’s liquidity and financial condition.

The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings cannot be estimated with certainty. As additional information concerning the estimates used by the Company becomes known, the Company reassesses its position both with respect to gain contingencies and accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change relate to legal matters as these are subject to change as events evolve and as additional information becomes available during the administration and litigation process. Increases in the number of claims filed or costs to resolve those claims will cause the Company to increase further the estimates of the costs associated with such claims and could have a material adverse effect on the business, financial condition, results of operations, and cash flows.

In the ordinary course of business, the Company and its subsidiaries enter into contracts providing for assessment of damages for nonperformance or delays in completion. Suits and claims have been or may be brought against the Company by customers alleging deficiencies in either equipment or plant construction and seeking resulting alleged damages. Based on its knowledge of the facts and circumstances relating to the Company’s liabilities, if any, and to its insurance coverage, management of the Company believes that the disposition of such suits will not result in material charges against the financial position, results of operations or cash flows in excess of amounts previously provided in the accounts.

22

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

4. Changes in Shareholders’ Deficit

Changes in Shareholders’ Deficit for the three months ended March 26, 2004 were as follows:

	Common Stock				Paid-in		Accumulated			Accumulated Other Comprehensive			Total Shareholders’
	Shares		Amount		Capital		Deficit			Loss			Deficit
Balance at December 26, 2003		40,771,560	$	40,772	$	201,841	$	(811,054	)	$	(303,999	)	$	(872,440	)
Net loss		—		—		—		(4,298	)		—			(4,298	)
Foreign currency translation adjustment		—		—		—		—			(4,004	)		(4,004	)
Balance at March 26, 2004		40,771,560	$	40,772	$	201,841	$	(815,352	)	$	(308,003	)	$	(880,742	)

5. Major Business Groups

Management uses several financial metrics to measure the performance of the Company’s business segments. EBITDA, as discussed and defined below, is the primary earnings measure used by the Company’s chief decision makers.

EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings/(loss) before taxes (before goodwill charge), interest expense, depreciation and amortization. The Company has presented EBITDA because it believes it is an important supplemental measure of operating performance. EBITDA, adjusted for certain unusual and infrequent items specifically excluded in the terms of the Senior Credit Facility, is also used as a measure for certain covenants under the Senior Credit Facility. The Company believes that the line item on its condensed consolidated statement of operations and comprehensive loss entitled “net loss” is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net loss as an indicator of operating performance. EBITDA, as the Company calculates it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the Company’s ability to fund its cash needs. As EBITDA excludes certain financial information compared with net earnings/(loss), the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions which are excluded. The Company’s non-GAAP performance measure, EBITDA, has certain material limitations as follows:

• It does not include interest expense. Because the Company has borrowed substantial amounts of money to finance some of its operations, interest is a necessary and ongoing part of the Company’s costs and has assisted the Company in generating revenue. Therefore, any measure that excludes interest has material limitations;

• It does not include taxes. Because the payment of taxes is a necessary and ongoing part of the Company’s operations, any measure that excludes taxes has material limitations;

• It does not include depreciation. Because the Company must utilize substantial property, plants and equipment in order to generate revenues in its operations, depreciation is a necessary and ongoing part of the Company’s costs. Therefore, any measure that excludes depreciation has material limitations.

23

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

5. Major Business Groups — (Continued)

A reconciliation of EBITDA, a non-GAAP financial measure, to net (loss)/earnings, a GAAP measure, is shown below.

	Total			Engineering and Construction			Energy Group			Corporate and Financial Services (1)
For the three months ended March 26, 2004
Third party revenue	$	702,308		$	417,189		$	266,568		$	18,551
Intercompany revenue		—			3,167			3,237			(6,404	)
Total revenue	$	702,308		$	420,356		$	269,805		$	12,147
EBITDA	$	42,627		$	33,084		$	17,013		$	(7,470	)
Less: Interest expense (2)(3)		25,432			268			4,762			20,402
Less: Depreciation and amortization		8,049			2,254			5,150			645
Earnings/(loss) before income taxes		9,146			30,562			7,101			(28,517	)
Income tax provision/(benefits)		13,444			10,125			8,000			(4,681	)
Net (loss)/earnings	$	(4,298	)	$	20,437		$	(899	)	$	(23,836	)
For the three months ended March 28, 2003
Third party revenue	$	810,868		$	479,739		$	327,518		$	3,611
Intercompany revenue		—			3,066			(1,091	)		(1,975	)
Total revenue	$	810,868		$	482,805		$	326,427		$	1,636
EBITDA	$	19,242		$	12,148		$	30,486		$	(23,392	)
Less: Interest expense (2)(4)		21,794			(630	)		4,868			17,556
Less: Depreciation and amortization		9,810			2,973			5,824			1,013
(Loss)/earnings before income taxes		(12,362	)		9,805			19,794			(41,961	)
Income tax provision/(benefits)		7,458			2,967			6,497			(2,006	)
Net (loss)/earnings	$	(19,820	)	$	6,838		$	13,297		$	(39,955	)

(1) Includes general corporate income and expense, the Company’s captive insurance operation and eliminations.

(2) Includes intercompany interest charged by Corporate and Financial Services to the business groups on outstanding borrowings.

(3) Includes interest expense on subordinated deferrable interest debentures of $4,792 for the three months ended March 26, 2004.

(4) Includes mandatorily redeemable preferred security distributions of subsidiary trust of $4,372 for the three months ended March 28, 2003.

24

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

5. Major Business Groups — (Continued)

Operating revenues by industry segment for the three-month periods ending March 26, 2004 and March 28, 2003 were as follows:

	Three Months Ended
	March 26, 2004			March 28, 2003
Power	$	321,535		$	371,680
Oil and gas/refinery		232,324			203,234
Pharmaceutical		71,516			60,064
Chemical		22,068			56,154
Environmental		7,856			77,881	*
Power production		25,623			28,314
Eliminations and other		(14,563	)		(13,235	)
Total operating revenues	$	666,359		$	784,092	*

* The decline in operating revenues in the environmental industry segment resulted from the sale of certain assets of Environmental on March 7, 2003. The first quarter of 2003 operating revenues in this segment included $62,900 from Environmental.

6. Consolidating Financial Information

A. Senior Notes at 6.75%

As a result of the reorganization on May 25, 2001, Foster Wheeler LLC, as successor to Foster Wheeler Corporation, became obligor for the Senior Notes due November 15, 2005. In connection with the Company finalizing the Senior Credit Facility, Foster Wheeler Ltd. and the following 100% owned companies issued guarantees in favor of the holders of the Senior Notes: Equipment Consultants, Inc., Foster Wheeler Holdings Ltd. (formerly known as Foreign Holdings Ltd.), Foster Wheeler Asia Limited, Foster Wheeler Capital & Finance Corporation, Foster Wheeler Constructors, Inc., Foster Wheeler Development Corporation, Foster Wheeler Energy Corporation, Foster Wheeler Energy Manufacturing, Inc., Foster Wheeler Energy Services, Inc., Foster Wheeler Enviresponse, Inc., Foster Wheeler Environmental Corporation, Foster Wheeler Facilities Management, Inc., Foster Wheeler Inc., Foster Wheeler International Corporation, Foster Wheeler International Holdings, Inc., Foster Wheeler North America Corp. (formerly known as “Foster Wheeler Power Group, Inc.”), Foster Wheeler Power Systems, Inc., Foster Wheeler Pyropower, Inc., Foster Wheeler Real Estate Development Corporation, Foster Wheeler Realty Services, Inc., Foster Wheeler USA Corporation, Foster Wheeler Virgin Islands, Inc., Foster Wheeler Zack, Inc., FW Mortshal, Inc., FW Technologies Holding LLC, HFM International, Inc., Process Consultants, Inc., Pyropower Operating Services Company, Inc., and Perryville III Trust. Each of the guarantees is full and unconditional and joint and several. Foster Wheeler LLC and each of the subsidiary guarantors are 100% owned, directly or indirectly, by Foster Wheeler Ltd. The summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the wholly owned subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. None of the subsidiary guarantors are restricted from making distributions to the Company. The following represents summarized condensed consolidating financial information as of March 26, 2004 and December 26, 2003 with respect to the financial position, and for the three months ended March 26, 2004 and March 28, 2003 for results of operations and for cash flows of the Company and its 100% owned and majority-owned subsidiaries.

25

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

A. Senior Notes at 6.75% — (Continued)

The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. is also a guarantor. The Foster Wheeler LLC column presents the issuer’s financial information. The Guarantor Subsidiaries column presents the financial information of all guarantors excluding that of Foster Wheeler Ltd. which is separately presented. The guarantor subsidiaries include the results of Foster Wheeler Holdings Ltd. (formerly known as Foreign Holdings Ltd.), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other guarantor subsidiaries and non-guarantor subsidiaries.

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING BALANCE SHEET
March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Cash and cash equivalents	$	—		$	—		$	69,862		$	305,752		$	—		$	375,614
Accounts and notes receivable, net		—			293,625			139,549			729,052			(639,784	)		522,442
Contracts in process and inventories		—			—			51,155			84,875			(8,846	)		127,184
Investment and advances		—			—			64,614			—			(64,614	)		—
Other current assets		—			—			3,571			64,185			—			67,756
Total current assets		—			293,625			328,751			1,183,864			(713,244	)		1,092,996
Investments in subsidiaries and others		(880,374	)		(934,655	)		401,947			88,824			1,413,044			88,786
Land, buildings & equipment, net		—			—			62,427			241,179			—			303,606
Notes and accounts receivable — long-term		210,000			575,118			280,927			277,009			(1,336,774	)		6,280
Intangible assets, net		—			—			100,993			20,308			—			121,301
Asbestos-related insurance recovery receivable		—			480,786			—			—			—			480,786
Other assets		—			24,726			83,356			217,106			—			325,188
TOTAL ASSETS	$	(670,374	)	$	439,600		$	1,258,401		$	2,028,290		$	(636,974	)	$	2,418,943
Liabilities & Shareholders’ (Deficit)/Equity
Accounts payable and accrued expenses	$	420		$	85,473		$	709,149		$	438,850		$	(648,630)		$	585,262
Estimated costs to complete long-term contracts		—			—			149,218			428,831			—			578,049
Other current liabilities		(52	)		(1,085	)		27,714			122,962			—			149,539
Total current liabilities		368			84,388			886,081			990,643			(648,630	)		1,312,850
Corporate and other debt		—			326,912			44,239			23,492			—			394,643
Special-purpose project debt		—			—			—			115,735			—			115,735
Pension, postretirement and other employee benefits		—			—			219,890			84,071			—			303,961
Asbestos-related liability		—			502,287			—			—			—			502,287
Other long-term liabilities and minority interest		—			231,312			876,562			760,339			(1,695,007	)		173,206
Subordinated Robbins obligations		—			—			112,003			—			—			112,003
Convertible subordinated notes		210,000			—			—			—			—			210,000
Subordinated deferrable interest debentures		—			175,000			—			—			—			175,000
TOTAL LIABILITIES		210,368			1,319,899			2,138,775			1,974,280			(2,343,637	)		3,299,685
Common stock and paid-in capital		242,613			242,613			242,613			303,143			(788,369	)		242,613
Accumulated deficit		(815,352	)		(814,909	)		(814,984	)		(43,467	)		1,673,360			(815,352	)
Accumulated other comprehensive loss		(308,003	)		(308,003	)		(308,003	)		(205,666	)		821,672			(308,003	)
TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY		(880,742	)		(880,299	)		(880,374	)		54,010			1,706,663			(880,742	)
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY	$	(670,374)		$	439,600		$	1,258,401		$	2,028,290		$	(636,974	)	$	2,418,943

26

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

A. Senior Notes at 6.75% — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Cash and cash equivalents	$	—		$	—		$	32,984		$	331,111		$	—		$	364,095
Accounts and notes receivable, net		—			272,361			111,142			798,644			(625,733	)		556,414
Contracts in process and inventories		—			—			121,527			60,876			(9,110	)		173,293
Investment and advances		—			—			88,641			—			(88,641	)		—
Other current assets		—			—			4,310			76,264			—			80,574
Total current assets		—			272,361			358,604			1,266,895			(723,484	)		1,174,376
Investments in subsidiaries and others		(872,080	)		(919,588	)		407,023			98,651			1,384,645			98,651
Land, buildings & equipment, net		—			—			64,315			245,300			—			309,615
Notes and accounts receivable — long-term		210,000			575,118			281,108			458,490			(1,517,940	)		6,776
Intangible assets, net		—			—			101,664			21,025			—			122,689
Asbestos-related insurance recovery receivable		—			495,400			—			—			—			495,400
Other assets		—			28,478			83,898			186,647			—			299,023
TOTAL ASSETS	$	(662,080	)	$	451,769		$	1,296,612		$	2,277,008		$	(856,779	)	$	2,506,530
Liabilities & Shareholders’ (Deficit)/Equity
Accounts payable and accrued expenses	$	412		$	78,278		$	723,122		$	519,693		$	(634,843	)	$	686,662
Estimated costs to complete long-term contracts		—			—			162,168			390,586			—			552,754
Other current liabilities		(52	)		(1,085	)		17,209			118,272			—			134,344
Total current liabilities		360			77,193			902,499			1,028,551			(634,843	)		1,373,760
Corporate and other debt		—			328,163			44,120			23,819			—			396,102
Special-purpose project debt		—			—			—			119,281			—			119,281
Pension, postretirement and other employee benefits		—			—			216,281			78,852			—			295,133
Asbestos-related liability		—			526,200			—			—			—			526,200
Other long-term liabilities and minority interest		—			392,221			894,203			763,125			(1,877,644	)		171,905
Subordinated Robbins obligations		—			—			111,589			—			—			111,589
Convertible subordinated notes		210,000			—			—			—			—			210,000
Preferred Trust Securities		—			—			—			175,000			—			175,000
TOTAL LIABILITIES		210,360			1,323,777			2,168,692			2,188,628			(2,512,487	)		3,378,970
Common stock and paid-in capital		242,613			242,613			242,613			325,741			(810,967	)		242,613
Accumulated deficit		(811,054	)		(810,622	)		(810,694	)		(33,254	)		1,654,570			(811,054	)
Accumulated other comprehensive loss		(303,999	)		(303,999	)		(303,999	)		(204,107	)		812,105			(303,999	)
TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY		(872,440	)		(872,008	)		(872,080	)		88,380			1,655,708			(872,440	)
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY	$	(662,080)		$	451,769		$	1,296,612		$	2,277,008		$	(856,779	)	$	2,506,530

27

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

A. Senior Notes at 6.75% — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
Three Months Ended March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues	$	—		$	—		$	136,425		$	553,092		$	(23,158	)	$	666,359
Other income		3,413			14,095			21,746			28,348			(31,653	)		35,949
Total revenues and other income		3,413			14,095			158,171			581,440			(54,811	)		702,308
Cost of operating revenues		—			—			108,478			505,827			(23,158	)		591,147
Selling, general and administrative expenses		—			—			19,957			37,227			—			57,184
Other deductions and minority interest		2			88			12,278			7,423			(392	)		19,399
Interest expense *		3,419			17,708			18,211			17,355			(31,261	)		25,432
Equity in net loss of subsidiaries		(4,290	)		(586	)		(1,469	)		—			6,345			—
(Loss)/earnings before income taxes		(4,298	)		(4,287	)		(2,222	)		13,608			6,345			9,146
Provision for income taxes		—			—			2,068			11,376			—			13,444
Net (loss)/earnings		(4,298	)		(4,287	)		(4,290	)		2,232			6,345			(4,298	)
Other comprehensive loss:
Foreign currency translation adjustment		(4,004	)		(4,004	)		(4,004	)		(1,558	)		9,566			(4,004	)
Net comprehensive loss	$	(8,302	)	$	(8,291	)	$	(8,294	)	$	674		$	15,911		$	(8,302	)

* Includes interest expense on subordinated deferrable interest debentures of $4,792.

28

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

A. Senior Notes at 6.75% — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
AND COMPREHENSIVE LOSS
Three Months Ended March 28, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues	$	—		$	—		$	263,681		$	544,482		$	(24,071	)	$	784,092
Other income		3,413			13,696			23,617			22,961			(36,911	)		26,776
Total revenues and other income		3,413			13,696			287,298			567,443			(60,982	)		810,868
Cost of operating revenues		—			—			257,551			493,649			(24,071	)		727,129
Selling, general and administrative expenses		—			—			25,090			26,650			—			51,740
Other deductions and minority interest		6			130			17,306			5,531			(406	)		22,567
Interest expense *		3,434			14,058			14,031			26,776			(36,505	)		21,794
Equity in net loss of subsidiaries		(19,793	)		(19,296	)		8,997			—			30,092			—
(Loss)/earnings before income taxes		(19,820	)		(19,788	)		(17,683	)		14,837			30,092			(12,362	)
Provision for income taxes		—			—			2,110			5,348			—			7,458
Net (loss)/earnings		(19,820	)		(19,788	)		(19,793	)		9,489			30,092			(19,820	)
Other comprehensive loss:
Foreign currency translation adjustment		(815	)		(815	)		(815	)		(815	)		2,445			(815	)
Net comprehensive (loss)/income	$	(20,635	)	$	(20,603	)	$	(20,608	)	$	8,674		$	32,537		$	(20,635	)

* Includes mandatorily redeemable preferred security distributions of subsidiary trust of $4,372.

29

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

A. Senior Notes at 6.75% — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from Operating Activities
Net cash (used)/provided by Operating Activities	$	(8	)	$	13,583		$	3,409		$	23,061		$	(10,477	)	$	29,568
Cash Flows from Investing Activities
Change in restricted cash		—			—			—			(20,700	)		—			(20,700	)
Capital expenditures		—			—			605			(2,364	)		—			(1,759	)
Proceeds from sale of assets		—			—			(6	)		133			—			127
(Increase)/decrease in investment and advances		—			—			24,103			(24,103	)		—			—
Increase in short-term investments		—			—			—			8,309			—			8,309
Net cash provided/(used) by Investing Activities		—			—			24,702			(38,725	)		—			(14,023	)
Cash Flows from Financing Activities
Dividends to shareholders		—			—			—			(10,477	)		10,477			—
Decrease in short-term debt		—			—			—			(121	)		—			(121	)
Proceeds from long-term debt		—			—			—			—			—			—
Repayment of long-term debt		—			(1,252	)					(3,574	)		—			(4,826	)
Other		8			(12,331	)		8,774			886			—			(2,663	)
Net cash provided/(used) by Financing Activities		8			(13,583	)		8,774			(13,286	)		10,477			(7,610	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(7	)		3,591			—			3,584
Increase/(decrease) in cash and cash equivalents		—			—			36,878			(25,359	)		—			11,519
Cash and Cash equivalents, beginning of period		—			—			32,984			331,111			—			364,095
Cash and Cash equivalents, end of period	$	—		$	—		$	69,862		$	305,752		$	—		$	375,614

30

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

A. Senior Notes at 6.75% — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 28, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from Operating Activities
Net cash (used)/provided by Operating Activities	$	(27	)	$	2,861		$	(22,589	)	$	3,652		$	(867	)	$	(16,970	)
Cash Flows from Investing Activities
Change in restricted cash		—			—			(654	)		(3,043	)		—			(3,697	)
Capital expenditures		—			—			(747	)		(2,866	)		—			(3,613	)
Proceeds from sale of assets		—			—			72,580			338			—			72,918
(Increase)/decrease in investment and advances		—			—			(4,417	)		2,754			5,381			3,718
Increase in short-term investments		—			—			—			(2	)		—			(2	)
Net cash provided/(used) by Investing Activities		—			—			66,762			(2,819	)		5,381			69,324
Cash Flows from Financing Activities
Decrease in short-term debt		—			—			—			(503	)		—			(503	)
Proceeds from long-term debt		—			—			—			18			—			18
Repayment of long-term debt		—			(10,000	)		—			(3,603	)		—			(13,603	)
Other		27			7,139			31,074			(36,605	)		(4,514	)		(2,879	)
Net cash provided/(used) by Financing Activities		27			(2,861	)		31,074			(40,693	)		(4,514	)		(16,967	)
Effect of exchange rate changes on cash and cash equivalents		—			—			356			4,058			—			4,414
Increase/(decrease) in cash and cash equivalents		—			—			75,603			(35,802	)		—			39,801
Cash and Cash equivalents, beginning of period		—			—			19,614			324,691			—			344,305
Cash and Cash equivalents, end of period	$	—		$	—		$	95,217		$	288,889		$	—		$	384,106

31

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes

In May and June 2001, Foster Wheeler Ltd. issued 6.5% Convertible Subordinated Notes (“Convertible Notes”) due in 2007. The Convertible Notes are fully and unconditionally guaranteed by Foster Wheeler LLC, a 100% owned subsidiary of Foster Wheeler Ltd. Foster Wheeler LLC has assumed the obligation to fund the debt service. The following summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of Foster Wheeler LLC because management does not believe that such separate financial statements and related disclosures would be material to investors. The following represents summarized condensed consolidating financial information as of March 26, 2004 and December 26, 2003 with respect to the financial position, and for the three months ended March 26, 2004 and March 28, 2003 for results of operations and for cash flows of the Company and its 100% owned and majority-owned subsidiaries.

The Foster Wheeler Ltd. column presents the financial information of the parent company, who is also the issuer. The Guarantor Subsidiary column presents the financial information of the sole guarantor, Foster Wheeler LLC. The non-guarantor subsidiaries include the results of all direct and indirect non-guarantor subsidiaries of Foster Wheeler Ltd., including Foster Wheeler Holdings Ltd. (previously known as Foreign Holdings Ltd.), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other non- guarantor subsidiaries.

32

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING BALANCE SHEET
March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	—		$	—		$	375,614		$	—		$	375,614
Accounts and notes receivable, net		—			293,625			450,531			(221,714	)		522,442
Contracts in process and inventories		—			—			127,184			—			127,184
Other current assets		—			—			67,756			—			67,756
Total current assets		—			293,625			1,021,085			(221,714	)		1,092,996
Investments in subsidiaries and others		(880,374	)		(934,655	)		143,142			1,760,673			88,786
Land, buildings & equipment, net		—			—			303,606			—			303,606
Notes and accounts receivable — long-term		210,000			575,118			6,220			(785,058	)		6,280
Intangible assets, net		—			—			121,301			—			121,301
Asbestos-related insurance recovery receivable		—			480,786			—			—			480,786
Other assets		—			24,726			300,462			—			325,188
TOTAL ASSETS	$	(670,374	)	$	439,600		$	1,895,816		$	753,901		$	2,418,943
LIABILITIES & SHAREHOLDERS’ DEFICIT
Accounts payable and accrued expenses	$	420		$	85,473		$	721,083		$	(221,714	)	$	585,262
Estimated costs to complete long-term contracts		—			—			578,049			—			578,049
Other current liabilities		(52	)		(1,085	)		150,676			—			149,539
Total current liabilities		368			84,388			1,449,808			(221,714	)		1,312,850
Corporate and other debt		—			326,912			67,731			—			394,643
Special-purpose project debt		—			—			115,735			—			115,735
Pension, postretirement and other employee benefits		—			—			303,961			—			303,961
Asbestos-related liability		—			502,287			—			—			502,287
Other long-term liabilities and minority interest		—			231,312			726,952			(785,058	)		173,206
Subordinated Robbins obligations		—			—			112,003			—			112,003
Convertible subordinated notes		210,000			—			—			—			210,000
Subordinated deferrable interest debentures		—			175,000			—			—			175,000
TOTAL LIABILITIES		210,368			1,319,899			2,776,190			(1,006,772	)		3,299,685
Common stock and paid in capital		242,613			242,613			242,613			(485,226	)		242,613
Accumulated deficit		(815,352	)		(814,909	)		(814,984	)		1,629,893			(815,352	)
Accumulated other comprehensive loss		(308,003	)		(308,003	)		(308,003	)		616,006			(308,003	)
TOTAL SHAREHOLDERS’ DEFICIT		(880,742	)		(880,299	)		(880,374	)		1,760,673			(880,742	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	(670,374	)	$	439,600		$	1,895,816		$	753,901		$	2,418,943

33

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	—		$	—		$	364,095		$	—		$	364,095
Accounts and notes receivable, net		—			272,361			497,096			(213,043	)		556,414
Contracts in process and inventories		—			—			173,293			—			173,293
Other current assets		—			—			80,574			—			80,574
Total current assets		—			272,361			1,115,058			(213,043	)		1,174,376
Investments in subsidiaries and others		(872,080	)		(919,588	)		146,231			1,744,088			98,651
Land, buildings & equipment, net		—			—			309,615			—			309,615
Notes and accounts receivable — long-term		210,000			575,118			181,716			(960,058	)		6,776
Intangible assets, net		—			—			122,689			—			122,689
Asbestos-related insurance recovery receivable		—			495,400			—			—			495,400
Other assets		—			28,478			270,545			—			299,023
TOTAL ASSETS	$	(662,080	)	$	451,769		$	2,145,854		$	570,987		$	2,506,530
LIABILITIES & SHAREHOLDERS’ DEFICIT
Accounts payable and accrued expenses	$	412		$	78,278		$	821,015		$	(213,043	)	$	686,662
Estimated costs to complete long-term contracts		—			—			552,754			—			552,754
Other current liabilities		(52	)		(1,085	)		135,481			—			134,344
Total current liabilities		360			77,193			1,509,250			(213,043	)		1,373,760
Corporate and other debt		—			328,163			67,939			—			396,102
Special-purpose project debt		—			—			119,281			—			119,281
Pension, postretirement and other employee benefits		—			—			295,133			—			295,133
Asbestos-related liability		—			526,200			—			—			526,200
Other long-term liabilities and minority interest		—			392,221			739,742			(960,058	)		171,905
Subordinated Robbins obligations		—			—			111,589			—			111,589
Convertible subordinated notes		210,000			—			—			—			210,000
Preferred Trust Securities		—			—			175,000			—			175,000
TOTAL LIABILITIES		210,360			1,323,777			3,017,934			(1,173,101	)		3,378,970
Common stock and paid in capital		242,613			242,613			242,613			(485,226	)		242,613
Accumulated deficit		(811,054	)		(810,622	)		(810,694	)		1,621,316			(811,054	)
Accumulated other comprehensive loss		(303,999	)		(303,999	)		(303,999	)		607,998			(303,999	)
TOTAL SHAREHOLDERS’ DEFICIT		(872,440	)		(872,008	)		(872,080	)		1,744,088			(872,440	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	(662,080	)	$	451,769		$	2,145,854		$	570,987		$	2,506,530

34

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues	$	—		$	—		$	666,359		$	—		$	666,359
Other income		3,413			14,095			35,955			(17,514	)		35,949
Total revenues and other income		3,413			14,095			702,314			(17,514	)		702,308
Cost of operating revenues		—			—			591,147			—			591,147
Selling, general and administrative expenses		—			—			57,184			—			57,184
Other deductions and minority interest		2			88			19,309			—			19,399
Interest expense*		3,419			17,708			21,819			(17,514	)		25,432
Equity in net loss of subsidiaries		(4,290	)		(586	)		(3,701	)		8,577			—
(Loss)/earnings before income taxes		(4,298	)		(4,287	)		9,154			8,577			9,146
Provision for income taxes		—			—			13,444			—			13,444
Net loss		(4,298	)		(4,287	)		(4,290	)		8,577			(4,298	)
Other comprehensive loss:
Foreign currency translation adjustment		(4,004	)		(4,004	)		(4,004	)		8,008			(4,004	)
Net comprehensive loss	$	(8,302	)	$	(8,291	)	$	(8,294	)	$	16,585		$	(8,302	)

* Includes interest expense on subordinated deferrable interest debentures of $4,792.

35

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 28, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues	$	—		$	—		$	784,092		$	—		$	784,092
Other income		3,413			13,696			31,170			(21,503	)		26,776
Total revenues and other income		3,413			13,696			815,262			(21,503	)		810,868
Cost of operating revenues		—			—			727,129			—			727,129
Selling, general and administrative expenses		—			—			51,740			—			51,740
Other deductions and minority interest		6			130			22,431			—			22,567
Interest expense*		3,434			14,058			25,805			(21,503	)		21,794
Equity in net loss of subsidiaries		(19,793	)		(19,296	)		(492	)		39,581			—
Loss before income taxes		(19,820	)		(19,788	)		(12,335	)		39,581			(12,362	)
Provision for income taxes		—			—			7,458			—			7,458
Net loss		(19,820	)		(19,788	)		(19,793	)		39,581			(19,820	)
Other comprehensive loss:
Foreign currency translation adjustments		(815	)		(815	)		(815	)		1,630			(815	)
Net comprehensive loss	$	(20,635	)	$	(20,603	)	$	(20,608	)	$	41,211		$	(20,635	)

* Includes mandatorily redeemable preferred security distributions of subsidiary trust of $4,372.

36

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from Operating Activities
Net cash (used)/provided by Operating Activities	$	(8	)	$	13,583		$	26,470		$	(10,477	)	$	29,568
Cash Flows from Investing Activities
Change in restricted cash		—			—			(20,700	)		—			(20,700	)
Capital expenditures		—			—			(1,759	)		—			(1,759	)
Proceeds from sale of properties		—			—			127			—			127
Increase in short-term investments		—			—			8,309			—			8,309
Net cash used by Investing Activities		—			—			(14,023	)		—			(14,023	)
Cash Flows from Financing Activities
Dividends to shareholders		—			—			(10,477	)		10,477			—
Decrease in short-term debt		—			—			(121	)		—			(121	)
Repayment of long-term debt		—			(1,252	)		(3,574	)		—			(4,826	)
Other		8			(12,331	)		9,660			—			(2,663	)
Net cash used by Financing Activities		8			(13,583	)		(4,512	)		10,477			(7,610	)
Effect of exchange rate changes on cash and cash equivalents		—			—			3,584			—			3,584
Increase in cash and cash equivalents		—			—			11,519			—			11,519
Cash and Cash equivalents, beginning of period		—			—			364,095			—			364,095
Cash and Cash equivalents, end of period	$	—		$	—		$	375,614		$	—		$	375,614

37

FOSTER WHEELER LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

B. Convertible Subordinated Notes — (Continued)

FOSTER WHEELER LTD.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 28, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			Guarantor Subsidiary			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from Operating Activities
Net cash (used)/provided by Operating Activities	$	(27	)	$	2,861		$	(26,970	)	$	7,166		$	(16,970	)
Cash Flows from Investing Activities
Change in restricted cash		—			—			(3,697	)		—			(3,697	)
Capital expenditures		—			—			(3,613	)		—			(3,613	)
Proceeds from sale of properties		—			—			72,918			—			72,918
Decrease in investment and advances		—			—			3,718			—			3,718
Increase in short-term investments		—			—			(2	)		—			(2	)
Net cash provided by Investing Activities		—			—			69,324			—			69,324
Cash Flows from Financing Activities
Decrease in short-term debt		—			—			(503	)		—			(503	)
Proceeds from long-term debt		—			—			18			—			18
Repayment of long-term debt		—			(10,000	)		(3,603	)		—			(13,603	)
Other		27			7,139			(2,879	)		(7,166	)		(2,879	)
Net cash provided/(used) by Financing Activities		27			(2,861	)		(6,967	)		(7,166	)		(16,967	)
Effect of exchange rate changes on cash and cash equivalents		—			—			4,414			—			4,414
Increase in cash and cash equivalents		—			—			39,801			—			39,801
Cash and Cash equivalents, beginning of period		—			—			344,305			—			344,305
Cash and Cash equivalents, end of period	$	—		$	—		$	384,106		$	—		$	384,106

38

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

C. Preferred Trust Securities

On January 13, 1999, FW Preferred Capital Trust I (the “Capital Trust”), a Delaware Business Trust, which is a 100% indirectly owned finance subsidiary of the Company, consummated a $175,000 public offering of 7,000 Preferred Trust Securities (the “Trust Securities”). The Trust Securities, which are fully and unconditionally guaranteed by Foster Wheeler Ltd. and Foster Wheeler LLC, accrue cumulative distributions at an annual rate of 9%. The distributions are payable quarterly in arrears on April 15, July 15, October 15 and January 15 of each year. The maturity date of the Trust Securities is January 15, 2029; however, the Capital Trust can redeem the Trust Securities on or after January 15, 2004.

The Capital Trust invested the proceeds from the sale of the Trust Securities in an equal principal amount of 9.0% Junior Subordinated Deferrable Interest Debentures of the Company due January 15, 2029 (the “Debentures”). The Company used the net proceeds to pay indebtedness under a revolving credit agreement. The Capital Trust distributes the quarterly cash payments it receives from the Company as interest on the Debentures to the Trust Securities security holders. The Company may defer interest on the Debentures for up to 20 consecutive quarterly periods. If this occurs, the Capital Trust will also defer distribution payments on the Trust Securities. In accordance with this provision, the Capital Trust deferred all quarterly distributions beginning with the distribution due on January 15, 2002.

Prior to December 27, 2003, the Capital Trust was consolidated in the financial statements of the Company and the Trust Securities were presented as mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures in the condensed consolidated balance sheet. The accumulated undistributed quarterly distributions were presented on the condensed consolidated balance sheet as deferred accrued mandatorily redeemable preferred security distributions of subsidiary trust. The distributions expense on the Trust Securities was presented as mandatorily redeemable preferred security distributions of subsidiary trust on the condensed consolidated statement of operations and comprehensive loss.

Effective March 26, 2004, the Company adopted FIN 46, “Consolidation of Variable Interest Entities,” for variable interest entities formed prior to February 1, 2003. In accordance with the provisions of FIN 46, the Company determined that (i) the Capital Trust is a variable interest entity and (ii) the Company is not the primary beneficiary. Accordingly, the Company de-consolidated the Capital Trust as of December 27, 2003. The Company’s condensed consolidated balance sheet now reflects the Company’s obligations to the Capital Trust as subordinated deferrable interest debentures and deferred accrued interest on subordinated deferrable interest debentures. The interest expense on the Debentures is presented on the condensed consolidated statement of operations and comprehensive loss as interest expense on subordinated deferrable interest debentures.

39

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

C. Preferred Trust Securities — (Continued)

Summarized below is the condensed financial information of the Capital Trust:

Balance Sheet Data:		March 26, 2004
Non-current assets — subordinated deferrable interest debentures, net of $138,600 valuation allowance	$	36,400
Non-current assets — accrued interest on subordinated deferrable interest debentures, net of $42,813 valuation allowance		—
Long-term liabilities — mandatorily redeemable preferred trust securities		175,000
Long-term liability — deferred accrued mandatorily
redeemable preferred security distributions		42,813
Net assets		(181,413	)
Income Statement Data for the three months:		March 26, 2004			March 28, 2003
Interest income on subordinated deferrable interest debentures	$	—		$	—
Decrease in valuation allowance		15,400			7,350
Mandatorily redeemable preferred security distributions		4,792			4,372
Net earnings		10,608			2,978
Cash Flow Data for the three months:		March 26, 2004
Cash flows from operating activities	$	—
Cash flows from investing activities		—
Cash flows from financing activities		—

Capital Trust has established a valuation allowance on the subordinated deferrable interest debentures and related interest income receivable from Foster Wheeler LLC. The valuation allowance was based on Foster Wheeler LLC’s financial condition and its decision to exercise its right to defer payments on the debentures since January 15, 2002. The valuation allowance was determined using the market price of the mandatorily redeemable preferred trust securities which is deemed a proxy for the fair value of the subordinated deferrable interest debentures.

The following represents summarized condensed consolidating financial information as of March 26, 2004 with respect to the financial position, and for the three months ended March 26, 2004 for results of operations and for cash flows of the Company and its 100% owned and majority-owned subsidiaries. The following summarized condensed consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the guarantors because management does not believe that such separate financial statements and related disclosures would be material to investors.

The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. and Foster Wheeler LLC are guarantors. The non-guarantor subsidiaries include Foster Wheeler Holdings Ltd. (previously known as Foreign Holdings Ltd.), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other non-guarantor subsidiaries.

40

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

C. Preferred Trust Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	—		$	—		$	375,614		$	—		$	375,614
Accounts and notes receivable, net		—			293,625			450,531			(221,714	)		522,442
Contracts in process and inventories		—			—			127,184			—			127,184
Other current assets		—			—			67,756			—			67,756
Total current assets		—			293,625			1,021,085			(221,714	)		1,092,996
Investments in subsidiaries and others		(880,374	)		(934,655	)		143,142			1,760,673			88,786
Land, buildings & equipment, net		—			—			303,606			—			303,606
Notes and accounts receivable — long-term		210,000			575,118			6,220			(785,058	)		6,280
Intangible assets, net		—			—			121,301			—			121,301
Asbestos-related insurance recovery receivable		—			480,786			—			—			480,786
Other assets		—			24,726			300,462			—			325,188
TOTAL ASSETS	$	(670,374	)	$	439,600		$	1,895,816		$	753,901		$	2,418,943
LIABILITIES & SHAREHOLDERS’ DEFICIT
Accounts payable and accrued expenses	$	420		$	85,473		$	721,083		$	(221,714	)	$	585,262
Estimated costs to complete long-term contracts		—			—			578,049			—			578,049
Other current liabilities		(52	)		(1,085	)		150,676			—			149,539
Total current liabilities		368			84,388			1,449,808			(221,714	)		1,312,850
Corporate and other debt		—			326,912			67,731			—			394,643
Special-purpose project debt		—			—			115,735			—			115,735
Pension, postretirement and other employee benefits		—			—			303,961			—			303,961
Asbestos-related liability		—			502,287			—			—			502,287
Other long-term liabilities and minority interest		—			231,312			726,952			(785,058	)		173,206
Subordinated Robbins obligations		—			—			112,003			—			112,003
Convertible subordinated notes		210,000			—			—			—			210,000
Subordinated deferrable interest debentures(*)		—			175,000			—			—			175,000
TOTAL LIABILITIES		210,368			1,319,899			2,776,190			(1,006,772	)		3,299,685
Common stock and paid in capital		242,613			242,613			242,613			(485,226	)		242,613
Accumulated deficit		(815,352	)		(814,909	)		(814,984	)		1,629,893			(815,352	)
Accumulated other comprehensive loss		(308,003	)		(308,003	)		(308,003	)		616,006			(308,003	)
TOTAL SHAREHOLDERS’ DEFICIT		(880,742	)		(880,299	)		(880,374	)		1,760,673			(880,742	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	(670,374	)	$	439,600		$	1,895,816		$	753,901		$	2,418,943

(*) The subordinated deferrable interest debentures are due to the Capital Trust.

41

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

C. Preferred Trust Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues	$	—		$	—		$	666,359		$	—		$	666,359
Other income		3,413			14,095			35,955			(17,514	)		35,949
Total revenues and other income		3,413			14,095			702,314			(17,514	)		702,308
Cost of operating revenues		—			—			591,147			—			591,147
Selling, general and administrative expenses		—			—			57,184			—			57,184
Other deductions and minority interest		2			88			19,309			—			19,399
Interest expense*		3,419			17,708			21,819			(17,514	)		25,432
Equity in net loss of subsidiaries		(4,290	)		(586	)		(3,701	)		8,577			—
(Loss)/earnings before income taxes		(4,298	)		(4,287	)		9,154			8,577			9,146
Provision for income taxes		—			—			13,444			—			13,444
Net loss		(4,298	)		(4,287	)		(4,290	)		8,577			(4,298	)
Other comprehensive loss:
Foreign currency translation adjustment		(4,004	)		(4,004	)		(4,004	)		8,008			(4,004	)
Net comprehensive loss	$	(8,302	)	$	(8,291	)	$	(8,294	)	$	16,585		$	(8,302	)

* Includes interest expense on subordinated deferrable interest debentures of $4,792.

42

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

C. Preferred Trust Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from Operating Activities
Net cash (used)/provided by Operating Activities	$	(8	)	$	13,583		$	26,470		$	(10,477	)	$	29,568
Cash Flows from Investing Activities
Change in restricted cash		—			—			(20,700	)		—			(20,700	)
Capital expenditures		—			—			(1,759	)		—			(1,759	)
Proceeds from sale of properties		—			—			127			—			127
Increase in short-term investments		—			—			8,309			—			8,309
Net cash used by Investing Activities		—			—			(14,023	)		—			(14,023	)
Cash Flows from Financing Activities
Dividends to shareholders		—			—			(10,477	)		10,477			—
Decrease in short-term debt		—			—			(121	)		—			(121	)
Repayment of long-term debt		—			(1,252	)		(3,574	)		—			(4,826	)
Other		8			(12,331	)		9,660			—			(2,663	)
Net cash used by Financing Activities		8			(13,583	)		(4,512	)		10,477			(7,610	)
Effect of exchange rate changes on cash and cash equivalents		—			—			3,584			—			3,584
Increase in cash and cash equivalents		—			—			11,519			—			11,519
Cash and Cash equivalents, beginning of period		—			—			364,095			—			364,095
Cash and Cash equivalents, end of period	$	—		$	—		$	375,614		$	—		$	375,614

43

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

C. Preferred Trust Securities — (Continued)

As previously noted, the Capital Trust was consolidated in the financial statements of the Company prior to December 27, 2003. Accordingly, the Trust Securities were presented as mandatorily redeemable preferred securities of subsidiary trust holding solely junior subordinated deferrable interest debentures in the condensed consolidated balance sheet. The accumulated undistributed quarterly distributions were presented on the condensed consolidated balance sheet as deferred accrued mandatorily redeemable preferred security distributions of subsidiary trust. The distributions expense on the Trust Securities was presented as mandatorily redeemable preferred security distributions of subsidiary trust on the condensed consolidated statement of operations and comprehensive loss.

The following represents summarized condensed consolidating financial information as of December 26, 2003 with respect to the financial position, and for the three months ended March 28, 2003 for results of operations and for cash flows of the Company and its 100% owned and majority-owned subsidiaries. The following summarized condensed consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the 100% indirectly owned subsidiary guarantor and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors.

The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. is also a guarantor. The FW Preferred Capital Trust column presents the financial information of the issuer. The Guarantor Subsidiary column presents the financial information of Foster Wheeler LLC, but excludes that of Foster Wheeler Ltd., which is separately presented. The non-guarantor subsidiaries include Foster Wheeler Holdings Ltd. (previously known as Foreign Holdings Ltd.), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other non-guarantor subsidiaries.

44

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

C. Preferred Trust Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			FW Preferred Capital Trust		Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	—		$	—	$	—		$	364,095		$	—		$	364,095
Accounts and notes receivable, net		—			—		272,361			497,096			(213,043	)		556,414
Contracts in process and inventories		—			—		—			173,293			—			173,293
Other current assets		—			—		—			80,574			—			80,574
Total current assets		—			—		272,361			1,115,058			(213,043	)		1,174,376
Investments in subsidiaries and others		(872,080	)		—		(919,588	)		146,231			1,744,088			98,651
Land, buildings & equipment, net		—			—		—			309,615			—			309,615
Notes and accounts receivable — long-term		210,000			175,000		575,118			6,716			(960,058	)		6,776
Intangible assets, net		—			—		—			122,689			—			122,689
Asbestos-related insurance recovery receivable		—			—		495,400			—			—			495,400
Other assets		—			—		28,478			270,545			—			299,023
TOTAL ASSETS	$	(662,080	)	$	175,000	$	451,769		$	1,970,854		$	570,987		$	2,506,530
LIABILITIES & SHAREHOLDERS’ DEFICIT
Accounts payable and accrued expenses	$	412		$	—	$	78,278		$	821,015		$	(213,043	)	$	686,662
Estimated costs to complete long-term contracts		—			—		—			552,754			—			552,754
Other current liabilities		(52	)		—		(1,085	)		135,481			—			134,344
Total current liabilities		360			—		77,193			1,509,250			(213,043	)		1,373,760
Corporate and other debt		—			—		328,163			67,939			—			396,102
Special-purpose project debt		—			—		—			119,281			—			119,281
Pension, postretirement and other employee benefits		—			—		—			295,133			—			295,133
Asbestos-related liability		—			—		526,200			—			—			526,200
Other long-term liabilities and minority interest		—			—		392,221			739,742			(960,058	)		171,905
Subordinated Robbins obligations		—			—		—			111,589			—			111,589
Convertible subordinated notes		210,000			—		—			—			—			210,000
Subordinated debt		—			175,000		—			—			—			175,000
TOTAL LIABILITIES		210,360			175,000		1,323,777			2,842,934			(1,173,101	)		3,378,970
Common stock and paid in capital		242,613			—		242,613			242,613			(485,226	)		242,613
Accumulated deficit		(811,054	)		—		(810,622	)		(810,694	)		1,621,316			(811,054	)
Accumulated other comprehensive loss		(303,999	)		—		(303,999	)		(303,999	)		607,998			(303,999	)
TOTAL SHAREHOLDERS’ DEFICIT		(872,440	)		—		(872,008	)		(872,080	)		1,744,088			(872,440	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	(662,080	)	$	175,000	$	451,769		$	1,970,854		$	570,987		$	2,506,530

45

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

C. Preferred Trust Securities — Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 28, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			FW Preferred Capital Trust		Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues	$	—		$	—	$	—		$	784,092		$	—		$	784,092
Other income		3,413			4,372		13,696			26,798			(21,503	)		26,776
Total revenues and other income		3,413			4,372		13,696			810,890			(21,503	)		810,868
Cost of operating revenues		—			—		—			727,129			—			727,129
Selling, general and administrative expenses		—			—		—			51,740			—			51,740
Other deductions and minority interest		6			—		130			22,431			—			22,567
Interest expense*		3,434			4,372		14,058			21,433			(21,503	)		21,794
Equity in net loss of subsidiaries		(19,793	)		—		(19,296	)		(492	)		39,581			—
Loss before income taxes		(19,820	)		—		(19,788	)		(12,335	)		39,581			(12,362	)
Provision for income taxes		—			—		—			7,458			—			7,458
Net loss		(19,820	)		—		(19,788	)		(19,793	)		39,581			(19,820	)
Other comprehensive loss:
Foreign currency translation adjustments		(815	)		—		(815	)		(815	)		1,630			(815	)
Net comprehensive loss	$	(20,635	)	$	—	$	(20,603	)	$	(20,608	)	$	41,211		$	(20,635	)

* Includes mandatorily redeemable preferred security distributions of subsidiary trust of $4,372.

46

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

C. Preferred Trust Securities — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 28, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			FW Preferred Capital Trust		Guarantor Subsidiary			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from Operating Activities
Net cash (used)/provided by Operating Activities	$	(27	)	$	—	$	2,861		$	(26,970	)	$	7,166		$	(16,970	)
Cash Flows from Investing Activities
Change in restricted cash		—			—		—			(3,697	)		—			(3,697	)
Capital expenditures		—			—		—			(3,613	)		—			(3,613	)
Proceeds from sale of properties		—			—		—			72,918			—			72,918
Increase in investment and advances		—			—		—			3,718			—			3,718
Increase in short-term investments		—			—		—			(2	)		—			(2	)
Net cash provided by Investing Activities		—			—		—			69,324			—			69,324
Cash Flows from Financing Activities
Decrease in short-term debt		—			—		—			(503	)		—			(503	)
Proceeds from long-term debt		—			—		—			18			—			18
Repayment of long-term debt		—			—		(10,000	)		(3,603	)		—			(13,603	)
Other		27			—		7,139			(2,879	)		(7,166	)		(2,879	)
Net cash provided/(used) by Financing Activities		27			—		(2,861	)		(6,967	)		(7,166	)		(16,967	)
Effect of exchange rate changes on cash and cash equivalents		—			—		—			4,414			—			4,414
Increase in cash and cash equivalents		—			—		—			39,801			—			39,801
Cash and Cash equivalents, beginning of year		—			—		—			344,305			—			344,305
Cash and Cash equivalents, end of year	$	—		$	—	$	—		$	384,106		$	—		$	384,106

47

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

D. Proposed 10.5% Senior Secured Notes due 2011

Under the terms of Foster Wheeler LLC’s proposed exchange offer, Foster Wheeler LLC plans to issue 10.5% Senior Secured Notes due 2011 in exchange for a portion of its Senior Notes at 6.75% due 2005.

The proposed 10.5% Senior Secured Notes are to be fully and unconditionally guaranteed by Foster Wheeler Ltd. and the following 100% owned companies: Continental Finance Company Ltd., Energy Holdings, Inc., Equipment Consultants, Inc., Financial Services S.a.r.l., Foster Wheeler Holdings, Ltd., Foster Wheeler Asia Limited, Foster Wheeler Capital & Finance Corporation, Foster Wheeler Constructors, Inc., Foster Wheeler Development Corporation, FW Energie B.V., Foster Wheeler Energy Corporation, Foster Wheeler Energy Manufacturing, Inc., Foster Wheeler Energy Services, Inc., Foster Wheeler Enviresponse, Inc., Foster Wheeler Environmental Corporation, Foster Wheeler Europe Limited, Foster Wheeler Facilities Management, Inc., Foster Wheeler Inc., Foster Wheeler Intercontinental Corporation, Foster Wheeler International Corporation, Foster Wheeler International Holdings, Inc., Foster Wheeler Middle East Corporation, Foster Wheeler North America Corp. (“formerly known as Foster Wheeler Power Group, Inc.), Foster Wheeler Power Corporation, Foster Wheeler Power Systems, Inc., Foster Wheeler Pyropower, Inc., Foster Wheeler Real Estate Development Corporation, Foster Wheeler Realty Services, Inc., Foster Wheeler USA Corporation, Foster Wheeler Virgin Islands, Inc., Foster Wheeler Zack, Inc., FW Hungary Licensing Limited Liability Company, FW Mortshal, Inc., HFM International, Inc., PGI Holdings, Inc., Process Consultants, Inc., Pyropower Operating Services Company, Inc. and Perryville III Trust. Each of the guarantees is full and unconditional and joint and several. Foster Wheeler LLC and each of the subsidiary guarantors are 100% owned, directly or indirectly, by Foster Wheeler Ltd. The summarized consolidating financial information is presented in lieu of separate financial statements and other related disclosures of the wholly owned subsidiary guarantors and issuer because management does not believe that such separate financial statements and related disclosures would be material to investors. The following represents summarized condensed consolidating financial information as of March 26, 2004 and December 26, 2003 with respect to the financial position, and for the three months ended March 26, 2004 and March 28, 2003 for results of operations and for cash flows of the Company and its 100% owned and majority-owned subsidiaries.

The Foster Wheeler Ltd. column presents the parent company’s financial information. Foster Wheeler Ltd. is also a guarantor. The Foster Wheeler LLC column presents the issuer’s financial information. The Guarantor Subsidiaries column presents the financial information of all guarantors excluding that of Foster Wheeler Ltd. which is separately presented. The guarantor subsidiaries include the results of Foster Wheeler Holdings Ltd. (formerly known as Foreign Holdings Ltd.), the parent of Foster Wheeler LLC. Foster Wheeler LLC owns, directly or indirectly, the other guarantor subsidiaries and non-guarantor subsidiaries.

Under the terms of the proposed 10.5% Senior Secured Notes, the Company has the option to add other wholly owned subsidiaries as guarantors in the future to avoid increases in the interest rate. The interest rate could increase up to 1% should the Company elect not to provide the additional guarantor subsidiaries.

48

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

D. Proposed 10.5% Senior Secured Notes due 2011 — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	—		$	—		$	70,401		$	305,213		$	—		$	375,614
Accounts and notes receivable, net		—			293,625			148,063			704,198			(623,444	)		522,442
Contracts in process and inventories		—			—			49,190			86,840			(8,846	)		127,184
Investment and advances		—			—			64,614			—			(64,614	)		—
Other current assets		—			—			3,649			64,107			—			67,756
Total current assets		—			293,625			335,917			1,160,358			(696,904	)		1,092,996
Investments in subsidiaries and others		(880,374	)		(934,655	)		366,294			129,069			1,408,452			88,786
Land, buildings & equipment, net		—			—			62,427			241,179			—			303,606
Notes and accounts receivable - long-term		210,000			575,118			114,327			77,009			(970,174	)		6,280
Intangible assets, net		—			—			100,993			20,308			—			121,301
Asbestos-related insurance recovery receivable		—			480,786			—			—			—			480,786
Other assets		—			24,726			82,449			218,013			—			325,188
TOTAL ASSETS	$	(670,374	)	$	439,600		$	1,062,407		$	1,845,936		$	(258,626	)	$	2,418,943
LIABILITIES & SHAREHOLDERS’ (DEFICIT)/EQUITY
Accounts payable and accrued expenses	$	420		$	85,473		$	692,549		$	439,110		$	(632,290	)	$	585,262
Estimated costs to complete long-term contracts		—			—			149,218			428,831			—			578,049
Other current liabilities		(52	)		(1,085	)		23,276			127,400			—			149,539
Total current liabilities		368			84,388			865,043			995,341			(632,290	)		1,312,850
Corporate and other debt		—			326,912			44,239			23,492			—			394,643
Special-purpose project debt		—			—			—			115,735			—			115,735
Pension, postretirement and other employee benefits		—			—			219,890			84,071			—			303,961
Asbestos-related liability		—			502,287			—			—			—			502,287
Other long-term liabilities and minority interest		—			231,312			701,606			225,612			(985,324	)		173,206
Subordinated Robbins obligations		—			—			112,003			—			—			112,003
Convertible subordinated notes		210,000			—			—			—			—			210,000
Subordinated deferred interest debentures		—			175,000			—			—			—			175,000
TOTAL LIABILITIES		210,368			1,319,899			1,942,781			1,444,251			(1,617,614	)		3,299,685
Common stock and paid-in capital		242,613			242,613			242,613			441,497			(926,723	)		242,613
Accumulated deficit		(815,352	)		(814,909	)		(814,984	)		158,210			1,471,683			(815,352	)
Accumulated other comprehensive loss		(308,003	)		(308,003	)		(308,003	)		(198,022	)		814,028			(308,003	)
TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY		(880,742	)		(880,299	)		(880,374	)		401,685			1,358,988			(880,742	)
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY	$	(670,374	)	$	439,600		$	1,062,407		$	1,845,936		$	(258,626	)	$	2,418,943

49

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

D. Proposed 10.5% Senior Secured Notes due 2011 — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING BALANCE SHEET
December 26, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Cash and cash equivalents	$	—		$	—		$	33,161		$	330,934		$	—		$	364,095
Accounts and notes receivable, net		—			272,361			113,559			777,142			(606,648	)		556,414
Contracts in process and inventories		—			—			121,527			60,876			(9,110	)		173,293
Investment and advances		—			—			88,641			—			(88,641	)		—
Other current assets		—			—			4,359			76,215			—			80,574
Total current assets		—			272,361			361,247			1,245,167			(704,399	)		1,174,376
Investments in subsidiaries and others		(872,080	)		(919,588	)		375,116			138,896			1,376,307			98,651
Land, buildings & equipment, net		—			—			64,315			245,300			—			309,615
Notes and accounts receivable - long-term		210,000			575,118			114,508			258,490			(1,151,340	)		6,776
Intangible assets, net		—			—			101,664			21,025			—			122,689
Asbestos-related insurance recovery receivable		—			495,400			—			—			—			495,400
Subordinated debt		—			28,478			83,898			186,647			—			299,023
TOTAL ASSETS	$	(662,080	)	$	451,769		$	1,100,748		$	2,095,525		$	(479,432	)	$	2,506,530
LIABILITIES & SHAREHOLDERS’ (DEFICIT)/EQUITY
Accounts payable and accrued expenses	$	412		$	78,278		$	706,397		$	517,333		$	(615,758	)	$	686,662
Estimated costs to complete long-term contracts		—			—			162,168			390,586			—			552,754
Other current liabilities		(52	)		(1,085	)		14,385			121,096			—			134,344
Total current liabilities		360			77,193			882,950			1,029,015			(615,758	)		1,373,760
Corporate and other debt		—			328,163			44,120			23,819			—			396,102
Special-purpose project debt		—			—			—			119,281			—			119,281
Pension, postretirement and other employee benefits		—			—			216,281			78,852			—			295,133
Asbestos-related liability		—			526,200			—			—			—			526,200
Other long-term liabilities and minority interest		—			392,221			717,888			228,401			(1,166,605	)		171,905
Subordinated Robbins obligations		—			—			111,589			—			—			111,589
Convertible subordinated notes		210,000			—			—			—			—			210,000
Preferred trust securities		—			—			—			175,000			—			175,000
TOTAL LIABILITIES		210,360			1,323,777			1,972,828			1,654,368			(1,782,363	)		3,378,970
Common stock and paid-in capital		242,613			242,613			242,613			465,451			(950,677	)		242,613
Accumulated deficit		(811,054	)		(810,622	)		(810,694	)		174,312			1,447,004			(811,054	)
Accumulated other comprehensive loss		(303,999	)		(303,999	)		(303,999	)		(198,606	)		806,604			(303,999	)
TOTAL SHAREHOLDERS’ (DEFICIT)/EQUITY		(872,440	)		(872,008	)		(872,080	)		441,157			1,302,931			(872,440	)
TOTAL LIABILITIES AND SHAREHOLDERS’ (DEFICIT)/EQUITY	$	(662,080	)	$	451,769		$	1,100,748		$	2,095,525		$	(479,432	)	$	2,506,530

50

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

D. Proposed 10.5% Senior Secured Notes due 2011 — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries		Eliminations			Consolidated
Operating revenues	$	—		$	—		$	136,425		$	553,092	$	(23,158	)	$	666,359
Other income		3,413			14,095			21,634			25,728		(28,921	)		35,949
Total revenues and other income		3,413			14,095			158,059			578,820		(52,079	)		702,308
Cost of operating revenues		—			—			108,478			505,827		(23,158	)		591,147
Selling, general and administrative expenses		—			—			19,974			37,210		—			57,184
Other deductions and minority interest		2			88			13,053			12,939		(6,683	)		19,399
Interest expense *		3,419			17,708			21,754			4,789		(22,238	)		25,432
Equity in net (loss)/earnings of subsidiaries		(4,290	)		(586	)		1,469			—		3,407			—
(Loss)/earnings before income taxes		(4,298	)		(4,287	)		(3,731	)		18,055		3,407			9,146
Provision for income taxes		—			—			559			12,885		—			13,444
Net (loss)/earnings		(4,298	)		(4,287	)		(4,290	)		5,170		3,407			(4,298	)
Other comprehensive (loss)/income:
Foreign currency translation adjustment		(4,004	)		(4,004	)		(4,004	)		584		7,424			(4,004	)
Net comprehensive (loss)/income	$	(8,302	)	$	(8,291	)	$	(8,294	)	$	5,754	$	10,831		$	(8,302	)

* Includes interest expense on subordinated deferrable interest debentures of $4,792.

51

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

D. Proposed 10.5% Senior Secured Notes due 2011 — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS AND COMPREHENSIVE LOSS
Three Months Ended March 28, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Operating revenues	$	—		$	—		$	263,681		$	544,482		$	(24,071	)	$	784,092
Other income		3,413			13,696			23,137			16,348			(29,818	)		26,776
Total revenues and other income		3,413			13,696			286,818			560,830			(53,889	)		810,868
Cost of operating revenues		—			—			257,551			493,649			(24,071	)		727,129
Selling, general and administrative expenses		—			—			25,105			26,635			—			51,740
Other deductions and minority interest		6			130			17,352			10,826			(5,747	)		22,567
Interest expense *		3,434			14,058			18,328			10,045			(24,071	)		21,794
Equity in net loss of subsidiaries		(19,793	)		(19,296	)		12,401			—			26,688			—
(Loss)/earnings before income taxes		(19,820	)		(19,788	)		(19,117	)		19,675			26,688			(12,362	)
Provision for income taxes		—			—			676			6,782			—			7,458
Net (loss)/earnings		(19,820	)		(19,788	)		(19,793	)		12,893			26,688			(19,820	)
Other comprehensive loss:
Foreign currency translation adjustment		(815	)		(815	)		(815	)		(2,672	)		4,302			(815	)
Net comprehensive (loss)/income	$	(20,635	)	$	(20,603	)	$	(20,608	)	$	10,221		$	30,990		$	(20,635	)

* Includes mandatorily redeemable preferred security distributions of subsidiary trust of $4,372.

52

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

D. Proposed 10.5% Senior Secured Notes due 2011 — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 26, 2004
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from Operating Activities
Net cash (used)/provided by
Operating Activities	$	(8	)	$	13,583		$	9,465		$	25,832		$	(19,304	)	$	29,568
Cash Flows from Investing Activities
Change in restricted cash		—			—			—			(20,700	)		—			(20,700	)
Capital expenditures		—			—			605			(2,364	)		—			(1,759	)
Proceeds from sale of assets		—			—			(6	)		133			—			127
(Increase)/decrease in investment and advances		—			—			24,103			(24,103	)		—			—
Increase in short-term investments		—			—			—			8,309			—			8,309
Net cash provided/(used) by
Investing Activities		—			—			24,702			(38,725	)		—			(14,023	)
Cash Flows from Financing Activities
Dividends to shareholders		—			—			—			(19,304	)		19,304			—
Decrease in short-term debt		—			—			—			(121	)		—			(121	)
Proceeds from long-term debt		—			—			—			—			—			—
Repayment of long-term debt		—			(1,252	)					(3,574	)		—			(4,826	)
Other		8			(12,331	)		3,083			6,577			—			(2,663	)
Net cash provided/(used) by
Financing Activities		8			(13,583	)		3,083			(16,422	)		19,304			(7,610	)
Effect of exchange rate changes on cash and cash equivalents		—			—			(10	)		3,594			—			3,584
Increase/(decrease) in cash and cash equivalents		—			—			37,240			(25,721	)		—			11,519
Cash and Cash equivalents, beginning of period		—			—			33,161			330,934			—			364,095
Cash and Cash equivalents, end of period	$	—		$	—		$	70,401		$	305,213		$	—		$	375,614

53

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

6. Consolidating Financial Information — (Continued)

D. Proposed 10.5% Senior Secured Notes due 2011 — (Continued)

FOSTER WHEELER LTD.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Three Months Ended March 28, 2003
(in thousands of dollars)

	Foster Wheeler Ltd.			Foster Wheeler LLC			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Cash Flows from Operating Activities
Net cash (used)/provided by
Operating Activities	$	(27	)	$	2,861		$	(25,975	)	$	15,932		$	(9,761	)	$	(16,970	)
Cash Flows from Investing Activities
Change in restricted cash		—			—			(654	)		(3,043	)		—			(3,697	)
Capital expenditures		—			—			(747	)		(2,866	)		—			(3,613	)
Proceeds from sale of assets		—			—			72,580			338			—			72,918
(Increase)/decrease in investment and advances		—			—			(4,417	)		2,754			5,381			3,718
Increase in short-term investments		—			—			—			(2	)		—			(2	)
Net cash provided/(used) by Investing Activities		—			—			66,762			(2,819	)		5,381			69,324
Cash Flows from Financing Activities
Dividends to shareholders		—			—			—			(8,894	)		8,894			—
Decrease in short-term debt		—			—			—			(503	)		—			(503	)
Proceeds from long-term debt		—			—			—			18			—			18
Repayment of long-term debt		—			(10,000	)		—			(3,603	)		—			(13,603	)
Other		27			7,139			35,691			(41,222	)		(4,514	)		(2,879	)
Net cash provided/(used) by
Financing Activities		27			(2,861	)		35,691			(54,204	)		4,380			(16,967	)
Effect of exchange rate changes on cash and cash equivalents		—			—			356			4,058			—			4,414
Increase/(decrease) in cash and cash equivalents		—			—			76,834			(37,033	)		—			39,801
Cash and Cash equivalents, beginning of period		—			—			20,805			323,500			—			344,305
Cash and Cash equivalents, end of period	$	—		$	—		$	97,639		$	286,467		$	—		$	384,106

54

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

7. Equity Interests

The Company owns a non-controlling equity interest in three cogeneration projects and one waste-to-energy project; three of which are located in Italy and one in Chile. Two of the projects in Italy are each 42% owned while the third is 49% owned by the Company. The project in Chile is 85% owned by the Company. The Company does not have a controlling financial interest in the Chilean project. Following is summarized financial information for the Company’s equity affiliates combined, as well as the Company’s interest in the affiliates.

	March 26, 2004				December 26, 2003
	Italian Projects		Chilean Project		Italian Projects		Chilean Project
Balance Sheet Data:
Current assets	$	103,228	$	9,920	$	95,977	$	23,891
Other assets (primarily buildings and equipment)		383,519		182,675		409,267		185,315
Current liabilities		40,305		14,086		32,735		17,188
Other liabilities (primarily long-term debt)		361,849		116,874		385,047		121,362
Net assets		84,593		61,635		87,462		70,656

	March 26, 2004				March 28, 2003
	Italian Projects		Chilean Project		Italian Projects		Chilean Project
Income Statement Data for three months:
Total revenues	$	63,050	$	9,923	$	48,688	$	9,560
Gross earnings		15,688		5,198		13,792		5,257
Income before income taxes		11,162		2,617		7,492		2,579
Net earnings		6,754		2,059		4,215		2,141

As of March 26, 2004, the Company’s share of the net earnings and investment in the equity affiliates totaled $4,653 and $88,786 respectively. Dividends of $9,090 and $43 were received during the first three months of 2004 and 2003, respectively. The Company has guaranteed certain performance obligations of these projects. The Company’s average contingent obligations under these guarantees are approximately $2,700 per year for the four projects in total. The Company has provided a $10,000 debt service reserve letter of credit providing liquidity should the performance of the Chilean Project be insufficient to cover the debt service payments. No amount has been drawn under the letter of credit.

8. Guarantees and Warranties

The Company has provided indemnifications to third parties relating to businesses and/or assets the Company previously owned. Such indemnifications relate primarily to potential environmental and tax exposures for activities conducted by the Company prior to the sale.

	Maximum Potential Payment		Carrying Amount of Liability as of March 26, 2004		Carrying Amount of Liability as of March 28, 2003
Environmental indemnifications		No limit	$	5,500	$	6,400
Tax indemnifications		No limit	$	0	$	0

55

FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

8. Guarantees and Warranties — (Continued)

The Company provides for make good/warranty reserves on certain of its long-term contracts. Generally, these reserves are accrued over the life of the contract so that a sufficient balance is maintained to cover the exposures throughout the warranty period.

	First Quarter 2004			First Quarter 2003
Balance beginning of quarter	$	131,600		$	81,900
Accruals		5,500			11,000
Settlements		(3,200	)		(2,600	)
Adjustments to provisions		(1,300	)		(6,100	)
Balance end of quarter	$	132,600		$	84,200

9. Income Taxes

The difference between the statutory and effective tax rates for the first three months of 2004 and 2003 results predominately from taxable income in certain jurisdictions (primarily non-U.S.) combined with a valuation allowance offsetting other loss benefits in other jurisdictions (primarily non-U.S.).

If the Company completes the proposed exchange offer as discussed in Note 1, it will be subject to substantial limitations on the use of pre-change losses and credits to offset U.S. federal taxable income in any post-change year. Since a valuation allowance has already been reflected to offset these losses and credits, this limitation will not result in a significant write-off by the Company.

10. Sale of Certain Business Assets

On March 7, 2003, the Company sold certain assets of its wholly owned subsidiary, Foster Wheeler Environmental Corporation, for sales proceeds then approximating $72,000. The Company recognized a gain of $15,300 on the sale, which was recorded in other income in the first quarter of 2003. The Company also retained approximately $8,000 of cash on hand at the time of the asset sale. The sales proceeds were subject to adjustment based on a net worth calculation to be finalized subsequent to the sale. During the third quarter 2003, the Company and the buyer agreed on a final net worth calculation that resulted in the Company returning $4,500 of the sales proceeds to the buyer over a six month time period. A total of $3,000 was returned by year-end 2003 and $1,500 was paid in February 2004. The net worth agreement had no impact on the pretax gain previously disclosed.

On March 31, 2003, the Company sold its interest in a corporate office building for net proceeds of approximately $7,900, which approximated the value of the Company’s investment. With the completion of this transaction, $1,445 of the net proceeds were used to prepay principal outstanding under the Senior Credit Facility in accordance with the terms of the facility as described in Note 1.

The Company entered into an agreement in the first quarter of 2004 to sell a domestic corporate office building for estimated net cash proceeds of $17,000, which approximates carrying value. The Company recorded an impairment loss of $15,100 on this building in the third quarter of 2003 in anticipation of a sale. The carrying value of the building, which is held for sale, is included in land, buildings, and equipment on the condensed consolidated balance sheet. The sale closed in the second quarter 2004 and generated net cash proceeds of $16,400. Of this amount, 50% has been repaid to the Senior Credit Facilities’ lenders in the second quarter 2004.

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FOSTER WHEELER LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands of dollars, except per share amounts)
(Unaudited)

10. Sale of Certain Business Assets — (Continued)

In the first quarter of 2004, the Company, through a joint venture company, sold the development rights to a power project in Europe. The Company recorded a gain on the sale of $10,500, which was recorded in other income on the condensed consolidated statement of operations and comprehensive loss.

11. Pension and Other Postretirement Benefits

Components of Net Periodic Benefit cost for the three months ended March 26, 2004 and March 28, 2003 are as follows:

	Pension Benefits						Other Benefits
	2004			2003			2004			2003
Service Cost	$	9,553		$	4,979		$	106		$	185
Interest Cost		9,094			11,480			1,379			2,301
Expected return on plan assets		(11,714	)		(9,472	)		—			—
Amortization of transition assets		19			17			(3	)		—
Amortization of prior service cost		427			418			(1,186	)		(371	)
Other		5,273			7,919			658			(835	)
SFAS No. 87 - Net periodic pension cost	$	12,652		$	15,341		$	954		$	1,280
SFAS No. 88 - Cost		—			277			—			—
Total net periodic pension cost	$	12,652		$	15,618		$	954		$	1,280

The Company disclosed in its financial statements for the year ended December 26, 2003, that it expected to contribute $64,700 to its foreign and domestic pension plans in the year 2004. The Company currently projects that the expected pension contribution for 2004 for its domestic pension plans now approximates $29,200 as compared to $37,000 included in the estimate at December 26, 2003. The reduction is primarily the result of new pension funding legislation enacted in the United States. As of March 26, 2004, $7,500 of that contribution has been made.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(in thousands of dollars, except per share amounts)

The following is Management’s Discussion and Analysis of certain significant factors that have affected the financial condition and results of operations of the Company for the periods indicated below. This Management’s Discussion and Analysis and other sections of this Report on Form 10-Q contain forward-looking statements that are based on management’s assumptions, expectations and projections about the various industries within which the Company operates. Such forward-looking statements by their nature involve a degree of risk and uncertainty. The Company cautions that a variety of factors, including but not limited to the following, could cause business conditions and results to differ materially from what is contained in forward-looking statements such as: changes in the rate of worldwide economic growth in the major international economies; changes in investment by the power, oil and gas, pharmaceutical, chemical/petrochemical and environmental industries; changes in financial condition of customers; changes in regulatory environment; changes in project design or schedules; contract cancellations; changes in trade, monetary and fiscal policies worldwide; currency fluctuations; war or terrorist attacks on facilities either owned or where equipment or services are or may be provided; outcomes of pending and future litigation including litigation regarding the Company’s liability for damages and insurance coverage for asbestos exposure; protection and validity of patents and other intellectual property rights and increasing competition by foreign and domestic companies; monetization of certain facilities; and recoverability of claims against customers.

This discussion and analysis should be read in conjunction with the financial statements included on this Quarterly Report on Form 10-Q and the Annual Report on Form 10-K for the year ended December 26, 2003.

Overview

The accompanying condensed consolidated financial statements and management’s discussion and analysis herein are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern (see “Liquidity and Capital Resources” and Note 1 to the condensed consolidated financial statements for additional going concern information).

The Company operates through two main business groups – the Engineering & Construction Group (“E & C”), and the Energy Group (“Energy”). The corporate center and certain legacy liabilities (e.g. corporate debt) are included in the Corporate and Finance Group (“C & F”).

The global markets in which the Company operates are largely dependent on overall economic growth and continue to be highly competitive. Consolidated new orders and backlog have declined from recent years, but performance on existing contracts is profitable (see the Energy Group and Engineering & Construction Group discussions for additional details).

Many of the Company’s contracts contain lump-sum prices and management expects that the number of lump-sum contracts and the number of countries where these projects will be executed will increase in the future. Lump-sum contracts are inherently risky because the Company agrees to the selling price at the time it enters into the contracts. Costs and execution schedules are based on estimates, and management assumes substantially all of the risks associated with completing the project as well as the post-completion warranty obligations. For the quarter ended March 26, 2004, a charge of approximately $24,600 was recorded on a lump-sum contract. For the quarter ended March 28, 2003, charges of approximately $16,100 primarily on lump-sum contracts were recorded. The Company established a Project Risk Management Group (“PRMG”) in the second quarter of 2002 to be responsible for reviewing proposals and work that has been contracted to evaluate the levels of risk acceptable to the Company.

During the first quarter of 2004, the Company continued its restructuring activities. On May 4, 2004 the Company filed an amended registration statement for the proposed equity for debt exchange offer. The Company’s goal is to complete the exchange offer by mid- June 2004.

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The Company reported a net loss for the first quarter 2004 of $4,300. The E & C companies and the North American Power business were profitable during the quarter despite the fact that the domestic U.S. power business continues to operate in a depressed power market. Management believes the turnaround of its domestic power business resulted, in part, from changes in the unit’s management team, as well as from the benefits obtained from the 2002 initiatives that focused on cost reductions and the way the Company plans and executes projects in the field. However, the European power business reported a loss largely because of a $24,600 loss on a lump-sum project in Europe.

New orders booked for the quarter increased 32% compared to the first quarter of 2003. Unfilled orders declined as revenues exceeded the new orders booked during the quarter. Increasing the level of new bookings remains one of management’s top priorities for 2004.

The number of new asbestos claims received during the quarter declined from the number received in the fourth quarter 2003 and the Company continued its strategy of settling with asbestos insurance carriers by monetizing policies or arranging coverage in place agreements. Two such settlements occurred in the first quarter of 2004.

The net loss for the quarter included an $11,700 pretax (and after-tax) gain on settlements with asbestos insurance carriers, and a $10,500 pretax gain ($6,600 after-tax) on the sale of development rights for a power project in Italy. While the sale of the power project development rights is recorded as a one-time gain, the business in Italy has historically developed and sold such project rights, and is continuing to actively develop other project rights that are expected to be offered for sale in the future.

Expenses primarily from professional advisors working on the Company’s restructuring continued to be significant during the quarter and are expected to continue until the restructuring is completed. Management expects the level of costs to decline in the second half of the year, but anticipates the need to continue certain advisory services in the third and fourth quarters.

Cash and cash equivalents, short-term investments, and restricted cash totaled $453,800 at March 26, 2004. This reflects an increase of $23,600 for the first quarter 2004.

The Company continues to carry high levels of debt in the United States, and the total U.S. operations, which include the corporate center, are cash flow negative and are expected to continue to be cash flow negative. The Company’s foreign operations generate positive cash flow and are expected to continue to generate positive cash flow. The Company normally repatriates cash from its foreign operations and expects to continue to need to repatriate cash from its foreign operations in the future. Maintaining adequate domestic liquidity remains one of management’s priorities and its U.S. liquidity forecasts are updated on a weekly basis. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand; cash flows from operations; cash repatriated from non-U.S. subsidiaries; asset sales; collections of receivables and claims recoveries; and working capital needs.

Commercial operations under a retained Environmental contract commenced in January 2004. The Company funded the construction of this project which processes spent nuclear waste for the U.S. Department of Energy. Capital recovery and operating revenues are generated as the plant processes the waste materials. This project successfully processed sufficient quantities of material during the first quarter to recover all the capital recovery originally forecast to be received during the first nine months of 2004.

Management continues to forecast that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2004. As with any forecast, there can be no assurance that the cash amounts realized and/or timing of the cash flows will match the Company’s forecast. See “Liquidity and Capital Resources” for additional details.

As part of its debt restructuring plan, the Company and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on April 12, 2004 and on May 4, 2004, relating to an exchange offer for all of the existing $175,000 trust preferred securities, $210,000 Convertible Subordinated Notes (“Convertible Notes”), $113,700 Subordinated Robbins Exit Funding Obligations (“Robbins Bonds”), and $200,000 2005 Senior Notes (the “Senior Notes”) due 2005.

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On February 5, 2004, the Company announced, in support of its restructuring activities, that a number of institutional investors committed to provide $120,000 of new financing in a private transaction to the Company to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, the Company has discontinued its previously announced plans to divest one of its European operating units.

The total amount of debt and preferred trust securities subject to the proposed exchange offer is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. The Company expects to offer a mix of equity as well as debt with longer maturities in exchange for these securities. The Company anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, the Company may not complete the exchange offer on acceptable terms, or at all, which could have a material adverse impact on the Company’s operations.

The Company may not be able to complete the restructuring plan on acceptable terms, or at all, which could have a material adverse impact on the Company’s operations.

Results of Operations

Three months ended March 26, 2004 compared to the three months ended March 28, 2003

	Three Months Ended
	March 26, 2004			March 28, 2003
Revenues	$	702,300		$	810,900
Earnings/(loss) before tax	$	9,100		$	(12,400	)
Net loss	$	(4,300	)	$	(19,800	)

In the three months ended March 26, 2004 and March 28, 2003, the Company recorded net pretax charges of $12,100 and $19,200, respectively. These charges and (gains) are separately identified below to provide for a better comparison of results.

	Three months ended March 26, 2004											Three months ended March 28, 2003
	E & C			Energy		C&F			Total			E & C			Energy			C&F		Total
1) (Gains) on asbestos settlements	$	—		$	—	$	(11,700	)	$	(11,700	)	$	—		$	—		$	—	$	—
2) (Gains) on sale of assets		(10,500	)		—		—			(10,500	)		(15,300	)		—			—		(15,300	)
3) Re-evaluation of contract cost estimates		—			24,600		—			24,600			21,100			(5,000	)		—		16,100
4) Restructuring and credit agreement costs		—			—		9,300			9,300			—			—			10,400		10,400
5) Severance cost		400			—		—			400			2,800			3,300			100		6,200
6) Legal settlements and other provisions		—			—		—			—			—			—			1,800		1,800
Total	$	(10,100	)	$	24,600	$	(2,400	)	$	12,100		$	8,600		$	(1,700	)	$	12,300	$	19,200

(1) In March 2004, the Company entered into a settlement and release agreement that resolves asbestos coverage litigation with two asbestos insurance carriers. The Company recorded a gain on settlement of $11,700, which was recorded in other income.

(2) In the first quarter of 2004, the Company, through a joint venture company, sold the development rights to a power project in Europe. The Company recorded a gain on the sale of $10,500, which was recorded in other income. In the first quarter of 2003, the Company sold certain assets of its wholly owned subsidiary, Foster Wheeler Environmental Corporation, resulting in a net gain of $15,300, which was recorded in other income.

(3) The charge in 2004 relates to reserves recorded on a lump-sum project in Europe. The net charge in 2003 relates to reserves recorded on two government contracts retained by Environmental totaling $21,100, partially offset by the reduction of a project reserve of $5,000, which was no longer required in the Energy Group.

(4) Costs of $9,300 and $10,400 for the first quarters of 2004 and 2003, respectively, were recorded in other deductions for restructuring activities and credit agreement costs.

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(5) Severance costs were recorded in cost of operating revenues for the E&C and Energy Groups and in selling, general and administrative expenses for the C&F Group.

(6) The charges represent accruals for legal costs and were recorded in other deductions.

Consolidated Operating Revenues

March 26, 2004		March 28, 2003		$ Change			% Change
$	666,400	$	784,100	$	(117,700	)		-15.0%

The decline in consolidated operating revenues is primarily due to the Energy Group’s North American operating unit where a major project completed in 2003 has not been replaced in 2004. See the individual group discussions for additional details.

Consolidated Gross Earnings from Operations

March 26, 2004		March 28, 2003		$ Change		% Change
$	75,200	$	57,000	$	18,200		31.9%

Gross earnings are equal to operating revenues minus the cost of operating revenues. The increase in consolidated gross earnings from operations resulted primarily from improved profitability on current projects.

Consolidated Selling, General and Administrative Expenses

March 26, 2004		March 28, 2003		$ Change		% Change
$	57,200	$	51,700	$	5,500		10.6%

The increase in consolidated selling, general and administrative expenses is primarily due to increased sales and lump-sum proposal activity in the E&C Group’s U.K. operations and the Energy Group’s Finnish operations.

Consolidated Other Income

March 26, 2004		March 28, 2003		$ Change		% Change
$	35,900	$	26,800	$	9,100		34.0%

The increase in consolidated other income is primarily due to the sale of development rights to a power project by the E&C Group’s European operations, and an asbestos settlement in 2004, offset by a $15,300 gain on the sale of certain assets of Environmental in March 2003.

Consolidated Other Deductions

March 26, 2004		March 28, 2003		$ Change			% Change
$	18,400	$	21,200	$	(2,800	)		-13.2%

The decrease in consolidated other deductions is primarily due to the changes in certain of the charges detailed at the beginning of this Item 2.

Consolidated other deductions for the three-month period ending March 26, 2004, include charges for restructuring of $9,300, compared to restructuring and other charges of $10,400 and $1,800, respectively, for the same period ending March 28, 2003.

Management expects restructuring costs to continue until the restructuring activities are completed, but anticipates the level of costs to decline in the third and fourth quarters 2004.

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Consolidated Tax Provision

March 26, 2004		March 28, 2003		$ Change		% Change
$	13,400	$	7,500	$	5,900		78.7%

The provisions of SFAS No. 109 prohibit the Company from recording domestic and certain foreign tax benefits due to the cumulative losses incurred domestically and in certain international tax jurisdictions in the three years ending December 26, 2003. The increase in consolidated tax provision is primarily due to a gain on the sale of development rights to a power project by the E&C Group’s European operations in 2004.

Engineering and Construction Group

	Three Months Ended
	March 26, 2004		March 28, 2003		$ Change			% Change
Operating revenue	$	401,900	$	459,800	$	(57,900	)		-12.6	%
EBITDA	$	33,100	$	12,100	$	21,000			173.6	%

Management uses several financial metrics to measure the performance of the Company’s business segments. EBITDA, as discussed and defined below, is the primary earnings measure used by the Company’s chief decision makers.

EBITDA is a supplemental, non-GAAP financial measure. EBITDA is defined as earnings/(loss) before taxes (before goodwill charge), interest expense, depreciation and amortization. The Company has presented EBITDA because it believes it is an important supplemental measure of operating performance. EBITDA, adjusted for certain unusual and infrequent items specifically excluded in the terms of the Senior Credit Facility, is also used as a measure for certain covenants under the Senior Credit Facility. The Company believes that the line item on its condensed consolidated statement of operations and comprehensive loss entitled “net loss” is the most directly comparable GAAP measure to EBITDA. Since EBITDA is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation of, or as a substitute for, net loss as an indicator of operating performance. EBITDA, as the Company calculates it, may not be comparable to similarly titled measures employed by other companies. In addition, this measure does not necessarily represent funds available for discretionary use, and is not necessarily a measure of the Company’s ability to fund its cash needs. As EBITDA excludes certain financial information compared with net earnings/(loss), the most directly comparable GAAP financial measure, users of this financial information should consider the type of events and transactions which are excluded. The Company’s non-GAAP performance measure, EBITDA, has certain material limitations as follows:

• It does not include interest expense. Because the Company has borrowed substantial amounts of money to finance some of its operations, interest is a necessary and ongoing part of the Company’s costs and has assisted the Company in generating revenue. Therefore, any measure that excludes interest has material limitations;

• It does not include taxes. Because the payment of taxes is a necessary and ongoing part of the Company’s operations, any measure that excludes taxes has material limitations;

• It does not include depreciation. Because the Company must utilize substantial property, plants and equipment in order to generate revenues in its operations, depreciation is a necessary and ongoing part of the Company’s costs. Therefore, any measure that excludes depreciation has material limitations.

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A reconciliation of EBITDA, a non-GAAP financial measure, to net earnings, a GAAP measure, is shown below.

	Three Months Ended
	March 26, 2004		March 28, 2003
EBITDA	$	33,100	$	12,100
Less: Interest expense		300		(600	)
Depreciation and amortization		2,300		2,900
Earnings before income taxes		30,500		9,800
Income taxes		10,100		3,000
Net earnings	$	20,400	$	6,800

Operating revenues were essentially unchanged for the three months ended March 26, 2004 compared to March 28, 2003 after excluding the Environmental revenues of $62,900 for the three months ended March 28, 2003.

The changes in the charges outlined at the beginning of this Item 2 account for most of the increased EBITDA for the three-month period noted above.

Energy Group

	Three Months Ended
	March 26, 2004		March 28, 2003		$ Change			% Change
Operating revenue	$	264,500	$	322,100	$	(57,600	)		-17.9	%
EBITDA	$	17,000	$	30,500	$	(13,500	)		-44.3	%

For an explanation about the limitations of using EBITDA as a financial metric, see the notation above under Engineering and Construction Group.

A reconciliation of EBITDA, a non-GAAP financial measure, to net earnings/(loss) a GAAP measure, is shown below.

	Three Months Ended
	March 26, 2004			March 28, 2003
EBITDA	$	17,000		$	30,500
Less: Interest expense		4,800			4,900
Depreciation and amortization		5,100			5,800
Earnings before income taxes		7,100			19,800
Income taxes		8,000			6,500
Net (loss)/earnings	$	(900	)	$	13,300

The decrease in operating revenues primarily reflects the North American and European unit’s execution and completion in 2003 of significant major projects that were not replaced during the first quarter in 2004, and the delay of a major award in the European operating unit until the fourth quarter of 2004.

The decline in EBITDA and net (loss)/earnings reflects the write-down from a European power project.

As previously disclosed, the Company has reviewed various methods of monetizing selected Power Systems facilities. Based on current economic conditions, management concluded that it would continue to operate the facilities in the normal course of business. Management has reviewed these facilities for impairment on an undiscounted cash flow basis and determined that no adjustment to the carrying amounts is required. If the Company were able to monetize these assets, it is possible that the amounts realized could differ materially from the balances in the financial statements.

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Financial Condition

Shareholders’ deficit for the three months ended March 26, 2004 increased by $8,300, due primarily to a net loss for the period of $4,300 and changes in the foreign currency translation adjustment of $4,000.

Cash flows provided by operations were $29,600 for the three months ended March 26, 2004 compared to $17,000 used by operations for the three months ended March 28, 2003. The change in cash provided from operations is primarily due to capital recovery under an Environmental contract. The capital recovery received in the first quarter of 2004 had originally been forecasted for recovery over the first three quarters of 2004.

Cash and cash equivalents, short-term investments and restricted cash totaled $453,800 at March 26, 2004, reflecting an increase of $23,600 for the quarter.

During the three months ended March 26, 2004, long-term investments in land, buildings and equipment were $1,800 as compared with $3,600 for the comparable period in 2003. Capital expenditures primarily reflect routine replacement of information technology equipment and replacement of miscellaneous equipment associated with the Energy Group’s European power operations.

Corporate and other debts, including the Senior Credit Facility, are as follows:

	March 26, 2004		December 26, 2003
Senior Credit Facility (average interest rate 7.14%)	$	126,900	$	128,200
6.75% Notes due November 15, 2005		200,000		200,000
Other		5,400		5,600
		332,300		333,800
Less: Current portion		—		100
	$	332,300	$	333,700

Special purpose project debt consists of the debt associated with the build, own, and operate special purpose operating subsidiaries. The operating results of these companies are consolidated within the Energy Group and the debt by company is as follows:

	March 26, 2004		December 26, 2003
Martinez Cogen Limited Partnership	$	18,600	$	21,900
Foster Wheeler Coque Verde, L.P.		37,800		37,800
Camden County Energy Recovery Associates		77,500		77,500
		133,900		137,200
Less: Current portion		18,200		17,900
	$	115,700	$	119,300

Additionally, the Company held the following debt at the close of each period:

	March 26, 2004		December 26, 2003
Bank loans	$	—	$	100
Capital lease obligations, net of current portion ($1,100 and $1,300, respectively for 2004 and 2003)	$	62,300	$	62,400
Subordinated Robbins exit funding obligations, net of current portion ($1,700 in both 2004 and 2003)	$	112,000	$	111,600
Convertible subordinated notes	$	210,000	$	210,000
Preferred trust securities	$	—	$	175,000
Subordinated deferrable interest debentures	$	175,000	$	—

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Liquidity and Capital Resources

The accompanying condensed consolidated financial statements are prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company may not, however, be able to continue as a going concern. Realization of assets and the satisfaction of liabilities in the normal course of business are dependent on, among other things, the Company’s ability to return to profitability, to continue to generate cash flows from operations, asset sales and collections of receivables to fund its obligations, as well as the Company maintaining credit facilities and bonding capacity adequate to conduct its business. The Company incurred significant losses for the three months ended March 26, 2004 and in each of the years in the three-year period ended December 26, 2003, and has a shareholder deficit of $880,700 as of March 26, 2004. The Company has substantial debt obligations including its Senior Credit Facility and during 2002, it was unable to comply with certain debt covenants under the previous revolving credit agreement. As described in more detail below, the Company received waivers of covenant violations and ultimately negotiated new credit facilities in August 2002. In November 2002, the new Senior Credit Facility was amended to provide covenant relief of up to $180,000 of gross pretax charges recorded in the third quarter of 2002 and also to provide that up to an additional $63,000 in pretax charges related to specific contingencies could be excluded from the covenant calculation through December 2003, if incurred. In March 2003, the Senior Credit Facility was again amended to provide further covenant relief by modifying certain definitions of financial measures utilized in the calculation of the financial covenants and the minimum EBITDA and senior debt ratio. The credit facilities were also amended in July 2003 to provide waivers of the applicable sections of the Senior Credit Facility to permit the exchange offers described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations, and setoffs of certain intercompany obligations. There is no assurance that the Company will be able to comply with the terms of the Senior Credit Facility, as amended, and other debt agreements during 2004. Management’s current forecast indicates that the Company will be in compliance with the financial covenants throughout 2004. However, there can be no assurance that the actual financial results will match the forecasts or that the Company will not violate the covenants.

The Company’s U.S. operations, which include the corporate functions, are cash flow negative and are expected to continue to generate negative cash flow due to a number of factors including costs related to the Company’s indebtedness, obligations to fund U.S. pension plans, and other expenses related to corporate overhead.

Management closely monitors liquidity and updates its U.S. liquidity forecasts weekly. These forecasts include, among other analyses, cash flow forecasts, which include cash on hand, cash flows from operations, cash repatriations and loans from non-U.S. subsidiaries, asset sales, collections of receivables and claims recoveries, and working capital needs and unused credit line availability. The Company’s cash flow forecasts continue to indicate that sufficient cash will be available to fund the Company’s U.S. and foreign working capital needs throughout 2004. Ensuring adequate domestic liquidity remains a priority for the Company’s management, however, there can be no assurance that the cash amounts realized and/or timing of the cash flows will match the Company’s forecast.

As of March 26, 2004, the Company had aggregate indebtedness of approximately $1,000,000. A breakdown of the debt is provided in the Financial Condition Section. Details about specific debt instruments are also provided later in this section.

The corporate debt must be funded primarily with distributions from the Company’s foreign subsidiaries. As of March 26, 2004, the Company had cash and cash equivalents on hand, short-term investments, and restricted cash totaling $453,800 compared to $430,200 as of December 26, 2003. Of the $453,800 total at March 26, 2004, approximately $355,800 was held by foreign subsidiaries. The Company is sometimes required to cash collateralize bonding or certain bank facilities and such amounts are included in restricted cash. The amount of restricted cash at March 26, 2004 was $73,000, of which $61,200 relates to the non-U.S. operations.

The Company also requires cash distributions from its non-U.S. subsidiaries in the normal course of its operations to meet its U.S. operations’ minimum working capital needs. The Company’s current 2004 forecast assumes total cash repatriation from its non-U.S. subsidiaries from royalties, management fees, intercompany

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loans, debt service on intercompany loans, and dividends of approximately $61,000. In 2003, the Company repatriated approximately $100,000 from its non-U.S. subsidiaries.

There can be no assurance that the forecasted foreign cash repatriation will occur as there are significant legal and contractual restrictions on the Company’s ability to repatriate funds from its non-U.S. subsidiaries. These subsidiaries need to keep certain amounts available for working capital purposes, to pay known liabilities, and for other general corporate purposes. Such amounts exceed, and are not directly comparable to, the foreign component of restricted cash previously noted. In addition, certain of the Company’s non-U.S. subsidiaries are parties to loan and other agreements with covenants, and are subject to statutory minimum capitalization requirements in their jurisdictions of organization that restrict the amount of funds that such subsidiaries may distribute. Distributions in excess of these specified amounts would violate the terms of the agreements or applicable law which could result in civil or criminal penalties. The repatriation of funds may also subject those funds to taxation. As a result of these factors, the Company may not be able to repatriate and utilize funds held by its non-U.S. subsidiaries or future earnings of those subsidiaries in sufficient amounts to fund its U.S. working capital requirements, to repay debt, or to satisfy other obligations of its U.S. operations, which could limit the Company’s ability to continue as a going concern.

Commercial operations under a domestic contract retained by the Company in the Environmental asset sale, as described further under “Sale of Certain Business Assets” in the Notes to our Condensed Consolidated Financial Statements, commenced in January 2004. The plant processes low-level nuclear waste for the U.S. Department of Energy (“DOE”). The Company funded the plant’s construction costs and operates the facility. The majority of the Company’s invested capital is recovered during the early stages of processing the waste materials. This project’s performance exceeded expectations during the first quarter and successfully processed sufficient materials to fully recover the 2004 capital recovery amount. The original forecast expected to recover the capital over the first three quarters of 2004. At March 26, 2004 the project generated a year to date net cash flow of approximately $32,400. Net cash flow forecast for 2004 from this project remains in excess of $40,000.

On February 26, 2004, the California Public Utilities Commission approved certain changes to Pacific Gas & Electric’s rates. As relevant to the Company’s subsidiary’s Martinez Project, the E-20T rate has been decreased by approximately 15% retroactive to January 1, 2004, having a negative effect on the subsidiary’s 2004 cash flow and earnings. This rate change has been reflected in the Company’s liquidity forecast.

There can be no assurance that cash amounts realized and/or timing of the cash flows will match the Company’s forecast.

As part of its debt restructuring plan described below, the Company and certain of its subsidiaries filed an amended registration statement with the Securities and Exchange Commission (“SEC”) on April 12, 2004 and on May 4, 2004, relating to an exchange offer for all of the existing $175,000 trust preferred securities, $210,000 Convertible Notes, $113,700 Robbins Bonds, and $200,000 Senior Notes.

On February 5, 2004, the Company announced, in support of its restructuring activities, a number of institutional investors have committed to provide $120,000 of new financing in a private transaction to the Company to replace the current term loan and the revolving credit facility portions of its Senior Credit Facility. This commitment is contingent upon the completion of the proposed exchange offer. Additionally, the Company has discontinued its previously announced plans to divest one of its European operating units.

The total amount of debt and preferred trust securities subject to the proposed exchange offer that is part of the Company’s planned restructuring is approximately $700,000. Interest expense incurred on this debt in 2003 totaled approximately $55,000. The Company expects to offer a mix of equity as well as debt with longer maturities in exchange for these securities. The Company anticipates that both total debt and related interest expense would be significantly reduced upon completion of the debt exchange offer; however, Company may not complete the exchange offer on acceptable terms, or at all.

Failure by the Company to achieve its cash flow forecast or to complete the components of the restructuring plan on acceptable terms would have a material adverse effect on the Company’s financial condition. These matters raise substantial doubt about the Company’s ability to continue as a going concern.

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In August 2002, the Company finalized a Senior Credit Facility with its lender group. This facility included a $71,000 term loan, a $69,000 revolving credit facility, and a $149,900 letter of credit facility which expires on April 30, 2005. The Senior Credit Facility is secured by the assets of the domestic subsidiaries, the stock of the domestic subsidiaries, and, in connection with Amendment No. 3 discussed below, 100% of the stock of the first-tier foreign subsidiaries. The Senior Credit Facility has no required repayments prior to maturity on April 30, 2005. The agreement requires prepayments from proceeds of assets sales, the issuance of debt or equity, and from excess cash flow. The Company retained the first $77,000 of such amounts and also retains a 50% share of the balance. With the Company’s sale of the Environmental net assets on March 7, 2003, and an interest in a corporate office building on March 31, 2003, the $77,000 threshold was exceeded. Accordingly, principal prepayments of $1,250 and $11,800 were made on the term loan in the first quarter of 2004 and during the full year of 2003, respectively.

The financial covenants in the Senior Credit Facility include a senior leverage ratio and a minimum EBITDA as defined in the agreement, as amended. Compliance with these covenants is measured quarterly. The EBITDA covenant compares the actual average rolling four quarter EBITDA, as adjusted in the Senior Credit Facility, to minimum EBITDA targets. The senior leverage covenant compares actual average rolling EBITDA, as adjusted in the Senior Credit Facility, to total senior debt. The resultant multiple of debt to EBITDA must be less than maximum amounts specified in the Senior Credit Facility. Management’s current forecast indicates that the Company will be in compliance with these covenants throughout 2004. However, there can be no assurance that the actual results will match to forecasts or that the Company will not violate the covenants.

Amendment No. 1 to the Senior Credit Facility, obtained on November 8, 2002, provides covenant relief of up to $180,000 of gross pretax charges recorded by the Company in the third quarter of 2002. The amendment further provides that up to an additional $63,000 in pretax charges related to specific contingencies may be excluded from the covenant calculation through December 31, 2003, if incurred. By the fourth quarter 2003, $31,000 of the contingency risks were favorably resolved, and additional project reserves were established for $32,000 leaving a contingency balance of $0.

Amendment No. 2 to the Senior Credit Facility, entered into on March 24, 2003, modifies (i) certain definitions of financial measures utilized in the calculation of the financial covenants and (ii) the Minimum EBITDA, and Senior Debt Ratio, as specified in section 6.01 of the Credit Agreement. In connection with this amendment of the Credit Agreement, the Company made a prepayment of principal in the aggregate amount of $10,000 in March 2003.

Amendment No. 3 to the Senior Credit Facility, entered into on July 14, 2003, modified certain affirmative and negative covenants to permit the exchange offer described elsewhere in this report, other internal restructuring transactions as well as transfers, cancellations and setoffs of certain intercompany obligations. The terms of the amendment called for the Company to pay a fee equal to 5% of the lenders’ credit exposure since it had not made a required prepayment of principal under the Senior Credit Facility of $100,000 on or before March 31, 2004. The Company paid the required fee of $13,600 on March 31, 2004. The annual interest rate on borrowings under the Senior Credit Facility has increased and will continue to increase an additional 0.5% each quarter until the Company repays $100,000 of indebtedness under the Senior Credit Facility. The fee was included in Foster Wheeler’s liquidity forecast for 2004.

Holders of the Company’s Senior Notes due November 15, 2005 have a security interest in the stock and debt of certain of Foster Wheeler LLC’s subsidiaries and on facilities owned by Foster Wheeler LLC or its subsidiaries that exceed 1% of consolidated net tangible assets, in each case to the extent such stock, debt and facilities secure obligations under the revolving portion of the Senior Credit Facility. The Term Loan and the obligations under the letter of credit facility (collectively approximating $155,200 as of March 26, 2004) have priority to the Senior Notes in these assets while the security interest of the Senior Notes ranks equally and ratably with $69,000 of revolving credit borrowings under the Senior Credit Facility.

The Company finalized a sale/leaseback arrangement in the third quarter of 2002 for an office building at its corporate headquarters. This capital lease arrangement leases the facility to the Company for an initial non-cancelable period of 20 years. The proceeds from the sale/leaseback were sufficient to repay the balance outstanding under a previous operating lease arrangement of $33,000 for a second corporate office building.

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The long-term capital lease obligation of $44,200 as of March 26, 2004 is included in capital lease obligations in the accompanying consolidated balance sheet. The Company entered into a binding agreement in the first quarter 2004 to sell the second corporate office building previously noted. The sale closed in the second quarter 2004 and generated net cash proceeds of $16,400. Of this amount, 50% has been repaid to the Senior Credit Facilities’ lenders in the second quarter 2004.

In the third quarter of 2002, the Company also entered into a receivables financing arrangement of up to $40,000. The funding available to the Company is dependent on the amount and characteristics of the domestic receivables. The amount available to the Company fluctuates daily, but the Company estimates that approximately $10,000 will be available during 2004. This financing arrangement expires in August 2005 and is subject to covenant compliance. The financial covenants commenced at the end of the first quarter of 2003 and include a senior leverage ratio and a minimum EBITDA level. Noncompliance with the financial covenants allows the lender to terminate the arrangement and accelerate any amounts then outstanding. As of March 26, 2004 and December 26, 2003, the Company had $0 borrowings outstanding under this facility.

On January 26, 2004, subsidiaries in the U.K. entered into a two-year revolving credit facility with Saberasu Japan Investments II B.V. in the Netherlands. The facility provides for up to $45,000 of additional revolving loans available to provide working capital, which may be required by these subsidiaries as they seek to grow the business by pursuing a larger volume of lump sum EPC contracts. The facility is secured by substantially all of the assets of these subsidiaries. The facility is subject to covenant compliance. Such covenants include a minimum EBITDA level and a loan to EBITDA ratio. As of March 26, 2004, the facility remained undrawn.

Since January 15, 2002, the Company has exercised its right to defer payments on the junior subordinated debentures underlying the 9.00% Preferred Capital Trust I securities and, as a result, to defer payments on those securities. The aggregate liquidation amount of the Preferred Trust Securities is currently $175,000. The Senior Credit Facility, as amended, requires the Company to defer the payment of the dividends on the preferred trust securities and no dividends were paid during the first quarter 2004.

The Senior Credit Facility, the sale/leaseback arrangement, and the receivables financing arrangement have quarterly debt covenant requirements. Management’s forecast indicates that the Company will be in compliance with the debt covenants throughout 2004. However, there can be no assurance that the actual results will match the forecasts or that the Company will not violate the covenants. If the Company violates a covenant under the Senior Credit Facility, the sale/leaseback arrangement or the receivables financing arrangement, repayment of amounts borrowed under such agreements could be accelerated. Acceleration of these facilities would result in a default under the following agreements: the Senior Notes, the Convertible Notes, the Subordinated Deferrable Interest Debentures, the Subordinated Robbins Facility Exit Funding Obligations, and certain of the special-purpose project debt facilities, which would allow such debt to be accelerated as well. The total amount of Foster Wheeler Ltd. debt that could be accelerated, including the amount outstanding under the Senior Credit Facility, is $915,000 as of March 26, 2004.

The debt covenants and the potential payment acceleration requirements raise substantial doubts about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Company’s operations generated cash of approximately $29,600 during the first quarter 2004. The net cash generated in the first quarter 2004 was primarily due to recovery of working capital from the DOE project previously noted. During the twelve months ended December 26, 2003 the Company used cash for operations of $62,100. Management had previously forecasted that much of positive cash flow generated in 2002 would reverse in 2003 due to the timing flows for several major projects.

The Company’s working capital varies from period to period depending on the mix, stage of completion and commercial terms and conditions of the Company’s contracts. Working capital needs increased in prior years as a result of the Company’s satisfying requests from its customers for more favorable payment terms under contracts. Such requests generally include reduced advance payments and less favorable payment schedules to the Company. As previously noted, Management forecasts that there will be sufficient liquidity to meet the Company’s operating requirement throughout 2004.

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Restricted cash at March 26, 2004 consists of approximately $13,200 held primarily by special purpose entities and restricted for debt service payments, approximately $54,500 that was required to collateralize letters of credit and bank guarantees, and approximately $5,300 of client escrow funds. Domestic restricted cash totals approximately $11,800, which relates to funds held primarily by special purpose entities and restricted for debt service payments and client escrow funds. Foreign restricted cash totals approximately $61,200 and is comprised of cash collateralized letters of credit and bank guarantees and client escrow funds.

During the first quarter of 2004, the E&C’s Italian business unit, through a joint venture with a third party, sold the development rights to a power project in Italy. The Company’s share of the proceeds from the sale in the first quarter of 2004, prior to repaying any borrowings under the Senior Credit Facility, approximated $10,500. While the sale of the power project development rights is recorded as a one-time gain, the business in Italy has historically developed and sold such project rights, and is continuing to actively develop other project rights that are expected to be offered for sale in the future. The Company is a minority shareholder in the joint venture and does not have immediate access to the funds. Management forecasts that the sales proceeds will be distributed to the joint venture owners in the second quarter of 2004.

The Company retained from the Environmental sale, as further discussed in “Sale of Certain Business Assets” in the Notes to our Condensed Consolidated Financial Statements, a long-term contract with a government agency that is to be completed in four phases. The first phase was for the design, permitting and licensing of a spent fuel facility. This phase was completed for a price of $66,700. The first phase of this project was profitable, but the close out of this phase resulted in increased costs. An $11,900 charge was recorded in 2003. Approximately $7,900 and $2,000 of this charge was expended in 2003 and the first quarter 2004 and the remaining $2,000 of the charge will be expended throughout the balance of 2004. The Company is in the process of submitting requests for equitable adjustment related to this contract and, at March 26, 2004 and December 26, 2003, the Company’s financial statements reflect anticipated collection of $0 from these requests for equitable adjustment.

The second phase of the contract is billed on a cost plus fee basis and is expected to conclude in 2004. In this phase, the Company must respond to any questions regarding the initial design included in phase one. Phase three, which is for the construction, start-up and testing of the facility for a fixed price of $114,000, subject to escalation, is scheduled to commence in late 2004. This phase will begin with the purchase of long lead items followed in 2005 by the construction activities. Construction is expected to last two years and requires that a subsidiary of the Company fund the construction cost. Foster Wheeler USA Corporation, the parent company of Environmental, provided a performance guarantee on the project. In addition, a surety bond for the full contract price is required. The cost of the facility is expected to be recovered in the first nine months of operations under phase four, during which a subsidiary of the Company will operate the facility at fixed rates, subject to escalation, for approximately four years. The Company and the government agency have commenced discussions about possibly restructuring or terminating subsequent phases of the contract. If the project were to proceed, the Company intends to seek third party financing to fund the majority of the construction costs, but there can be no assurance that the Company will secure such financing on acceptable terms, or at all. There also can be no assurance that the Company will be able to obtain the required surety bond. If the Company cannot obtain third party financing or the required surety bond, the Company’s participation would be uncertain. This could have a material adverse effect on the Company’s financial condition, results of operations, and cash flow. No claims have been raised by the government agency against the Company. The ultimate potential liability to the Company would arise in the event that the government agency terminates the contract (for example, due to the Company’s inability to continue with the contract) and re-bids the contract under its exact terms and the resulting cost to the government agency is greater than it would have been under the existing terms with the Company. The Company does not believe a claim is probable and is unable to estimate the possible loss that could occur as a result of any claims. Additionally, the Company believes that it has good legal defenses should the government agency decide to pursue an action.

During the first quarter of 2004, the Company settled several domestic contract disputes and was required to pay portions of settlements finalized in 2003. Net settlement proceeds of $9,000 were collected by the Company in the first quarter of 2004. During 2003, the Company collected approximately $39,000 in net

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proceeds from domestic contract dispute settlements. An additional $3,000 will be paid by the Company over the balance of 2004 under terms of the 2003 settlement agreements.

In July 2003, several subsidiaries of the Company and Liberty Mutual Insurance Company (“Liberty Mutual”), one of their insurers, entered into a settlement and release agreement that resolves the coverage litigation between the subsidiaries and Liberty Mutual in both state courts in New York and New Jersey. The agreement provides for a buy-back of insurance policies and the settlement of all disputes between the subsidiaries and Liberty Mutual with respect to asbestos-related claims. The agreement requires Liberty Mutual to make payments over a nineteen-year period, subject to annual caps, which payments decline over time, into a special account, established to pay the subsidiaries’ indemnity and defense costs for asbestos claims. These payments, however, would not be available to fund the subsidiaries’ required contributions to any national settlement trust that may be established by future federal legislation. In July 2003, the subsidiaries received an initial payment under the agreement of approximately $6,000, which was used to pay asbestos-related defense and indemnity costs.

In September 2003, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and certain London Market and North River Insurers. This agreement provides for a cash payment of $5,900, which has been received by the subsidiaries, and additional amounts which have been deposited in a trust for use by the subsidiaries for defense and indemnity of asbestos claims.

The Company recorded a charge of $68,100 in the fourth quarter 2003 to increase the valuation allowance for insurance claims receivable. The 2003 non-cash asbestos charge was due to the Company receiving a somewhat larger number of claims in 2003 than had been expected, which resulted in an increase in the projected liability related to asbestos. This charge was recorded in other deductions in the consolidated statement of operations.

In January 2004, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and Hartford Accident and Indemnity Company and certain of its affiliates. This agreement provides for a cash payment of $5,000, which has been received by the subsidiaries, an additional amount which has been deposited in a trust for use by the subsidiaries and a further amount to be deposited in that trust in 2005.

In March 2004, the Company’s subsidiaries and two asbestos insurance carriers entered into settlement and release agreements that resolve coverage litigation between the subsidiaries and the insurance carriers. The agreements provide for a buy-back of insurance policies and the settlement of all disputes between the subsidiaries and the insurance carriers with respect to asbestos-related claims. The agreements resulted in the insurance carriers making payments into a trust, established to pay the subsidiaries’ indemnity and defense costs for asbestos claims. As a result of these settlements, the Company reversed $11,700 of the $68,100 non-cash charge recorded in the fourth quarter of 2003. The Company projects that it will not be required to fund any asbestos liabilities from its cash flow for at least six years.

It is customary in the industries in which the Company operates to provide letters of credit, bank guarantees or performance bonds in favor of clients to secure obligations under contracts. The Company traditionally obtained letters of credit or bank guarantees from its banks, or performance bonds from a surety on an unsecured basis. Due to the Company’s financial condition and current credit ratings, as well as changes in the bank and surety markets, the Company is now required in certain circumstances to provide security to banks and the surety to obtain new letters of credit, bank guarantees and performance bonds. (Refer to Note 2, “Restricted Cash”) If the Company is unable to provide sufficient collateral to secure the letters of credit, bank guarantees and performance bonds, its ability to enter into new contracts could be materially limited. Providing collateral increases working capital needs and limits the ability to repatriate funds from operating subsidiaries.

On April 10, 2003, the Board of Directors approved changes to the Company’s domestic employee benefits program, including the pension, postretirement medical, and 401(k) plans. The changes were made following an independent review of the Company’s domestic employee benefits which assessed the Company’s benefit program against that of the marketplace and its competitors. The principal changes consist

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of the following: the U.S. pension plan was frozen as of May 31, 2003, which means participants will not be able to increase the amount earned under the terms of the plan; the number of employees eligible for the postretirement medical plan will be reduced; and the 401(k) plan will be enhanced to increase the level of employer matching contribution. The net effect of these changes is expected to positively impact the financial condition of the Company through reduced costs and reduced cash outflow. The Company anticipates a savings in expenses over what would have been paid if the plans were not amended of approximately $10,000 per year. The savings commenced in 2004. The Company froze the Supplemental Employee Retirement Plan (“SERP”) and in April 2003 issued accreting letters of credit to certain employees. At March 26, 2004, letters of credit totaling $1,500 were outstanding under the SERP curtailment.

The Company maintains several defined benefit pension plans in its North American, United Kingdom, South African, and Canadian operations. Funding requirements for these plans are dependent, in part, on the performance of global equity markets and the discount rates used to calculate the present value of the liability. The poor performance of the global equity markets during recent years and low interest rates are expected to significantly increase the funding requirements for these plans in 2004 and 2005. The non-U.S. plans are funded from the local operating cash flows while funding for the U.S. plans is included within the U.S. working capital requirements previously noted. The U.S. pension plans are frozen and the United Kingdom’s plan is now closed to new entrants. The South African and Canadian plans are relatively immaterial in size. The liability interest rate used to calculate the U.S. funding requirement is established by the U.S. Government. The U.S. Congress previously passed legislation that temporarily increased the liability interest rate and thereby reduced the present value liability and corresponding funding requirements. This increased liability interest rate expired at the end of 2003. The U.S. Congress recently passed legislation amending the funding requirements. The funding requirement for the U.S. plans will approximate $29,200 in 2004 and $21,400 in 2005, versus $13,800 in 2003. The new legislation reduced the 2004 and 2005 funding requirements by approximately $7,800 and $12,600, respectively. The funding amounts incorporate the savings achieved through the modification of the Company’s domestic pension plans discussed above, but are subject to change as the performance of the plans’ investments and the liability interest rates fluctuate, and as the Company’s workforce demographics change. The next update will occur no later than the first quarter 2005.

On November 14, 2003, the New York Stock Exchange (“NYSE”) de-listed the Company’s common stock as well as its related security, 9.00% FW Preferred Capital Trust I based on the Company’s inability to meet its listing criteria. The common stock and the 9.00% FW Preferred Capital Trust I securities are quoted on the Over-the-Counter Bulletin Board (“OTCBB”).

Under Bermuda law, the consent of the Bermuda Monetary Authority (“BMA”) is required prior to the transfer by non-residents of Bermuda of a Bermuda company’s shares. Since becoming a Bermuda company, Foster Wheeler has relied on an exemption from this rule provided to NYSE-listed companies. Due to the Company’s de-listing, this exemption was no longer available. To address this issue, the Company obtained the consent of the BMA to transfers between non-residents for so long as the Company’s shares continue to be quoted in the Pink Sheets or on the OTCBB. The Company believes that this consent will continue to be available.

The Board of Directors of the Company discontinued the common stock dividend in July 2001. The Company is currently prohibited from paying dividends under the Senior Credit Facility, as amended. Accordingly, the Company paid no dividends on common shares during the first quarter 2004 and does not expect to pay dividends on the common shares for the foreseeable future.

Backlog and New Orders Booked

The elapsed time from the award of a contract to completion of performance may be up to four years. The dollar amount of backlog is not necessarily indicative of the future earnings of the Company related to the performance of such work. The backlog of unfilled orders includes amounts based on signed contracts as well as agreed letters of intent which management has determined are likely to be performed. Although backlog represents only business that is considered firm, cancellations or scope adjustments may occur. Due to factors outside the Company’s control, such as changes in project schedules or project cancellations, the

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Company cannot predict with certainty the portion of backlog to be performed in a given year. Backlog is adjusted to reflect project cancellations, deferrals, sale of subsidiaries and revised project scope and cost.

CONSOLIDATED DATA

	Three Months Ended
	March 26, 2004		March 28, 2003		$ Change			% Change
Backlog	$	2,138,200	$	3,530,200	$	(1,392,000	)		-39.4	%
New orders	$	629,900	$	476,300	$	153,600			32.2	%

As of March 26, 2004, approximately $1,109,000 or 48% of the consolidated backlog was from lump-sum work. As of March 28, 2003, approximately $1,736,000 or 45% of the consolidated backlog was from lump-sum work. Approximately $636,000 or 57% of the 2004 lump-sum backlog is attributable to the Energy Group. This compares to $1,118,000 or 64% as of March 28, 2003.

The reduction in backlog is attributable to both the E&C and Energy Groups’ operations as the level of operating revenues exceeded new orders.

A total of 77% of first quarter 2004 new orders were for projects awarded to the Company’s subsidiaries located outside of the United States compared to 63% in first quarter 2003. Approximately 37% of first quarter 2004 new orders are lump sum contracts compared to 26% in first quarter 2003. Key geographic regions contributing to new orders awarded in 2004 were Europe, the United States, Asia and the Middle East. The increase in new orders was primarily due to the winning of two larger E&C awards in Europe, and one in the USA. Additional information is included in the group discussions below.

New order levels remain an operating concern as management believes the financial condition of the Company is having an increasingly negative impact with some clients. The Company established new, formalized internal reporting requirements in the second quarter of 2003 that closely monitors E&C man-hours in backlog and a new metric, Foster Wheeler scope.

Foster Wheeler scope is defined as the dollar value of backlog excluding costs incurred by Foster Wheeler as agent or as principal on a reimbursable basis (i.e., flow-through costs). Foster Wheeler scope measures the component of backlog with mark-up, and corresponds to Foster Wheeler services plus fees for reimbursable contracts, and total selling price for lump-sum contracts.

CONSOLIDATED DATA

	Three Months Ended
	March 26, 2004		March 28, 2003		$ Change			% Change
E&C manhours in quarter-end backlog (in thousands)*		4,050		5,060		(1,010	)		-20.0	%
Foster Wheeler scope in quarter-end backlog **	$	1,042,200	$	1,940,900	$	(898,700	)		-46.3	%

* Excludes retained Foster Wheeler Environmental processing facility.

** Excludes Foster Wheeler Power Systems and Foster Wheeler Environmental processing facilities.

The decline in E&C man-hours is attributable primarily to operations in Europe. The decline in Foster Wheeler scope is attributable to both the Energy and E&C Groups.

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Additional information is included in the group discussions below.

Engineering and Construction Group (E&C)

	Three Months Ended
	March 26, 2004		March 28, 2003		$ Change			% Change
Backlog	$	1,328,500	$	2,195,700	$	(867,200	)		-39.5	%
New orders	$	473,500	$	262,800	$	210,700			80.2	%
E&C manhours in quarter-end backlog (in thousands)*		4,050		5,060		(1,010	)		-20.0	%
Foster Wheeler scope in quarter-end backlog *	$	330,200	$	696,200	$	(366,000	)		-52.6	%

* Excludes retained Foster Wheeler Environmental processing facility.

Overall, the level of bookings rose significantly compared to 2003. Approximately 68% of E&C backlog at March 26, 2004 and 72% of first quarter 2004 new orders were from cost reimbursable plus fee contracts. This compares to 75% and 88% for the corresponding period of 2003, respectively. Approximately 88% of E&C backlog at March 26, 2004 and 88% of first quarter 2004 new orders are for projects located outside North America. This compares to 86% and 93% for the corresponding period of 2003, respectively.

The decline in E&C man-hours is attributable primarily to the operations in Europe and result from project execution efforts exceeding new awards.

The Company believes higher expectations for world economic growth in 2004, in particular in the U.S. and Asia, did generally boost the confidence of oil, gas and chemical companies. Although new orders increased, the Company’s results for the first quarter of 2004 continue to reflect the residual effects of weak investment over the last several years in many of the market sectors served by the E&C Group. Depressed oil refining margins discouraged investment in 2003 and this has impacted new orders in the first quarter of 2004, although the Company continued to win business for environmentally mandated clean fuels projects. The refinery market was most active in the United States and Europe; however, refinery owners in the Middle East were awarding contracts in the second half of 2003 and are expected to continue doing so in 2004.

The Company believes that the ongoing economic recovery in the United States has boosted prospects for growth in global trade, especially in Asia, in 2004. Growth in global trade is expected to impact the E&C industry in which the Company operates by, among other things, firming up the demand for oil and gas which management believes will help sustain higher energy prices and correspondingly drive demand for the Company’s business. Additionally, the Company believes gas to liquids plants may be planned for construction in Qatar. The Company anticipates this will encourage investment in oil and gas production facilities in the mid to later part of 2004 in many parts of the world, notably the Middle East, Russia and the Caspian region. The liquid natural gas industry (“LNG”) continues to evidence intentions to develop the infrastructure to increase LNG imports to the United States. In addition, the ongoing economic recovery is also expected to increase demand for petrochemical products. The Company anticipates investment in new capacity to continue and be heavily concentrated in the Middle East and China, although the latter country’s demand for imports may encourage some investment in other parts of Asia. The Company anticipates increased petrochemical investment in 2005. As the Company previously anticipated, there appears to be a slowing of clean fuels projects at refineries in Europe and the U.S. as legislative demands are met. However, several Middle East countries have begun planning large investment programs to upgrade their refineries in order to meet the demands of clean fuels export markets. This follows a period of low refinery investment in that region. The pharmaceutical industry continues to invest but at a reduced level owing to excess production capacity following a series of mergers. In general, the Company believes the underlying growth in demand for pharmaceutical products should result in increased investment in the latter part of 2005 and 2006, and that the most significant investment will likely be spread across the U.S., Europe and Singapore. The Company presently expects that the growth in new orders resulting from these improved economic conditions will be realized in 2005 rather than in 2004.

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Many of the target markets noted above require lump-sum contracts and the Company expects to increase the number of lump-sum contracts in the future and the number of countries where it is willing to execute lump-sum contracts.

On March 11, 2004, our subsidiary in the U.K. was awarded a contract by the Coalition Provisional Authority to undertake oil sector program management support services in Iraq. Mobilization of personnel to Iraq has been minimized until the security situation in Iraq improves.

Energy Group

	Three Months Ended
	March 26, 2004		March 28, 2003		$ Change			% Change
Backlog	$	812,600	$	1,341,700	$	(529,100	)		-39.4	%
New orders	$	156,300	$	210,100	$	(53,800	)		-25.6	%
Foster Wheeler scope in quarter-end backlog*	$	712,000	$	1,244,700	$	(532,700	)		-42.8	%

* Excludes Foster Wheeler Power Systems.

The Energy Group’s backlog decreased $529,100 at March 26, 2004, representing a 39% decrease from March 28, 2003. Several large Heat Recovery Steam Generators and Selective Catalytic Reduction contracts were not replaced in 2003, thereby decreasing backlog in 2004. In addition, the supply and erect portions of a major contract anticipated to be released to the Finnish operation in the first quarter 2004 were delayed and are now anticipated for the fourth quarter of 2004. The preliminary engineering for this project was completed.

The decline in new orders for the first quarter 2004 of $53,800 or 26% is primarily a result of the depressed power market in North America. Approximately 76% of Energy backlog at March 26, 2004 and 65% of new orders for the first quarter 2004 were from lump- sum projects as compared to 77% and 44% in the corresponding period of 2003, respectively. Approximately 56% of Energy backlog at March 26, 2004, and 44% of new orders for the first quarter 2004, were for projects located outside North America as compared to 64% and 26% in the corresponding period of 2003, respectively. The decrease in the relative percentage of business outside North America reflects the slow worldwide economy in the power sector and the client perceptions towards the Company’s financial condition.

Foster Wheeler scope declined $532,700 or 43%, as of March 26, 2004 as compared to March 28, 2003 and as expected is in line with the 39% decrease in backlog.

The North American power market continues to suffer from relatively slow economic growth, over capacity, and the financial difficulties of independent power producers. In 2004, maintenance and service contracts will continue to be the growth opportunities in the North American power market. Supply opportunities for new equipment associated with solid fuel boiler contracts are expected to be limited in the short term except for growth opportunities in circulating fluidized bed boilers which are expected to continue in certain European and Asian markets. Selected opportunities in environmental retrofits are expected to continue.

Other Matters

The ultimate legal and financial liability of the Company in respect to all claims, lawsuits and proceedings cannot be estimated with certainty. As additional information concerning the estimates used by the Company becomes known, the Company reassesses its position both with respect to gain contingencies and accrued liabilities and other potential exposures. Estimates that are particularly sensitive to future change relate to legal matters that are subject to change as events evolve and as additional information becomes available during the administration and litigation processes. The Company adjusted its estimates on several contracts during the quarter resulting in both increases and decreases to final estimated profits on contracts.

In the ordinary course of business, the Company and its subsidiaries enter into contracts providing for assessment of damages for nonperformance or delays in completion. Suits and claims have been or may be

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brought against the Company by customers alleging deficiencies in either equipment design or plant construction. Based on its knowledge of the facts and circumstances relating to the Company’s liabilities, if any, and to its insurance coverage, management of the Company believes that the disposition of such suits will not result in charges materially in excess of amounts provided in the accounts.

Inflation

The effect of inflation on the Company’s revenues and earnings is minimal. Although a majority of the Company’s revenues are realized under long-term contracts, the selling prices of such contracts, established for deliveries in the future, generally reflect estimated costs to complete in these future periods. In addition, some contracts provide for price adjustments through escalation clauses.

Application of Critical Accounting Estimates

The Company’s condensed consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America. Management and the Audit Committee of the Board of Directors approve the critical accounting policies.

Highlighted below are the accounting policies that management considers significant to the understanding and operations of the Company’s business as well as key estimates that are used in implementing the policies.

Revenue Recognition

Revenues and profits on long-term fixed-price contracts are recorded under the percentage-of-completion method. Progress towards completion is measured using physical completion of individual tasks for all contracts with a value of $5,000 or greater. Progress toward completion of fixed-priced contracts with a value under $5,000 is measured using the cost-to-cost method.

Revenues and profits on cost reimbursable contracts are recorded as the costs are incurred. The Company includes flow-through costs consisting of materials, equipment and subcontractor costs as revenue on cost-reimbursable contracts when the Company is responsible for the engineering specifications and procurement for such costs.

Contracts in progress are stated at cost, increased for profits recorded on the completed effort, or decreased for estimated losses, less billings to the customer and progress payments on uncompleted contracts. Negative balances are presented as “estimated costs to complete long-term contracts.”

The percentage-of-completion method is the preferable method of revenue recognition as set forth in the American Institute of Certified Public Accountants (“AICPA”) Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.”

The Company has thousands of projects in both reporting segments that are in various stages of completion. Such contracts require estimates to determine the appropriate final estimated cost (“FEC”), profits, revenue recognition, and the percentage complete. In determining the FEC, the Company uses significant estimates to forecast quantities to be expended (i.e. man-hours, materials and equipment), the costs for those quantities (including exchange rate fluctuations), and the schedule to execute the scope of work including allowances for weather, labor and civil unrest. Many of these estimates cannot be based on historical data as most contracts are unique, specifically designed facilities. In determining the revenues, the Company must estimate the percentage complete, the likelihood of the client paying for the work performed, and the cash to be received net of any taxes ultimately due or withheld in the country where the work is performed. Projects are reviewed on an individual basis and the estimates used are tailored to the specific circumstances. Significant judgment is exercised by management in establishing these estimates as all possible risks cannot be specifically quantified.

The percentage-of-completion method requires that adjustments or revaluations to estimated project revenues and costs, including estimated claim recoveries, be recognized on a cumulative basis, as changes to the estimates are identified. Revisions to project estimates are made on an individual project basis as additional information becomes available throughout the life cycle of contracts. If the FEC to complete long-

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term contracts indicates a loss, provision is made immediately for the total loss anticipated. Profits are accrued throughout the life of the project based on the percentage complete. The project life cycle, including the warranty commitments, can be up to six years in duration.

The recent financial results and the resultant intervention actions initiated by management evidence the fact that the estimates can be significantly different from the actual results. When these adjustments are identified near or at the end of a project, the full impact of the change in estimate would be recognized as a change in the margin on the contract in that period. This can result in a material impact on our results for a single reporting period.

It is extremely difficult to calculate sensitivities on the above estimates given the thousands of individual contracts that exist at any point in time and because the estimates are project-specific rather than broad-based percentages.

Claims Recognition

Claims are amounts in excess of the agreed contract price (or amounts not included in the original contract price) that a contractor seeks to collect from clients or others 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. The Company records claims in accordance with paragraph 65 of the AICPA Statement of Position 81-1, “Accounting for Performance of Construction-Type and Certain Production-Type Contracts.” This statement of position states that recognition of amounts as additional contract revenue related to claims is appropriate only if it is probable that the claims will result in additional contract revenue and if the amount can be reliably estimated. Those two requirements are satisfied by management’s determination of the existence of all of the following conditions: the contract or other evidence provides a legal basis for the claim; additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of deficiencies in the contractor’s performance; costs associated with the claim are identifiable or otherwise determinable and are reasonable in view of the work performed; and the evidence supporting the claim is objective and verifiable. If such requirements are met, revenue from a claim is recorded to the extent that contract costs relating to the claim have been incurred. The amounts recorded, if material, are disclosed in the notes to the financial statements. Costs attributable to claims are treated as costs of contract performance as incurred.

In 2002, the Company revised its estimates of claim revenues to reflect recent adverse recovery experience due to management’s desire to monetize claims, and the poor economic conditions impacting the markets served by the Company. As a result, pretax charges approximating $136,200 were recorded in 2002. As claims are settled, differences between the claim specific amounts reflected in the financial statements and the settlements are recorded as gains or losses. The Company continues to actively pursue these claims and, in 2003 recoveries of $1,500 were recognized as income when collected. At December 26, 2003, the Company had no claims and no requests for equitable adjustment recorded. Company policy requires all new claims in excess of $500 to be formally reviewed and approved by the corporate chief financial officer prior to being recorded in the financial results.

Asbestos

The Company has recorded assets of $540,800 relating to probable insurance recoveries of which approximately $60,000 is recorded in accounts and notes receivables, and $480,800 is recorded as long-term. The total liability recorded is comprised of an estimated liability relating to open (outstanding) claims of approximately $348,300 and an estimated liability relating to future unasserted claims of approximately $214,000. Of the total, $60,000 is recorded in accrued expenses and $502,300 is recorded in asbestos related liability on the condensed consolidated balance sheet. The liability is an estimate of future asbestos-related defense costs and indemnity payments that are based upon assumed average claim resolution costs applied against currently pending and estimated future claims. The asset is an estimate of recoveries from insurers based upon assumptions relating to cost allocation and resolution of pending litigation with certain insurers. The defense costs and indemnity payments are expected to be incurred over the next fifteen years.

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As of March 26, 2004, approximately $257,500 was contested by the Company’s subsidiaries’ insurers in ongoing litigation. The litigation relates to the proper allocation of the coverage liability among the subsidiaries’ various insurers and the subsidiaries as self- insurers. The Company believes that any amounts that its subsidiaries might be allocated as self-insurers would be immaterial. Based on the nature of the litigation and the opinions received from outside counsel, the Company believes that the possibility of not recovering the full amount of the asset is remote.

In July 2003, several subsidiaries of the Company and Liberty Mutual, one of their insurers, entered into a settlement and release agreement that resolves the coverage litigation between the subsidiaries and Liberty Mutual in both state courts in New York and New Jersey. The agreement provides for a buy-back of insurance policies and the settlement of all disputes between the subsidiaries and Liberty Mutual with respect to asbestos-related claims. The agreement requires Liberty Mutual to make payments over a nineteen-year period, subject to annual caps, which payments decline over time, into a special account, established to pay the subsidiaries’ indemnity and defense costs for asbestos claims. These payments, however, would not be available to fund the subsidiaries’ required contributions to any national settlement trust that may be established by future federal legislation. In July 2003, the subsidiaries received an initial payment under the agreement of approximately $6,000, which was used to pay asbestos-related defense and indemnity costs.

In September 2003, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and certain London Market and North River Insurers. This agreement provides for a cash payment of $5,900, which has been received by the subsidiaries, and additional amounts which have been deposited in a trust for use by the subsidiaries for defense and indemnity of asbestos claims.

The Company recorded a charge of $68,100 in the fourth quarter 2003 to increase the valuation allowance for insurance claims receivable. The 2003 non-cash asbestos charge was due to the Company receiving a somewhat larger number of claims in 2003 than had been expected, which resulted in an increase in the projected liability related to asbestos and because of the insolvency of an insurance carrier in the fourth quarter of 2003. This charge was recorded in other deductions in the consolidated statement of operations.

In January 2004, the Company’s subsidiaries entered into a settlement and release agreement that resolves coverage litigation between them and Hartford Accident and Indemnity Company and certain of its affiliates. This agreement provides for a cash payment of $5,000, which has been received by the subsidiaries, an additional amount which has been deposited in a trust for use by the subsidiaries and a further amount to be deposited in that trust in 2005.

In March 2004, the Company’s subsidiaries and two asbestos insurance carriers entered into settlement and release agreements that resolve coverage litigation between the subsidiaries and the insurance carriers. The agreements provide for a buy-back of insurance policies and the settlement of all disputes between the subsidiaries and the insurance carriers with respect to asbestos-related claims. The agreements resulted in the insurance carriers making payments into a trust, established to pay the subsidiaries’ indemnity and defense costs for asbestos claims. As a result of these settlements, the Company reversed $11,700 of the $68,100 non-cash charge recorded in the fourth quarter of 2003.

Management of the Company has considered the asbestos litigation and the financial viability and legal obligations of its subsidiaries’ insurance carriers and believes that except for those insurers which have become or may become insolvent for which a reserve has been provided, the insurers or their guarantors will continue to adequately fund claims and defense costs relating to asbestos litigation. The average cost per closed claims since 1993 is $1.9.

It should be noted that the estimates of the assets and liabilities related to asbestos claims and recovery are subject to a number of uncertainties that may result in significant changes in the current estimates. Among these are uncertainties as to the ultimate number of claims filed, the amounts of claim costs, the impact of bankruptcies of other companies currently involved in litigation, the Company’s subsidiaries’ ability to recover from their insurers, uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, as well as potential legislative changes. If the number of claims received in the future exceeds the Company’s estimate, it is likely that the costs of defense and indemnity will similarly exceed the

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Company’s estimates. These factors are beyond the Company’s control and could have a material adverse effect on the Company’s financial condition, results of operations, and cash flows.

The Company’s subsidiaries have been effective in managing the asbestos litigation in part because (1) the Company’s subsidiaries have access to historical project documents and other business records going back more than 50 years, allowing them to defend themselves by determining if they were present at the location that is the cause of the alleged asbestos claim and, if so, the timing and extent of their presence, (2) the Company’s subsidiaries maintain good records on insurance policies and have identified policies issued since 1952, and (3) the Company’s subsidiaries have consistently and vigorously defended these claims which has resulted in dismissal of claims that are without merit or settlement of claims at amounts that are considered reasonable.

Pension

The calculations of pension liability, annual service cost, and cash contributions required rely heavily on estimates about future events often extending decades into the future. Management is responsible for establishing the estimates used and major estimates include:

• The expected percentage of annual salary increases

• The annual inflation percentage

• The discount rate used to present value the future obligations

• The expected long-term rate of return on plan assets

• The selection of the actuarial mortality tables

Management utilizes its business judgment in establishing these estimates. The estimates can vary significantly from the actual results and management cannot provide any assurance that the estimates used to calculate the pension liabilities included herein will approximate actual results. The volatility between the assumptions and actual results can be significant. For example, the performance by the global equity markets during 2000-2002 was significantly worse than estimated, while the equity markets in 2003 were better than expected. The expected long-term rate of return on plan assets is developed using a weighted-average methodology, blending the expected returns on each class of investment in the plans’ portfolio. The expected returns by asset class are developed considering both past performance and future considerations. The long-term rate of return is reviewed annually by the Company for its funded plans and adjusted, if required. The weighted-average expected long-term rate of return on plan assets has declined from 9.3% to 7.9% over the past three years. Returns on the Company’s pension plan assets in the United States from 2000 through 2002 were less than the estimates by approximately $100,000. A reduction in the U.S. interest rate serving as the basis for the discount rate assumptions during the same three years accounted for an approximate $40,000 increase in the Company’s calculated liability.

Pension liability calculations are normally updated annually at each year end, but may be updated in interim periods if any major plan amendments or curtailments occur. The Company’s liability calculation is reflected in the financial statements herein.

Long-Lived Asset Accounting

The Company accounts for its long-lived assets, including those that it may consider monetizing, as assets to be held and used. Management periodically reviews subsidiaries for impairment as required under SFAS No. 144 using an undiscounted cash flow analysis. These reviews require estimating the costs to operate and maintain the facilities over an extended period that could approximate 25 years or more. Estimates are made regarding the costs to maintain and replace equipment throughout the facilities, period operating costs, the production quantities and revenues, and the ability by clients to financially meet their obligations. If a formal decision is made by management to sell an asset, a discounted cash flow methodology is utilized for such assessment.

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Certain special-purpose subsidiaries in the Energy Group are reimbursed by customers for their costs, including amounts related to principal repayments of non-recourse project debt, for building and operating certain facilities over the lives of the non-cancelable service contracts. The Company records revenues relating to debt repayment obligations on these contracts on a straight-line basis over the lives of the service contracts, and records depreciation of the facilities on a straight-line basis over the estimated useful lives of the facilities, after consideration of the estimated residual value.

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 the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Investment tax credits are accounted for by the flow-through method whereby they reduce income taxes currently payable and the provision for income taxes in the period the assets giving rise to such credits are placed in service. To the extent such credits are not currently utilized on the Company’s tax return, deferred tax assets, subject to considerations about the need for a valuation allowance, are recognized for the carryforward amounts.

In the fourth quarter of 2001, the Company established a valuation allowance of $194,600, primarily for domestic deferred tax assets under the provisions of SFAS No. 109. Such action was required due to the losses from domestic operations experienced in the three most recent fiscal years. For statutory purposes, the majority of the deferred tax assets for which a valuation allowance was provided do not begin to expire until 2020 and beyond, based on the current tax laws. Based on the establishment of the valuation allowance, the Company does not anticipate recognizing a provision for federal income taxes on domestic operations until some time subsequent to the successful completion of the proposed restructuring.

If the Company completes the exchange offer as discussed in Note 1 to the condensed consolidated financial statements, it will be subject to substantial limitations on the use of pre-change losses and credits to offset U.S. federal taxable income in any post-change year. Since a valuation allowance has already been reflected to offset these losses and credits, this limitation will not result in a significant write-off by the Company.

Performance Improvement Intervention

In March 2002, the Company initiated a comprehensive plan to enhance cash generation and to improve profitability. The operating performance portion of the plan concentrated on the quality and quantity of backlog, the execution of projects in order to achieve or exceed the profit and cash targets and the optimization of all non-project related cash sources and uses, including cost reductions. In connection with this plan, a group of outside consultants was hired for the purpose of carrying out a performance improvement intervention. The tactical portion of the performance improvement intervention concentrates on booking current projects, and generating incremental cash from high leverage opportunities such as overhead reductions, procurement, and accounts receivable. The systemic portion of the performance improvement intervention concentrates on sales effectiveness, estimating, bidding, and project execution procedures. Management believes the turnaround of the Energy Group’s North American operating unit is in large part the result of the intervention activities.

Code of Ethics

The Company maintains a code of ethics for all employees, including executive management. No exceptions or waivers were made to the code of ethics during the first quarter of 2004.

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Accounting Developments

In January 2003, the FASB issued FASB Interpretation (“FIN”) 46, “Consolidation of Variable Interest Entities.” This interpretation requires consolidation by business enterprises of variable interest entities which have one or both of the following characteristics:

• The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties, which is provided through other interest that will absorb some or all of the expected losses of the entity; and

• The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; b) the obligation to absorb the expected losses of the entity if they occur, which makes it possible for the entity to finance its activities; and c) the right to receive expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected loss.

FIN 46 applied immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On October 9, 2003, the effective date of FIN 46 for variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003 was deferred until the end of the first interim or annual period ending after March 15, 2004.

The Company adopted the provisions of this interpretation in the first quarter of 2004. The adoption did not result in the consolidation of any previously unconsolidated variable interest entities. However, the adoption did result in the de-consolidation of a subsidiary trust which issued mandatorily redeemable preferred securities. This had no impact on the Company’s consolidated debt as the intercompany debt to the subsidiary became third party debt upon de-consolidation.

In December 2003, the FASB issued SFAS No. 132R “Employer’s Disclosure about Pensions and Other Postretirement Benefits.” SFAS No. 132R requires the following disclosures: (1) the dates on which plan’s assets and obligations are measured, (2) reporting entities must segregate data on the market values of plan assets into broad asset categories, (3) a narrative description of the investment policy of plan assets, (4) a narrative description for the basis for the development of the expected long-term rate of return of plan assets, (5) expected contributions to be made to the plan on a cash basis over the next fiscal year and (6) expected benefit payments for each of the next ten fiscal years. These changes are effective for fiscal years ending after December 15, 2003, with the exception of (1) expected benefit payments and (2) foreign plans which are delayed until fiscal years ending after June 15, 2004. SFAS No. 132R requires disclosure of two items in quarterly interim reports. These requirements are the net benefit cost and contribution made during the fiscal year. The Company adopted the disclosure requirements of this standard, including the foreign plans.

On January 12, 2004, the FASB issued FASB Staff Position (“FSP”) No. 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003.” FSP No. 106-1 permitted employers that sponsor postretirement benefit plans that provide prescription drug benefits to retirees to make a one-time election to defer accounting for any effects of the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”). Without FSP No. 106-1, plan sponsors would have been required under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions,” to account for the effects of the Act in the fiscal period that includes December 8, 2003, the date President Bush signed the Act into law. On March 12, 2004, the FASB issued proposed FSP No. 106-b, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003.” Proposed FSP No. 106-b would supercede FSP No. 106-1. In accordance with proposed FSP No. 106-b, the accumulated postretirement benefit obligation (“APBO”) or net periodic postretirement benefit cost in the condensed consolidated financial statements or accompanying notes do not reflect any amounts associated with the subsidy because the Company is unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act. The provisions of proposed FSP No. 106-b would be effective for the Company’s first interim period

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ending September 30, 2004. The Company is currently assessing the impact of the Act and whether its postretirement plan should be amended in consideration of the new legislation.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
(in thousands of dollars)

Management’s strategy for managing transaction risks associated with currency fluctuations is for each operating unit to enter into derivative transactions, such as forward foreign exchange agreements, to hedge its exposure on contracts into the operating unit’s functional currency. The Company utilizes all such financial instruments solely for hedging. Corporate policy prohibits the speculative use of such instruments. The Company is exposed to credit loss in the event of nonperformance by the counter parties to such financial instruments. To minimize this risk, the Company enters into these financial instruments with financial institutions that are primarily rated A or better by Standard & Poor’s or A2 or better by Moody’s. The geographical diversity of the Company’s operations mitigates to some extent the effects of the currency translation exposure. However, the Company maintains substantial operations in Europe and is subject to translation risk for the Euro and the pound Sterling. No significant unhedged assets or liabilities are maintained outside the functional currency of the operating subsidiaries. Accordingly, translation exposure is not hedged.

Interest Rate Risk — The Company is exposed to changes in interest rates primarily as a result of its borrowings under its Revolving Credit Agreement and its variable rate project debt. If market rates average 1% more in 2004 than in 2003, the Company’s interest expense for the next twelve months would increase, and income before tax would decrease by approximately $1,400. This amount has been determined by considering the impact of the hypothetical interest rates on the Company’s variable-rate balances as of March 26, 2004. In the event of a significant change in interest rates, management would likely take action to further mitigate its exposure to the change. However, due to uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company’s financial structure.

Foreign Currency Risk — The Company has significant overseas operations. Generally, all significant activities of the overseas affiliates are recorded in their functional currency, which is generally the currency of the country of domicile of the affiliate. This results in a mitigation of the potential impact of earnings fluctuations as a result of changes in foreign exchange rates. In addition, in order to further mitigate risks associated with foreign currency fluctuations, the affiliates of the Company enter into foreign currency exchange contracts to hedge the exposed contract value back to their functional currency. As of March 26, 2004, the Company had approximately $67,200 of foreign exchange contracts outstanding. These contracts mature in 2004. The contracts have been established by various international subsidiaries to sell a variety of currencies and either receive their respective functional currency or other currencies for which they have payment obligations to third parties. The Company does not enter into foreign currency contracts for speculative purposes.

Inflation

The effect of inflation on the Company’s revenues and earnings is minimal. Although a majority of the Company’s revenues are made under long-term contracts, the selling prices of such contracts, established for deliveries in the future, generally reflect estimated costs to complete in these future periods. In addition, some contracts provide for price adjustments through escalation clauses.

ITEM 4. CONTROLS AND PROCEDURES

Included as Exhibits 31.1 and 31.2 are the Certifications that are required under Section 302 of the Sarbanes-Oxley Act of 2002. This section of the Report contains information concerning the controls evaluation referred to in the Section 302 Certifications and the information contained herein should be read in conjunction with the Certifications.

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The Company’s internal controls are designed with the objective of ensuring that assets are safeguarded, transactions are authorized, and financial reports are prepared on a timely basis in accordance with generally accepted accounting principles in the United States. The Company’s disclosure controls and procedures are designed to comply with the regulations established by the SEC.

Internal controls, no matter how designed, have limitations. It is the Company’s intent that the internal controls be conceived to provide adequate, but not absolute, assurance that the objectives of the controls are met on a consistent basis. Management plans to continue its review of internal controls and disclosure procedures on an ongoing basis.

The Company initiated a detailed review of internal controls in the third and fourth quarters of 2002. The review included evaluation of the Company’s contracting policies and procedures relating to bidding and estimating practices. Among other things, these reviews included evaluation of the Company’s reserving practices for bad debts and uncollectible accounts receivables, warranty costs, change orders and claims. Management, with approval of the Audit Committee of the Board of Directors, enhanced its policies and established more formalized and higher level approvals for setting and releasing project contingencies and reserves, establishing claims and change orders, and requires that all claims to be recorded in excess of $500 be reviewed and approved in advance by the corporate chief financial officer.

Management strengthened the Company’s financial controls and supplemented its financial and management expertise in 2002 and 2003. This included expanding the scope of the audit function, both internally and externally.

The Company outsourced its internal audit function to Deloitte & Touche LLP in the fourth quarter of 2002. Outsourcing internal audit allowed access to a world-class organization with skilled professionals and the latest information technology audit resources. Key objectives of the revised internal audit function include:

• Focusing resources on improving operational and financial performance in areas of highest risk;

• Reviewing and strengthening existing internal controls;

• Mitigating the risk of internal control failures; and

• Ensuring best practices are implemented across all business units.

The Company formed a disclosure review committee in the first quarter of 2003. The purpose of the committee is to evaluate, review and modify as necessary the disclosure controls and procedures designed to ensure that information required to be disclosed in the Company’s periodic reports is recorded, processed, summarized and reported accurately in all material respects within the time periods required by the SEC’s rules and forms.

Management also amended the composition of the boards of directors of the major operating companies to include at least three corporate executives. One of the corporate executives is also chairman of the disclosure committee. The Company believes that these changes in corporate governance will enhance the disclosure controls because critical operating information and strategic actions authorized will now involve the chairman of the disclosure committee. Internal controls are expected to be enhanced by these corporate governance changes.

Management began the formal documentation of the Company’s worldwide internal controls in 2003 as part of the new requirements under the Sarbanes-Oxley legislation. This process will continue throughout 2004.

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a- 14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended) were effective as of March 26, 2004 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

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During 2003, the Company’s financial reporting requirements increased significantly in connection with the 2002 10-K filing. The increased financial reporting stemmed from the SEC requirements relating to the security interest granted to the Senior Note holders in August 2002, and from the financial reporting requirements relating to the proposed exchange offer and restructuring process. Nine additional sets of audited financial statements for subsidiary companies (including three years comparable results) were required for 2002 and the first nine months of 2003. The Company’s permanent corporate accounting staff was not structured to address this increased workload under the deadlines required. The Company hired temporary professional personnel to assist with the process. Because the temporary personnel were unfamiliar with the Company’s operations, this resulted in inefficiencies in the financial reporting process. The external auditors notified the Audit Committee of the Board of Directors on December 16, 2003 that they believed the insufficient staffing levels in the corporate accounting department represented a “material weakness” in the preparation of the subsidiary financial statements, but noted that this did not constitute a material weakness for the Company’s Consolidated Financial Statements. A material weakness is defined as “a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by error or fraud in amounts that would be material in relation to the financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.” The Company has assigned the highest priority to the assessment of this internal control deficiency and is working together with the Audit Committee to resolve the issue. The Company is currently seeking to add additional permanent staff to replace the temporary personnel at its corporate headquarters. In the second quarter of 2004, two managers were hired in the Corporate Controller’s Department and more permanent hires are expected shortly.

The initiatives associated with implementation of the Sarbanes-Oxley legislation are also likely to require the Company to increase the quantity and quality of its financial professionals throughout the world. This is a management objective for 2004.

On March 3, 2004, the Company’s external auditors notified the Audit Committee of the Board of Directors that they believed the lack of formal process in place for senior financial management to review assumptions and check calculations on a timely basis relating to the Company’s asbestos liability and asset balances represented a “material weakness” in the internal controls for the preparation of the Company’s consolidated financial statements for 2003. In order to meet the accelerated deadline for filing its 10-K, in connection with the preparation of its 2003 consolidated financial statements, the Company submitted its calculations and assumptions relating to asbestos liability and related assets to the external auditors for their review prior to being fully reviewed by senior management. As a result, the external auditors noted a proposed change in an assumption used to calculate liability that had not been approved by senior management and also noted a mechanical error in calculating the number of open claims. In response, the Company corrected the mechanical error in its calculation and determined not to make the proposed change in the assumption.

Estimating the Company’s obligations arising from asbestos litigation, and the amounts of related insurance recoveries is a complex process involving many different assumptions about future events extending well into the future. These assumptions are developed by management together with its internal and external asbestos litigation team based on historical data regarding asbestos claims made against the Company, recoveries sought and settlement and trial resolution data. As these factors vary over any given period, the assumptions about future periods used to calculate the Company’s asbestos liabilities are adjusted correspondingly. In their March 3, 2004 letter, the external auditors recommended that the assumptions and calculations prepared by members of the Company’s asbestos litigation team be reviewed carefully by the Chief Accounting Officer of the Company and that all significant assumptions and estimates, including changes thereof, be approved by the Chief Financial and Chief Executive Officers of the Company prior to the asbestos calculations being submitted to the external auditor for review. The Company agreed with these suggestions and has adopted them both in connection with the 2003 audit and going forward. All asbestos estimates and assumptions included in the accompanying financial statements have been subjected to appropriate review by senior management.

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Safe Harbor Statement

Management’s Discussion and Analysis of Financial Condition and Results of Operations, other sections of this Report on Form 10-Q and other reports and oral statements made by representatives of the Company from time to time may contain forward-looking statements that are based on management’s assumptions, expectations and projections about the Company and the various industries within which the Company operates. These include statements regarding the Company’s expectation regarding revenues (including as expressed by its backlog), its liquidity, the outcome of litigation and legal proceedings and recoveries from customers for claims, and the costs of current and future asbestos claims and the amount and timing of insurance recoveries. Such forward-looking statements by their nature involve a degree of risk and uncertainty. The Company cautions that a variety of important factors could cause business conditions and results to differ materially from what is contained in forward-looking statements, including, but not limited to, the following:

• changes in the rate of economic growth in the United States and other major international economies;

• changes in investment by the power, oil & gas, pharmaceutical, chemical/petrochemical and environmental industries;

• changes in the financial condition of our customers;

• changes in regulatory environment;

• changes in project design or schedules;

• contract cancellations;

• changes in estimates made by the Company of costs to complete projects;

• changes in trade, monetary and fiscal policies worldwide;

• currency fluctuations;

• war and/or terrorist attacks on facilities either owned or where equipment or services are or may be provided;

• outcomes of pending and future litigation, including litigation regarding the Company’s liability for damages and insurance coverage for asbestos exposure;

• protection and validity of patents and other intellectual property rights;

• increasing competition by foreign and domestic companies;

• compliance with debt covenants;

• monetization of certain Power System facilities;

• implementation of its restructuring plan;

• recoverability of claims against customers; and

• changes in estimates used in its critical accounting policies.

Other factors and assumptions not identified above were also involved in the formation of these forward-looking statements and the failure of such other assumptions to be realized as well as other factors may also cause actual results to differ materially from those projected. Most of these factors are difficult to predict accurately and are generally beyond the control of the Company. The reader should consider the areas of risk described above in connection with any forward-looking statements that may be made by the Company.

The Company undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. The reader is advised, however, to consult any additional disclosures the Company makes in proxy statements, quarterly reports on Form 10-Q, annual reports on Form 10-K and current reports on Form 8-K filed with the Securities and Exchange Commission.

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PART II.

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to Note 3 to the Condensed Consolidated Financial Statements presented in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of legal proceedings, which is incorporated by reference in this Part II.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

Exhibit No.	Exhibits
10.1	Financing Agreement, dated as of January 26, 2004, between by and among the parties therein referred to as Borrowers, the parties therein referred to as Guarantors, the other parties named therein, the financial institutions from time to time party thereto referred to therein as lenders, Saberasu Japan Investments II B.V., as collateral agent for the Lenders, Saberasu Japan Investments II B.V., as administrative agent for the Lenders. (Filed as Exhibit 99.1 to Foster Wheeler Ltd.’s Form 8-K filed on January 28, 2004, and incorporated herein by reference).
10.2	Deed of Charge, dated as of January 26, 2004, between Foster Wheeler (QLD) Pty Limited and Saberasu Japan Investments II B.V. (Filed as Exhibit 99.2 to Foster Wheeler Ltd.’s Form 8-K filed on January 28, 2004, and incorporated herein by reference).
10.3	Deed of Charge, dated as of January 26, 2004, between Foster Wheeler (QLD) Pty Limited and Saberasu Japan Investments II B.V. (Filed as Exhibit 99.3 to Foster Wheeler Ltd.’s Form 8-K filed on January 28, 2004, and incorporated herein by reference).
10.4	Security Agreement, dated as of January 26, 2004, between the companies identified therein in Schedule 1 and Saberasu Japan Investments II B.V. (Filed as Exhibit 99.4 to Foster Wheeler Ltd.’s Form 8-K filed on January 28, 2004, and incorporated herein by reference).
10.5	Standard Security Agreement, dated as of January 26, 2004, between Foster Wheeler Energy Limited and Saberasu Japan Investments II B.V. (Filed as Exhibit 99.6 to Foster Wheeler Ltd.’s Form 8-K filed on January 28, 2004, and incorporated herein by reference).
10.6	Employment Agreement between Foster Wheeler Ltd. and John T. La Duc dated as of April 14, 2004. (Filed as Exhibit 99.2 to Foster Wheeler Ltd.’s Form 8-K filed on April 15, 2004, and incorporated herein by reference).
10.7	Change of Control Employment Agreement between Foster Wheeler Inc. and John T. La Duc dated as of April 14, 2004. (Filed as Exhibit 99.3 to Foster Wheeler Ltd.’s Form 8-K filed on April 15, 2004, and incorporated herein by reference).
10.8	Employment Agreement between Foster Wheeler Ltd. and Brian K. Ferraioli dated as of April 27, 2004 and effective as of December 1, 2003. (Filed as Exhibit 10.8 to Foster Wheeler Ltd.’s Form 10-Q for the quarter ended March 26, 2004, filed on May 5, 2004, and incorporated herein by reference).
10.9	Change of Control Employment Agreement between Foster Wheeler Inc. and Brian K. Ferraioli effective as of December 1, 2003. (Filed as Exhibit 10.9 to Foster Wheeler Ltd’s. Form 10-Q for the quarter ended March 26, 2004, filed on May 5, 2004, and incorporated herein by reference).
12.1	Statement of Computation of Consolidated Ratio of Earnings to Fixed Charges.
31.1	Section 302 Certification of Raymond J. Milchovich.
31.2	Section 302 Certification of John T. La Duc.
32.1	Certification of Raymond J. Milchovich Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of John T. La Duc Pursuant to 18 U.S. C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Reports on Form 8-K

Report Date	Description
January 26, 2004	Certain subsidiaries of the Company executed financing and security agreements (Items 5 and 7).
January 28, 2004	The Company announced the appointment of principal financial positions, including Acting Chief Financial Officer and Vice President and Treasurer (Items 5 and 7).
February 5, 2004	The Company announced a commitment to provide $120 million of new financing from institutional investors and the discontinuance of a plan to divest European assets (Items 5 and 7).
March 15, 2004	The Company announced its financial results for the Fourth Quarter of 2003 (Items 7, 9, and 12).
March 16, 2004	The Company posted its Fourth Quarter 2003 conference call script (Items 7, 9, and 12).
April 9, 2004	The Company, filed in contemplation of its proposed exchange offer and related registration statement on Form S-4 (No. 333-107054), revised financial statements due to Foster Wheeler LLC’s plans to issue 10.5% Senior Secured Notes due 2011, Series A (Item 5).
April 14, 2004	The Company announced that its Annual General Meeting of Shareholders would be held later in the year, pending consummation of the Company’s recently announced proposed equity for debt exchange offer (Items 5 and 7).
April 14, 2004	The Company announced the appointment of John T. La Duc as Executive Vice President and Chief Financial Officer and filed an Employment and Change of Control Agreement (Items 5 and 7).

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SIGNATURES

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

	FOSTER WHEELER LTD. (Registrant)
Date: May 5, 2004	BY:  /s/ RAYMOND J. MILCHOVICH
	Raymond J. Milchovich Chairman, President and Chief Executive Officer
Date: May 5, 2004	BY:  /s/ JOHN T. LA Duc John T. La Duc Executive Vice President and Chief Financial Officer

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