Shaw (SHAW) 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended May 31, 2006

Or

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

For the transition period from                    to                    

Commission File Number 1-12227

The Shaw Group Inc.

(Exact name of registrant as specified in its charter)

Louisiana	72-1106167
(State or other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
4171 Essen Lane, Baton Rouge, Louisiana	70809
(Address of principal executive offices)	(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports, and (2) has been subject to such filing requirements for the past 90 days.

Yesþ           Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filerþ Accelerated filero Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso           Noþ

The number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date, is as follows:
Common stock, no par value, 80,414,083 shares outstanding as of July 4, 2006.

FORM 10-Q
TABLE OF CONTENTS

Part I — Financial Information Item 1. — Financial Statements
Condensed Consolidated Balance Sheets — May 31, 2006 and August 31, 2005	3
Condensed Consolidated Statements of Operations — For the Three and Nine Months Ended May 31, 2006 and 2005	4
Condensed Consolidated Statements of Cash Flows — For the Nine Months Ended May 31, 2006 and 2005	5-6
Summary of Operating Segments	7
Notes to Condensed Consolidated Financial Statements	8-30
Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations	31-46
Item 3. — Quantitative and Qualitative Disclosures About Market Risk	46-47
Item 4. — Controls and Procedures	47
Part II — Other Information
Item 1. — Legal Proceedings	47
Item 1A. — Risk Factors	47
Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3. — Defaults Upon Senior Securities	47
Item 4. — Submission of Matters to a Vote of Security Holders	48
Item 5. — Other Information	48
Item 6. — Exhibits and Reports on Form 8-K	49
Signatures
Exhibit Index
Amendment No. 3 - $450,000,000 Credit Agreement
Employment Agreement
2001 Employee Incentive Compensation Plan
Form of Non-Qualified Stock Option Agreement
Form of Incentive Stock Option Agreement
2005 Non-Employee Director Stock Incentive Plan
Form of Phantom Stock Agreement
Certificate Pursuant to Section 302
Certificate Pursuant to Section 302
Certificate Pursuant to Section 906
Certificate Pursuant to Section 906

2

PART I—FINANCIAL INFORMATION

ITEM 1.—FINANCIAL STATEMENTS

THE SHAW GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	May 31,
	2006			August 31,
	(Unaudited)			2005
ASSETS
Current assets:
Cash and cash equivalents	$	117,619		$	56,779
Restricted and escrowed cash		19,701			171,900
Accounts receivable, including retainage, net		714,226			418,035
Inventories		101,035			97,684
Costs and estimated earnings in excess of billings on uncompleted contracts, including claims		628,085			395,124
Deferred income taxes		58,517			85,500
Prepaid expenses and other current assets		53,670			42,931
Total current assets		1,692,853			1,267,953
Investments in and advances to unconsolidated entities, joint ventures and limited partnerships		44,912			34,871
Property and equipment, less accumulated depreciation of $160,349 at May 31, 2006 and $142,051 at August 31, 2005		172,319			157,536
Goodwill		506,310			506,453
Other assets		119,534			116,975
	$	2,535,928		$	2,083,788
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	527,373		$	326,976
Accrued liabilities		206,018			163,651
Advanced billings and billings in excess of costs and estimated earnings on uncompleted contracts		249,034			274,198
Contract liability adjustments		4,255			6,936
Deferred revenue — prebilled		12,137			8,357
Current maturities of long-term debt		6,541			4,135
Short-term revolving lines of credit		5,786			6,367
Current portion of obligations under capital leases		2,005			1,854
Total current liabilities		1,013,149			792,474
Long-term revolving line of credit		226,397			40,850
Long-term debt, less current maturities		21,533			21,718
Obligations under capital leases, less current portion		3,604			2,973
Deferred income taxes		7,056			21,518
Other liabilities		47,037			44,462
Minority interests		386			15,240
Shareholders’ equity:
Common stock, no par value, 85,803,645 and 84,289,004 shares issued, respectively; and 80,414,241 and 78,957,349 shares outstanding, respectively		1,049,340			1,023,603
Retained earnings		301,690			263,812
Accumulated other comprehensive loss		(32,775	)		(31,752	)
Unearned stock-based compensation		—			(11,197	)
Treasury stock, 5,390,478 shares and 5,331,655 shares, respectively		(101,489	)		(99,913	)
Total shareholders’ equity		1,216,766			1,144,553
	$	2,535,928		$	2,083,788

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

3

THE SHAW GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)
(Dollars in thousands, except per share amounts)

	Three Months Ended						Nine Months Ended
	May 31,						May 31,
	2006			2005			2006			2005
Revenues	$	1,226,114		$	891,017		$	3,606,732		$	2,447,174
Cost of revenues		1,193,231			812,150			3,368,335			2,227,619
Gross profit		32,883			78,867			238,397			219,555
General and administrative expenses		52,320			49,575			162,252			140,559
Operating income (loss)		(19,437	)		29,292			76,145			78,996
Interest expense		(4,897	)		(7,338	)		(13,261	)		(26,683	)
Loss on retirement of debt		—			(47,772	)		—			(47,772	)
Interest income		794			1,338			4,273			3,789
Foreign currency transaction gain (loss), net		(1,735	)		2,572			(918	)		414
Other income (expense), net		589			476			(291	)		1,293
		(5,249	)		(50,724	)		(10,197	)		(68,959	)
Income (loss) before income taxes, minority interest, earnings (loss) from unconsolidated entities and income (loss) from and impairment of discontinued operations		(24,686	)		(21,432	)		65,948			10,037
Provision (benefit) for income taxes		(11,805	)		(813	)		21,367			10,102
Income (loss) before minority interest, earnings (loss) from unconsolidated entities and income (loss) from and impairment of discontinued operations		(12,881	)		(20,619	)		44,581			(65	)
Minority interest, net of income taxes		(3,435	)		(1,190	)		(7,248	)		(2,727	)
Earnings (loss) from unconsolidated entities, net of income taxes		(463	)		616			674			2,743
Income (loss) from continuing operations		(16,779	)		(21,193	)		38,007			(49	)
Income (loss) from and impairment of discontinued operations, net of income taxes		106			(556	)		(129	)		(1,439	)
Net income (loss)	$	(16,673	)	$	(21,749	)	$	37,878		$	(1,488	)
Net income (loss) per common share:
Basic:
Income (loss) from continuing operations	$	(0.21	)	$	(0.30	)	$	0.48		$	—
Income (loss) from and impairment of discontinued operations, net of income taxes		—			(0.01	)		—			(0.02	)
Net income (loss)	$	(0.21	)	$	(0.31	)	$	0.48		$	(0.02	)
Diluted:
Income (loss) from continuing operations	$	(0.21	)	$	(0.30	)	$	0.47		$	—
Income (loss) from and impairment of discontinued operations, net of income taxes		—			(0.01	)		—			(0.02	)
Net income (loss)	$	(0.21	)	$	(0.31	)	$	0.47		$	(0.02	)
Weighted average shares outstanding:
Basic		79,121			70,254			78,648			65,651
Diluted:
Stock options		—			—			1,324			—
LYONs Convertible Debt		—			—			10			—
Restricted stock		—			—			310			—
Total		79,121			70,254			80,292			65,651

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

4

THE SHAW GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended
	May 31,
	2006			2005
Cash flows provided by (used in) operating activities:
Net income (loss)	$	37,878		$	(1,488	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		24,453			23,290
Loss from and impairment of discontinued operations, net of taxes		129			1,439
Provision for deferred income taxes		12,521			2,054
Stock-based compensation expense		13,079			3,586
Provision for uncollectible accounts		7,951			2,004
Accretion of interest on discounted long-term debt		32			253
Amortization of deferred debt issue costs		763			3,139
Amortization of contract adjustments		(2,681	)		(9,150	)
Earnings (losses) from unconsolidated entities, net of tax		(674	)		(2,743	)
Foreign currency transaction (gains) losses, net		918			(414	)
Loss on retirement of debt		—			47,772
Gain (loss) on sale of businesses, net		183			22
Minority interest, net of taxes		7,248			2,727
Distributions from unconsolidated entities		1,921			3,503
Write-off of claims receivable from Wolf Hollow		48,155			—
(Increase) decrease in receivables		(292,758	)		37,196
(Increase) decrease in costs and estimated earnings in excess of billings on uncompleted contracts, including claims		(269,009	)		9,389
Increase in prepaid expenses		(7,096	)		(584	)
(Increase) decrease in other current assets		8,712			(7,083	)
(Increase) decrease in other assets		(11,012	)		3,644
Increase (decrease) in accounts payable		175,051			(32,480	)
Increase in accrued liabilities		37,185			9,679
Decrease in advanced billings and billings in excess of costs and estimated earnings on uncompleted contracts		(28,734	)		(28,568	)
Other operating activities, net		(2,965	)		(4,195	)
Net cash provided by (used in) operating activities		(238,750	)		62,992
Cash flows provided by (used in) investing activities:
Purchases of property and equipment		(34,015	)		(20,474	)
Investments in and advances to unconsolidated entities and joint ventures		(10,325	)		(12,887	)
Distributions from unconsolidated entities		1,738			3,632
Acquisition costs		(2,164	)		—
Proceeds from sale of property and equipment		4,462			923
Proceeds from sale of businesses, net		650			13,916
Purchases of businesses		(720	)		—
Cash received from restricted and escrowed cash		177,358			159,532
Cash deposited into restricted and escrowed cash		(25,159	)		(286,767	)
Net cash provided by (used in) investing activities		111,825			(142,125	)

Continued

5

	Nine Months Ended
	May 31,
	2006			2005
Cash flows provided by (used in) financing activities:
Repayment of debt and capital leases	$	(2,694	)	$	(278,818	)
Payments for financed insurance premiums		(8,226	)		(8,829	)
Return of capital to joint venture partner		(11,285	)		—
Proceeds from issuance of debt		1,500			6,036
Deferred credit costs		(2,077	)		(4,216	)
Issuance of common stock		18,451			262,595
Tax benefits from stock based compensation		2,449			—
Proceeds from revolving credit agreements		1,088,129			139,367
Repayments of revolving credit agreements		(903,163	)		(98,515	)
Net cash provided by financing activities		183,084			17,620
Cash from consolidation of joint venture entity previously unconsolidated		2,098			1,343
Effects of foreign exchange rate changes on cash		2,583			(1,029	)
Net change in cash and cash equivalents		60,840			(61,199	)
Cash and cash equivalents — beginning of year		56,779			102,351
Cash and cash equivalents — end of period	$	117,619		$	41,152
Non-cash investing and financing activities:
Issuance of restricted stock	$	13,317		$	9,290
Financed insurance premiums	$	10,068		$	11,033
Joint venture partner’s transfer of member’s equity as payment of note	$	10,025		$	—
Common stock received from employees to satisfy employee related payroll taxes	$	1,576		$	—
Assets acquired under capital leases	$	2,324		$	—

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

6

THE SHAW GROUP INC. AND SUBSIDIARIES

SUMMARY OF OPERATING SEGMENTS

(Unaudited)

(Dollars in Thousands)

	Three Months Ended						Nine Months Ended
	May 31,						May 31,
	2006			2005			2006			2005
Revenues:
E&I	$	513,419		$	273,282		$	1,700,478		$	836,959
E&C		343,828			327,692			995,607			893,430
Maintenance		295,778			235,571			707,841			578,074
F&M		73,089			54,472			202,806			138,711
Total consolidated revenues	$	1,226,114		$	891,017		$	3,606,732		$	2,447,174
Intersegment revenues:
E&I	$	—		$	17		$	1,743		$	827
E&C		129			83			584			335
Maintenance		77			1,536			3,341			3,559
F&M		—			5,285			18,201			22,326
Total intersegment revenues	$	206		$	6,921		$	23,869		$	27,047
Gross profit (loss):
E&I	$	45,577		$	22,152		$	168,807		$	84,528
E&C		(39,887	)		36,356			(4,631	)		85,855
Maintenance		9,593			10,100			29,265			20,062
F&M		17,600			10,259			44,956			29,110
Total gross profit	$	32,883		$	78,867		$	238,397		$	219,555
Gross profit percentage:
E&I		8.9	%		8.1	%		9.9	%		10.1	%
E&C		(11.6	)		11.1			(0.5	)		9.6
Maintenance		3.2			4.3			4.1			3.5
F&M		24.1			18.8			22.2			21.0
Total gross profit percentage		2.7			8.9			6.6			9.0
Income (loss) before income taxes, minority interest, earnings (loss) from unconsolidated entities and income (loss) from and impairment of discontinued operations:
E&I	$	29,778		$	5,098		$	116,342		$	35,187
E&C		(51,449	)		28,083			(32,619	)		57,092
Maintenance		6,740			8,015			21,170			13,608
F&M		13,019			6,349			31,127			14,175
Corporate items and eliminations		(22,774	)		(68,977	)		(70,072	)		(110,025	)
Total income (loss) before income taxes, minority interest, earnings (loss) from unconsolidated entities and income (loss) from and impairment of discontinued operations	$	(24,686	)	$	(21,432	)	$	65,948		$	10,037

	May 31,			August 31,
	2006			2005
Segment Assets:
E&I	$	961,712		$	656,188
E&C		570,745			692,105
Maintenance		110,255			73,741
F&M		341,351			309,322
Corporate		641,092			406,497
Total segment assets		2,625,155			2,137,853
Elimination of intercompany receivables		(17,885	)		(11,815	)
Income taxes not allocated to segments		(71,342	)		(42,250	)
Total consolidated assets	$	2,535,928		$	2,083,788

7

THE SHAW GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1—General Information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the interim reporting requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Consequently, financial information and disclosures normally included in financial statements prepared annually in accordance with Generally Accepted Accounting Principles (GAAP) have been condensed or omitted. Readers of this report should, therefore, refer to the consolidated financial statements and the notes included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2005.

The financial information of The Shaw Group Inc., including its wholly-owned subsidiaries, its consolidated variable interest entities, and the proportionate share of some of our investments in joint ventures as of May 31, 2006 and for the three and nine month periods ended May 31, 2006 and 2005, was not audited by our independent auditors. In the opinion of management, all adjustments (consisting of normal recurring adjustments) which are necessary to fairly present our financial position and our results of operations as of and for these periods have been made.

Our interim results of operations are not necessarily indicative of results of operations that will be realized for the full fiscal year. The results of operations related to our disaster relief, emergency response and recovery services work in the Gulf Coast area of the United States are not necessarily indicative of our expected results for future periods (See Note 5 of our condensed consolidated financial statements).

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

Certain reclassifications have been made to the prior period’s financial statements in order to conform to the current period’s presentation. The August 31, 2005 balance sheet reflects an increase of $13.1 million in cash and cash equivalents, $9.5 million in accrued liabilities and $3.6 million in accounts payable to reflect outstanding checks on certain bank accounts in a manner consistent with the May 31, 2006 balance sheet presentation. This adjustment is also reflected as an increase of $17.8 million in cash and cash equivalents and a decrease in the change in other operating activities, net of $1.4 million and an increase in proceeds from revolving credit agreements of $5.4 million in the May 31, 2005 condensed consolidated statement of cash flows to present it in a manner consistent with the May 31, 2006 condensed consolidated statement of cash flow presentation.

Note 2 — Share-Based Compensation

We have various types of share-based compensation plans. These plans are administered by our compensation committee of the Board of Directors, which approves persons eligible to receive awards and the number of shares and/or options subject to each award, the terms, conditions, performance measures, and other provisions of the award. Readers should refer to Note 15 of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended August 31, 2005 for additional information related to these share-based compensation plans.

Effective September 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 (revised), “Share-Based Payment” (SFAS 123(R)) utilizing the modified prospective approach. Prior to the adoption of SFAS 123(R), we accounted for stock option grants in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (the intrinsic value method), and accordingly, recognized no compensation expense for stock option grants.

Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards that were outstanding and unvested on September 1, 2005 as well as those that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized in the three and nine months ended May 31, 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested as of September 1, 2005, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share-based payments granted subsequent to September 1, 2005, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123(R). Prior periods were not restated to reflect the impact of adopting the new standard.

8

As a result of adopting SFAS 123(R) on September 1, 2005, our (loss) before taxes, net (loss) and basic and diluted losses per share for the three months ended May 31, 2006, were $2.3 million, $1.8 million, $0.03 and $0.02 higher, respectively, and our income before taxes, net income and basic and diluted earnings per share for the nine months ended May 31, 2006, were $6.9 million, $5.5 million, $0.09 and $0.07 lower, respectively, than if we had continued to account for share-based compensation under APB Opinion No. 25 for our stock option grants. We also reclassified unearned stock-based compensation to common stock in the accompanying balance sheet as a result of this standard.

We receive a tax deduction for certain stock option exercises during the period the options are exercised, generally for the excess of the price at which the stock is sold over the exercise price of the options. In addition, we receive an additional tax deduction when restricted stock vests at a higher value than the value used to recognize compensation expense at the date of grant. Prior to adoption of SFAS 123(R), we reported all tax benefits resulting from the award of equity instruments as operating cash flows in our condensed consolidated statements of cash flows. In accordance with SFAS 123(R), we are required to report excess tax benefits from the award of equity instruments as financing cash flows, for the nine months ended May 31, 2006, $2.4 million of tax benefits were reported as financing cash flows rather than operating cash flows.

Net cash proceeds from the exercise of stock options were $18.5 million for the nine months ended May 31, 2006. The actual income tax benefit realized from stock option exercises was $5.5 million for the same period.

The following table illustrates the effect on operating results and per share information had the Company accounted for share-based compensation in accordance with SFAS 123(R) for the periods indicated (in thousands, except per share amounts):

	Three Months			Nine Months
	Ended			Ended
	May 31, 2005			May 31, 2005
Net income (loss):
As reported	$	(21,749	)	$	(1,488	)
Add: Share-based employee compensation reported in net income (loss), net of taxes		1,097			2,485
Deduct: Share-based employee compensation under the fair value method for all awards, net of taxes		(2,983	)		(8,096	)
Pro forma	$	(23,635	)	$	(7,099	)
Basic net income (loss) per share:
As reported	$	(0.31	)	$	(0.02	)
Add: Share-based employee compensation reported in net income (loss), net of taxes		0.02			0.04
Deduct: Share-based employee compensation under the fair value method for all awards, net of taxes		(0.04	)		(0.12	)
Pro forma	$	(0.33	)	$	(0.10	)
Diluted net income (loss) per share:
As reported	$	(0.31	)	$	(0.02	)
Add: Share-based employee compensation reported in net income (loss), net of taxes		0.02			0.04
Deduct: Share-based employee compensation under the fair value method for all awards, net of taxes		(0.04	)		(0.12	)
Pro forma	$	(0.33	)	$	(0.10	)

Stock Options

We use the Black-Scholes option pricing model to estimate the fair value of stock-based awards with the following weighted-average assumptions for the indicated periods.

	Three Months Ended						Nine Months Ended
	May 31,						May 31,
	2006			2005			2006			2005
Dividend yield		0	%		0	%		0	%		0	%
Expected volatility		44	%		63	%		47	%		65	%
Risk-free interest rate		4.8	%		3.9	%		4.5	%		3.6	%
Expected life of options (in years)		5.4			5			6.6			5
Weighted-average grant-date fair value	$	14.68		$	10.89		$	15.32		$	9.36

9

The assumptions above are based on multiple factors, including historical patterns of employees in relatively homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercise patterns for these same homogeneous groups and the implied volatility of our stock price.

At May 31, 2006, there was $16.9 million of unrecognized compensation cost related to share-based payments which is expected to be recognized over a weighted-average period of 2.8 years.

The following table represents stock option activity for the nine months ended May 31, 2006:

						Weighted-
				Weighted-		Average
				Average		Contract
	Number of Shares			Exercise Price		Life
Outstanding options at beginning of period		5,761,162		$	16.11
Granted		804,694			21.52
Exercised		(1,153,082	)		16.19
Forfeited		(118,890	)		16.80
Outstanding options at end of period		5,293,884		$	16.90		6.44
Outstanding exercisable options at end of period		3,079,292		$	17.34		4.71

Shares available for future stock option and restricted share grants to employees and directors under existing plans were 3,520,865 and 113,098, respectively, at May 31, 2006. The aggregate intrinsic value of options outstanding as of May 31, 2006 was $51.5 million, and the aggregate intrinsic value of options exercisable was $28.6 million. Total intrinsic value of options exercised was $13.9 million for the nine months ended May 31, 2006.

The following table summarizes our nonvested stock option activity for the nine months ended May 31, 2006:

				Weighted-Average
				Grant-Date Fair
	Number of Shares			Value
Nonvested stock options at beginning of period		2,372,626		$	8.17
Granted		804,694			15.32
Vested		(859,341	)		9.06
Forfeited		(103,387	)		8.38
Nonvested stock options at end of period		2,214,592		$	10.42

Restricted Stock

The plans, as described in Note 15 of our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended August 31, 2005, allow for the issuance of restricted stock awards that may not be sold or otherwise transferred until certain restrictions have lapsed. The unrecognized compensation cost related to these awards is expected to be expensed over the period the restrictions lapse (generally one to four years).

The compensation expense for these awards was determined based on the market price of our stock at the date of grant applied to the total number of shares that were anticipated to fully vest. As of May 31, 2006, we have unrecognized compensation expense of $19.9 million associated with these awards. Upon adoption of SFAS 123(R), we recorded an immaterial cumulative effect of a change in accounting principle as a result of our change in policy from recognizing forfeitures as they occur to one where we recognize expense based on our expectation of the amount of awards that will vest over the requisite service period for our restricted stock awards. This amount was recorded in other income (expense) in the accompanying condensed consolidated statements of operations.

The following table represents the compensation expense that was included in general and administrative expenses and cost of revenues in the accompanying condensed consolidated statements of operations related to these restricted stock grants for the periods indicated below (in thousands):

	Three Months Ended				Nine Months Ended
	May 31,				May 31,
	2006		2005		2006		2005
Compensation expense	$	2,397	$	1,127	$	5,312	$	2,903

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The following table represents the shares that were granted and outstanding as of May 31, 2006 and August 31, 2005:

	May 31,		August 31,
	2006		2005
Restricted stock:
Granted during the period ended		420,655		454,152
Outstanding, as of		1,201,145		1,152,608
Future restricted stock awards:
Granted during the period ended		—		211,800
Outstanding, as of		—		21,000

Note 3—Significant Estimates

Our Annual Report on Form 10-K addresses significant accounting policies used in the preparation of our financial statements. The following enhances that discussion relative to selected significant estimates and significant changes in estimates that had a material impact on our financial statements for the period ended May 31, 2006.

Performance Guarantees

Our approach to estimating liability provisions related to contractual performance guarantees on sales of our technology paid-up license agreements requires that we make estimates on the performance of technology on projects where we may not be the EPC contractor. Our accounting for these contracts is discussed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2005 in “Critical Accounting Policies and Related Estimates That Have a Material Effect on Our Consolidated Financial Statements.” Our historical experience with performance guarantees on these types of agreements supports estimated liability provisions that vary based on our experience with the different types of technologies for which we license and provide engineering (for example, ethyl benzene, styrene, cumene, Bisphenol A). Our liability provisions range from nominal amounts up to 100% of the contractual performance guarantee. If our actual obligations under performance guarantees differ from our estimated liability provisions at the completion of these projects, we will record an increase or decrease in revenues (or an increase in costs where we are required to incur costs to remediate a performance deficiency) for the difference.

Prior to February of 2006, our estimates of these performance guarantees were recorded at the maximum contractual liability until the related project became operational, performance tests were met, the guarantee provisions expired or other factors provided evidence that the maximum liability was unlikely to be incurred. After three to six years of experience in addition to the previous experience of companies we acquired, we now believe that our history and experience with these types of guarantees allows us to make more accurate estimates of the potential liability and, in certain circumstances, revise our recorded performance liability amount below the maximum performance liability. For the nine months ended May 31, 2006, we recorded gross profit of $4.5 million due to changes in estimates for performance guarantees below the maximum liability. Our total estimated performance liability remaining as of May 31, 2006, is $14.7 million.

Project Incentives and Unapproved Change Orders

As discussed in our Annual Report on Form 10-K, application of the percentage of completion method of accounting for contracts requires significant estimates. Included below is a description of notable material estimates on individual projects.

Our financial statements as of February 28, 2006, reflected revised estimated revenues on a project in the United States to include a schedule incentive under the contract terms for substantial completion and satisfaction of performance tests before a specified date. The recognition of this incentive increased revenues and gross profit by $7.5 million for our E&C segment during the three and six months ended February 28, 2006. During May 2006, we achieved substantial completion and satisfied performance tests after the date specified in the contract to earn the incentive, resulting in a reduction of revenues and gross profit of $7.5 million related to this incentive during the three months ended May 31, 2006. For the same project we have recognized amounts for possible incurred schedule liquidated damages and other cost increases as a result of completion and start-up activities. We believe we have identified claims for certain of these additional costs and for delays which we will be making against other parties. Additionally, we were presented with claims from certain of our subcontractors for amounts in excess of our subcontracts with them. Our estimated gross profit on this project includes estimated change orders, claims, backcharges and settlements that increase our revenues or reduce our cost of revenues and increase our gross profit on this project. If we collect amounts different from the amount we have estimated as recoverable from our customer or if we pay amounts different from the amount we have estimated for claims against us from our subcontractors, those differences will be recognized as income or loss. Because the actual amounts for the three months ended May 31, 2006 for all of these items discussed above differed from our previous estimates, we reduced gross profit by $28.0 million relate to this project.

The estimated revenues on an energy project in the United States include an estimate of amounts which we will receive if we achieve a number of agreed upon criteria. Our contract provides for payment of incentives up to $38 million related to achievement of these criteria. If we do not achieve the specified delivery date and other criteria at the amounts we have estimated, our revenues and profit related to this project may be materially reduced. These revenues are being recognized using the percentage-of-completion method of accounting. We have recorded an estimate of the amount we expect to collect in revenues and in cost and

11

estimated earnings in excess of billings on uncompleted contracts related to this project based on our progress-to-date.

Five projects in our E&C segment have recorded combined revenues or, in some cases, reductions in costs, to date of $41.1 million ($22.5 million in the quarter ended May 31, 2006) related to unapproved change orders and claims on a percentage of completion basis. The amounts included in our estimated total revenues or, in some cases, reduction in costs, at completion for these five project are estimated to be a combined $51.9 million. These unapproved change orders and claims relate to delays and costs attributable to others as well as force majeure provisions under the contracts. If we collect amounts different from the amounts we have estimated, those differences will be recognized as income or loss.

In addition to the above items, see Note 11 for a discussion of our accounting for the estimates and our claims on certain major projects.

Government Indirect Rate Accrual

We have contracts with the U.S. government that contain provisions requiring compliance with the U.S. Federal Acquisition Regulation (“FAR”), and the U.S. Cost Accounting Standards (“CAS”). These regulations limit the recovery of certain specified costs on contracts subject to the FAR. Our process for recording revenue and corresponding billings for our services is based on forward pricing rates applicable to a given fiscal year. We accrue estimated amounts due to or from the U.S. Government for services provided and billed but for which the forward pricing rates may differ from actual recoverable rates. In addition, the U.S. Defense Contract Audit Agency (“DCAA”) routinely audits our overhead rates and incurred contract costs and may question whether the treatment of these costs is consistent with the requirements of the FAR and CAS and may recommend that such costs be disallowed. Our government rate accrual is adjusted, as necessary, based on the results of the DCAA audits. Our government rate accrual is included in costs and estimated earnings in excess of billings on uncompleted contracts in the accompanying balance sheets.

Disaster Relief, Emergency Response, and Recovery Services

We have agreements and contracts with federal, state, and local government agencies related to our disaster relief, emergency response and recovery services for which the collection of our contract revenue is substantially dependent on the U.S. Government making payments to us directly or through our government agency customers. Our balance sheet at May 31, 2006 includes $460.8 million in billed and unbilled receivables related to these projects. We have experienced delays in collections for our services as final contract terms, including fee amounts, are being negotiated in an effort to definitize the contracts. Prior to definitization, certain withholding arrangements are in place which limit our ability to invoice significant amounts including retainages and fees recognized in our revenues. In addition, our local government agency customers are experiencing delays in receiving federal funds reimbursements necessary to pay for our services. While we have a significant history of recovering amounts related to work performed for the U.S. government, the current circumstances increase the uncertainties in estimating the amounts we will actually recover under existing contracts for work we have already performed. If our estimated amounts recoverable on these projects differ from the amounts ultimately collected, those differences will be recognized as income or loss and our earnings and cash flows could be materially impacted.

Note 4—Goodwill and Other Intangible Assets

Goodwill

The following table reflects the changes in the carrying value of goodwill by segment from September 1, 2005 to May 31, 2006 (in thousands):

	E&I		E&C			Maintenance			F&M		Total
Balance at September 1, 2005	$	186,878	$	262,142		$	42,371		$	15,062	$	506,453
Currency translation adjustment		—		(190	)		(80	)		391		121
Sale of Shaw Field Services, Inc.		—		—			(264	)		—		(264	)
Balance at May 31, 2006	$	186,878	$	261,952		$	42,027		$	15,453	$	506,310

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During the first quarter of fiscal 2006, we sold the assets of Shaw Field Services, Inc. for $1.1 million in a combination of cash proceeds and a promissory note. The sale resulted in a net loss of $0.2 million, and is included in other expense in the accompanying condensed consolidated statements of operations for the nine months ended May 31, 2006.

As of May 31, 2006 and August 31, 2005, we had tax deductible goodwill of approximately $166.0 million and $178.2 million, respectively.

Annual Goodwill Impairment Analysis

We completed our annual impairment test during the third quarter of fiscal 2006 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” and determined that goodwill at March 1, 2006 was not impaired. We test goodwill for impairment of each of our reporting unit levels. In evaluating whether an impairment of goodwill exists, we calculate the estimated fair value of each of our reporting units based on estimated projected discounted cash flows as of the date we perform the impairment tests (implied fair value). We then compare the resulting estimated implied fair values, by reporting unit, to the respective book values, including goodwill. If the book value of a reporting unit exceeds its fair value, we measure the amount of the impairment loss by comparing the impaired fair value (which is a reasonable estimate of the value of goodwill for the purpose of measuring an impairment loss) of the reporting unit’s goodwill to the carrying amount of that goodwill. To the extent that the carrying amount of a reporting unit’s goodwill exceeds its implied fair value, we recognize an impairment loss on the goodwill at that time. In evaluating whether there was an impairment of goodwill, we also take into consideration changes in our business and changes in our projected discounted cash flows, in addition to our stock price and market value of interest bearing obligations.

Other Intangible Assets

The gross carrying values and accumulated amortization of our amortizable intangible assets, included in other assets, are presented below (in thousands):

	Proprietary Technologies,
	Patents and Tradenames					Customer Relationships
	Gross					Gross
	Carrying		Accumulated			Carrying		Accumulated
	Amount		Amortization			Amount		Amortization
Balance at August 31, 2005	$	44,261	$	(12,122	)	$	2,752	$	(868	)
Amortization		—		(2,309	)		—		(209	)
Balance at May 31, 2006	$	44,261	$	(14,431	)	$	2,752	$	(1,077	)

The following table presents the annual amortization for our intangible assets related to our proprietary technologies, patents, and trademarks (in thousands):

2006	$	786
2007		3,031
2008		2,970
2009		2,866
2010		2,708
Thereafter		17,469
Total	$	29,830

The following table presents the annual amortization for our customer relationships (in thousands):

2006	$	77
2007		307
2008		307
2009		307
2010		307
Thereafter		370
Total	$	1,675

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Contract Adjustments and Accrued Contract Losses

The contract liability (asset) adjustments and accrued contract losses established in purchase accounting (related to the IT Group and Stone & Webster acquisitions) are recognized periodically as reductions to cost of revenues in the accompanying condensed consolidated statements of operations. Contract (asset) adjustments are included in other current assets in the accompanying condensed consolidated balance sheets.

The following table presents the utilization of contract liability (asset) adjustments and accrued contract losses established in purchase accounting for the periods indicated (in thousands):

				Cost of
				Revenues
	March 1, 2006			Increase			May 31, 2006
Three Months ended May 31, 2006	Balance			(Decrease)			Balance
Contract (asset) adjustments	$	(299	)	$	110		$	(189	)
Contract liability adjustments		5,148			(893	)		4,255
Accrued contract losses		46			(41	)		5
Total	$	4,895		$	(824	)	$	4,071

				Cost of
				Revenues
	September 1, 2005			Increase			May 31, 2006
Nine Months ended May 31, 2006	Balance			(Decrease)			Balance
Contract (asset) adjustments	$	(519	)	$	330			(189	)
Contract liability adjustments		6,936			(2,681	)		4,255
Accrued contract losses		2,965			(2,960	)		5
Total	$	9,382		$	(5,311	)	$	4,071

				Cost of
				Revenues
	March 1, 2005			Increase			May 31, 2005
Three Months ended May 31, 2005	Balance			(Decrease)			Balance
Contract (asset) adjustments	$	(924	)	$	159		$	(765	)
Contract liability adjustments		10,794			(1,910	)		8,884
Accrued contract losses		5,814			(1,384	)		4,430
Total	$	15,684		$	(3,135	)	$	12,549

				Cost of
				Revenues
	September 1, 2004			Increase			May 31, 2005
Nine Months ended May 31, 2005	Balance			(Decrease)			Balance
Contract (asset) adjustments	$	(1,415	)	$	650		$	(765	)
Contract liability adjustments		17,347			(8,463	)		8,884
Accrued contract losses		5,878			(1,448	)		4,430
Total	$	21,810		$	(9,261	)	$	12,549

Accrued contract losses not accrued in business combinations are included in billings in excess of costs and estimated earnings on uncompleted contracts and were $4.3 million and $6.6 million as of May 31, 2006 and August 31, 2005, respectively.

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Note 5—Inventories, Accounts Receivable and Concentration of Credit Risk

Inventories

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

	May 31, 2006						August 31, 2005
	Weighted						Weighted
	Average		FIFO		Total		Average		FIFO		Total
Finished goods	$	49,714	$	—	$	49,714	$	33,553	$	—	$	33,553
Raw materials		1,186		40,684		41,870		2,431		49,490		51,921
Work in process		951		8,500		9,451		1,579		10,631		12,210
	$	51,851	$	49,184	$	101,035	$	37,563	$	60,121	$	97,684

Accounts Receivable

Accounts receivable as of May 31, 2006 and August 31, 2005 were as follows (in thousands):

	May 31,		August 31,
	2006		2005
Trade accounts receivable, net	$	498,260	$	303,412
Unbilled accounts receivable		33,484		26,793
Retainage		182,482		87,830
Total accounts receivable, including retainage, net	$	714,226	$	418,035

The increase in trade accounts receivable and retainage is primarily due to the disaster relief, emergency response and recovery services provided to FEMA and the U.S. Army Corps of Engineers.

Concentration of Credit — Government Contracting

The following table presents amounts due from government agencies or entities owned by the U.S. Government, along with revenues related to these governmental agencies and entities (in millions):

	May 31,		August 31,
	2006		2005
Amounts due from U.S. Government	$	233.7	$	70.1

	Three Months Ended				Nine Months Ended
	May 31,				May 31,
	2006		2005		2006		2005
Revenues	$	510.1	$	240.6	$	1,603.8	$	738.1

The increase in the amounts due from and revenues earned from government agencies or entities owned by the U.S. Government is primarily due to the disaster relief, emergency response and recovery services provided to FEMA and the U.S. Army Corps of Engineers (See Note 3).

Costs and estimated earnings in excess of billings on uncompleted contracts include $370.2 million related to the U.S. Government agencies and related entities, an increase of $268.6 million during the nine months ended May 31, 2006. This increase reflects our rapid deployment of a high volume of resources for the disaster relief, emergency response and recovery services provided in the Gulf Coast area of the U.S.

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Note 6 — Other Assets and Other Liabilities

Other Assets

The following table summarizes the balance of other assets (in thousands):

	May 31,		August 31,
	2006		2005
Power generation plant equipment and materials	$	12,650	$	15,303
LandBank assets		33,034		33,111
Intangible assets, other than contract (asset) adjustments, less accumulated amortization		31,505		34,023
Notes receivable		8,962		12,792
Deposits		2,978		2,642
Real estate option		12,183		12,183
Deferred financing fees		5,020		3,706
Deferred acquisition costs		2,528		958
Other		10,674		2,257
Total other assets	$	119,534	$	116,975

The following summarizes significant changes in other assets since August 31, 2005.

Power generation plant equipment and materials has decreased by $2.7 million during fiscal 2006, as we have used these assets on projects for other customers.

Notes receivable decreased during fiscal 2006 by $3.8 million. During the first quarter of fiscal 2006, one of our consolidated joint ventures, Badger Licensing, LLC (Badger) received a transfer of a portion of its joint venture partner member’s equity as payment of an $8.9 million long-term note receivable owed to Badger. Additionally, during the second quarter of fiscal 2006, we recorded a note receivable of $4.2 million related to the substantial payment and release of certain claims on the Wolf Hollow project (See Note 11). The payment of the receivable balance is due in 2012 from the purchaser of the plant and related assets.

It is our policy to defer certain third party costs directly attributable to our efforts on potential acquisitions. During the second quarter of fiscal 2006, we expensed $4.6 million of previously deferred costs relating to financing and equity offering costs and certain due diligence costs. These deferred costs are recorded in general and administrative expenses on our condensed consolidated statements of operations for the three and nine months ended May 31, 2006. The remaining $2.5 million of deferred acquisition costs relates to ongoing negotiations for the acquisition of a strategic equity investment in the same target company.

Other Liabilities

The following table summarizes the balance of other liabilities (in thousands):

	May 31,		August 31,
	2006		2005
Defined benefits plans’ accumulated benefit obligations	$	30,834	$	27,463
Deferred rental expense and lease obligations		3,692		3,237
LandBank environmental remediation liabilities		9,167		9,738
Other		3,344		4,024
Total other liabilities	$	47,037	$	44,462

Note 7—Variable Interest Entities, Unconsolidated Entities, Joint Ventures and Limited Partnerships

We invest in and make advances to unconsolidated entities, joint ventures, and limited partnerships. Each of these entities is recorded in the accompanying condensed consolidated financial statements based on the structure associated with each respective entity. These entities are accounted for as either variable interest entities (VIEs) as defined by FIN 46(R), “Consolidation of Variable Interest Entities (revised December 2003) — an interpretation of ARB No. 51,” or as investments accounted for under the equity method, except for one entity which we account for at cost.

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Variable Interest Entities

The following table represents the total assets and liabilities, before intercompany eliminations, of those VIEs for which we are the primary beneficiary, and therefore consolidate, and the total assets and liabilities before intercompany eliminations of those VIEs of which we are not the primary beneficiary, and therefore do not consolidate (in thousands):

	May 31,		August 31,
	2006		2005
Primary Beneficiary:
Total assets	$	78,887	$	96,150
Total liabilities		66,206		48,591
Not Primary Beneficiary:
Total assets	$	995,381	$	897,380
Total liabilities		865,030		814,023

There have been no significant changes in the status of our VIEs since August 31, 2005, other than the item described below.

In January 2006 our joint venture Peducah Remediation Services, LLC (Peducah) was awarded a remediation contract with the Department of Energy. We had determined in the second quarter of 2006 that Peducah was a VIE and that Shaw was the primary beneficiary; however, there was no activity for Peducah as of February 28, 2006. At May 31, 2006, Peducah has total assets of $3.2 million, and these are reflected in the E&I segment. Our exposure to loss is limited to our nominal equity interest and operating costs incurred on behalf of the joint venture, not to exceed $5.0 million above the initial capital contributions of $5,000 for each partner.

Unconsolidated Entities (including VIEs), Joint Ventures and Limited Partnerships

The following is a summary of our investments in and advances to unconsolidated entities which are accounted for under the equity method, except for one which is accounted for at cost.

Investments in unconsolidated entities, joint ventures and limited partnerships (in thousands):

	May 31,		August 31,
	2006		2005
Privatization entities	$	21,659	$	19,441
Other entities:
Stennis joint venture		5,467		4,584
Nordic		1,930		1,930
KB Home/Shaw Louisiana LLC		2,760		—
S&W Fluor Daniels		2,576		2,388
Newberg Perini		3,220		1,219
Terra Vista		2,000		—
Infrastructure Services Los Alamos		1,913		1,105
Other		223		1,056
Total investments		41,748		31,723
Long-term advances to and receivables from unconsolidated entities:
Shaw-YPC Piping (Nanjing) Co., Ltd.		3,081		3,081
Other		83		67
Total other advances and receivables		3,164		3,148
Total investments in and advances to unconsolidated entities, joint ventures and limited partnerships	$	44,912	$	34,871

Earnings (losses) from unconsolidated entities, net of income taxes, are as follows (in thousands):

17

	Three Months Ended						Nine Months Ended
	May 31,						May 31,
	2006			2005			2006			2005
Privatization entities	$	997		$	(926	)	$	1,852		$	196
Other entities:
Shaw-YPC Piping (Nanjing) Co., Ltd.		(791	)		(230	)		(1,393	)		(839	)
Stennis joint venture		172			141			530			490
KB Home/Shaw Louisiana LLC		(899	)		—			(899	)		—
Other		58			1,631			584			2,896
Total earnings (losses) from unconsolidated entities, net of income taxes	$	(463	)	$	616		$	674		$	2,743

We provided $1.5 million and $3.7 million in equity contributions during the three and nine months ended May 31, 2006, respectively, related to our housing privatization joint ventures as compared to no equity contributions in the third quarter of fiscal 2005, and approximately $11.0 million in contributions were made during the nine months ended May 31, 2005.

During the second quarter of fiscal 2006, we acquired for $0.5 million the interest held by one of the joint venture partners associated with one of our unconsolidated joint ventures, which increased our ownership percentage in the joint venture to 70%. As a result of the transaction, we obtained a controlling interest and now consolidate the joint venture. The total assets and total liabilities associated with the acquired entity were $10.5 million and $9.0 million, respectively as of May 31, 2006. Pursuant to the terms of the transaction, the acquired interest is subject to a fee sharing agreement with a significant subcontractor to the joint venture which limits the current terms under the agreements gross profit attributable to the additional acquired interest.

Note 8—Long-term Debt and Revolving Lines of Credit

Long-term debt consisted of the following (in thousands):

	May 31,			August 31,
	2006			2005
10.75% Senior Notes	$	15,058		$	15,041
Notes payable for insurance premiums		3,433			1,591
Notes payable of consolidated VIEs		8,012			8,038
Other notes payable		1,571			1,183
Total debt		28,074			25,853
Less: current maturities		(6,541	)		(4,135	)
Total long-term portion of debt	$	21,533		$	21,718

During fiscal 2006, we have financed insurance premiums of $10.1 million of which payments of $8.2 million have been made on the financed insurance premiums. The remainder of the amount financed will be paid over the remaining ten months.

Credit Facilities and Revolving Lines of Credit

Amounts outstanding under credit facilities and revolving lines of credit consisted of the following (in millions):

	May 31,			August 31,
	2006			2005
Credit Facility	$	226.4		$	40.9
Foreign subsidiaries’ revolving lines of credit		—			0.1
Credit facilities of consolidated VIEs		5.8			6.3
Total outstanding		232.2			47.3
Less: current maturities		(5.8	)		(6.4	)
Total long-term revolving lines of credit	$	226.4		$	40.9

On October 3, 2005, we entered into Amendment I to increase our Credit Facility dated April 25, 2005, from $450.0 million to $550.0 million, then on February 27, 2006 we entered into Amendment II, which increased our Credit Facility from $550.0 million to $750.0 million, and increased our sublimits for revolving credit and financial letters of credit from $325.0 million to $425.0 million, which will retract to $375.0 million on August 27, 2007. The amendments retained the original term of the agreement, which is five years and commenced on April 25, 2005. Readers should refer to Note 8 of the notes to our consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended August 31, 2005 for a more detailed description of our Credit Facility.

The following table presents our available credit under our amended Credit Facility as of May 31, 2006 (in millions), which is subject to a borrowing base calculation addressed in our 2005 Annual Report on Form 10-K referred to above.

Total Credit Facility	$	750.0
Less: outstanding performance letters of credit		(262.5	)
Less: outstanding financial letters of credit		(43.1	)

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Less: outstanding revolving credit loans		(226.4	)
Remaining availability for performance letters of credit	$	218.0
Portion of Credit Facility available for financial letters of credit and revolving credit loans	$	425.0
Less: outstanding financial letters of credit		(43.1	)
Less: outstanding revolving credit loans		(226.4	)
Remaining availability for financial letters of credit and revolving credit loans	$	155.5

In addition to the calculation presented above, the portion of the Credit Facility available for financial letters of credit and revolving credit loans is also limited to the lesser of the total Credit Facility ($750.0 million as of May 31, 2006) less outstanding performance letters of credit or the portion of the Credit Facility ($425.0 million as of May 31, 2006) available for financial letters of credit and revolving credit loans. The Credit Facility availability is also subject to a borrowing base calculation as mentioned above.

The Credit Facility will be used, from time to time, for working capital needs and to fund fixed asset purchases, acquisitions and investments in joint ventures. During fiscal 2006, we have and we expect we will continue to periodically borrow under our Credit Facility for our working capital needs and general corporate purposes.

The interest rates for revolving credit loans under the Credit Facility may be in a range of (i) LIBOR plus 1.50% to 3.00% or (ii) the defined base rate plus 0.00% to 0.50%. The weighted-average interest rate on the Credit Facility was 7.16% and 7.04% for the three and nine months ended May 31, 2006. As of May 31, 2006, we had outstanding letters of credit (inclusive of both domestic financial and domestic performance) of approximately $305.6 million under our Credit Facility as compared to $243.6 million as of August 31, 2005. The total amount of fees associated with these letters of credit were approximately $1.3 million and $3.4 million for the three and nine months ended May 31, 2006 compared to $1.4 million and $2.4 million for the three and nine months ended May 31, 2005.

As of May 31, 2006, we were in compliance with the covenants contained in the Credit Facility.

The following table sets forth the outstanding letters of credit and short-term revolving lines of credit for our foreign subsidiaries, excluding our VIEs (in thousands, except percentages):

	May 31, 2006			August 31, 2005
Capacity of foreign letters of credit and short-term revolving lines of credit	$	6,552		$	6,253
Outstanding:
Letters of credit		3,417			4,072
Short-term revolving lines of credit		15			57
Total outstanding		3,432			4,129
Remaining availability for foreign letters of credit and short-term revolving lines of credit	$	3,120		$	2,124
Weighted-average interest rate		6.50	%		6.75	%

As of May 31, 2006, borrowings under the short-term revolving lines of credit and term loan of one of our consolidated VIEs were $5.8 million and $1.2 million, respectively, with no outstanding performance bonds. Interest rates under this credit facility vary and ranged from 7.4% to 7.6% as of May 31, 2006. We also have a 50% guarantee related to this credit facility. As of August 31, 2005, this VIE had borrowings under the short-term revolving line of credit and term loan of $6.3 million and $1.2 million, respectively, with no outstanding performance bonds. Interest rates under this credit facility vary and ranged from 6.25% to 6.5% as of August 31, 2005.

On March 21, 2006, one of our foreign subsidiaries entered into a $27.0 million unsecured standby letter of credit facility with a bank. The term of the facility is one year, renewable on an annual basis. Quarterly fees are calculated using a base rate of 2% plus local bank charges. As of May 31, 2006, there were no outstanding letters of credit under this facility.

The estimated fair value of our long-term debt, excluding capital leases and borrowings on our Credit Facility as of May 31, 2006 and August 31, 2005 was approximately $25.1 million and $24.0 million, respectively, based generally on the current market prices of such debt.

For the three and nine months ended May 31, 2006, we recognized $0.3 million and $0.8 million of interest expense associated with the amortization of financing fees that were incurred with respect to the issuance of our Senior Notes and our Credit Facility, as compared to $0.8 million and $3.1 million for the three and nine months ended May 31, 2005. As of May 31, 2006 and August 31, 2005, unamortized deferred financing fees related to the Senior Notes and our Credit Facility were approximately $5.0 million and $3.7 million, respectively.

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Note 9 — Comprehensive Income and Hedging Activities

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

	Three Months Ended
	May 31,
	2006			2005
Net income (loss)	$	(16,673	)	$	(21,749	)
Foreign currency translation adjustments:
Unrealized translation adjustment gains (losses), net		584			(2,110	)
Change in unrealized net gains (losses) on hedging activities, net of taxes		(64	)		42
Total comprehensive income (loss)	$	(16,153	)	$	(23,817	)

	Nine Months Ended
	May 31,
	2006			2005
Net income (loss)	$	37,878		$	(1,488	)
Foreign currency translation adjustments:
Unrealized translation adjustment gains (losses), net		(1,016	)		350
Plus: reclassification adjustment for realized gains (losses) included in net income		(7	)		495
Change in unrealized net gains (losses) on hedging activities, net of taxes		—			(136	)
Total comprehensive income (loss)	$	36,855		$	(779	)

The foreign currency translation adjustments relate to the varying strength of the U.S. dollar in relation to the British pound, Mexican peso, Australian dollars, Canadian dollars and the Euro.

We enter into derivative instruments from time to time to hedge a portion of our expected future cash flows from unanticipated fluctuations caused by volatility in currency exchange rates related to certain contracts. We had nine derivative instruments outstanding as of May 31, 2006, all of which were foreign currency forward exchange contracts denominated in Canadian Dollars, Euros or British Pounds Sterling maturing within the next ten months. These forward exchange contracts do not qualify for hedge accounting treatment under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended and interpreted. For the three and nine month periods ended May 31, 2006, we recognized in other income approximately $2.1 million and $2.4 million, respectively, in net gains related to these instruments.

Note 10 — Supplemental Disclosure to Earnings (Loss) Per Common Share

The following table includes weighted-average incremental shares excluded from the calculation of diluted income per share because they were anti-dilutive (in thousands):

	Three Months Ended				Nine Months Ended
	May 31,				May 31,
	2006		2005		2006		2005
Stock options		161		3,487		304		2,787
LYONs convertible debt		10		10		—		10
Restricted Stock		363		262		—		181

Note 11 — Claims on Major Projects

Claims include amounts in excess of the original contract price (as adjusted for approved change orders) that we seek to collect from our customers for delays, errors in specifications and designs, contract terminations, change orders in dispute or unapproved as to both scope and price, or other causes of unanticipated additional costs. These amounts are included in estimated revenues when recovery of the amounts is probable and the costs can be reasonably estimated. Backcharges and claims against vendors, subcontractors and others are included in our cost estimates as a reduction in total estimated costs when recovery of the amount is probable and the costs can be reasonably estimated. We refer to these claims against customers and backcharges and claims against vendors, subcontractors and others as “claims.” As a result, the recording of claims increases revenues or decreases cost of revenues on the related projects in the period. Claims receivable are included in costs and estimated earnings in excess of billings on uncompleted contracts in the accompanying condensed consolidated balance sheets.

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If we collect amounts different than the amounts that we have recorded as claims receivable on completed projects, that difference will be recognized as income or loss. Timing of claim collections is uncertain and depends on negotiated settlements, trial date scheduling and other dispute resolution processes pursuant to the contracts. As a result, we may not collect our claims receivable within the next twelve months.

The following disclosure provides a summary and update of significant changes, if any, from August 31, 2005, related to our significant claims. Readers should refer to Note 18 of the notes to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 31, 2005 for a more detailed description of each claim. Also refer to Note 3 of this Form 10-Q for additional disclosure of unapproved change orders and claims related to other projects not included in the amounts or the disclosure below.

A summary of our net claims receivable position on the major projects discussed below is as follows (in millions):

	May 31,			August 31,
	2006			2005
Receivables from owners under contract terms	$	23.4		$	112.9
Reimbursement of letter of credit draws by owners		18.8			46.9
Claims receivable from owners, equipment vendors, subcontractors and others for costs incurred		22.0			28.2
Less: Liquidated damages recorded in contract costs		(5.0	)		(17.1	)
Less: Amounts collected by drawing letters of credit		(17.5	)		(17.5	)
Net claims receivable	$	41.7		$	153.4

Covert & Harquahala Projects

In December 2005, phase one of the previously announced arbitration relating to the Covert and Harquahala projects was completed. We received an arbitration award of $35.4 million, which was paid in January, on claims relating to the New Covert Generating Company, LLC (Covert).

On June 30, 2006, we were notified that the arbitration panel awarded $37.0 million to us and against the owner in the arbitration relating to the Harquahala project. This award compares to the net claim receivable balance we had recorded of $35.5 million related to this dispute. As a result, we recognized the difference of $1.5 million as an increase to revenues and gross profit in the quarter ended May 31, 2006, and we increased net claims receivable by the same amount.

A determination of interest on the Covert and Harquahala awards remains pending. We will record interest income to the extent of interest awarded in the period that amount becomes known. Upon collection of the Harquahala award, the present net claims receivable balance will be reduced by the amount collected.

Recovery of the claims and other amounts is dependent upon the results of arbitration. We can not provide absolute assurance as to the timing or outcome of these results.

Wolf Hollow Project

In May 2005, we completed the testimony phase of the arbitration proceeding between us and the major equipment supplier. The parties completed post hearing briefing in late July 2005. We continue awaiting a decision from the arbitrator, who has indicated a decision may come in July 2006.

In December 2005, we reached an agreement with the lender and a prospective purchaser of the Wolf Hollow plant and related assets, whereby we agreed to release our interests in the plant and assets, cancel the $27.7 million in subordinated notes and accrued interest due us and agreed to a mutual release of claims with the lender, in exchange for a substantial cash payment and a note receivable, due in 2012. The transaction closed on December 22, 2005.

On December 9, 2005, the District Court entered a new scheduling order in the trial against AES Corporation and Parsons that established a trial start date of June 28, 2006.

However, on March 24, 2006 the Court heard argument on the proper scope of the ruling on “AES Corp’s Motion for Summary Judgment Based upon Plaintiff’s Waiver and Regarding Plaintiff’s Allegations of Vicarious Liability.” A decision by the trial court judge was rendered on April 11, 2006, dismissing all of our claims against AES. Subsequently, we entered into negotiations with AES and Parsons and have settled all claims for a combined cash payment to us of approximately $8.3 million that we are scheduled to receive in our fiscal fourth quarter of 2006. As a result of the above, we recorded a net reduction in gross profit of $48.2 million in the third quarter of 2006 to reflect our revised estimates of recoveries on all outstanding matters related to this project.

Marcus Hook Project

During the second quarter of fiscal 2006, we agreed to terms with FPL-Energy (“FPLE”) and our primary subcontractor on this project. Under the agreements, we have received certain payments from a third party insurance company (toward settlement of certain of the claims) and certain payments from FPLE for certain outstanding receivables due us on the project. In addition, all parties agreed

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to a mutual release of claims and FPLE released our outstanding $23.0 million letter of credit. As a result of this agreement, we recorded an immaterial loss during the first nine months of fiscal 2006.

See Note 3 for a discussion of other claims, unapproved change orders and project uncertainties.

Note 12— Income Taxes

The components of our deferred tax position are as follows (in thousands):

	May 31,			August 31,
	2006			2005
Assets:
Deferred tax assets	$	143,366		$	149,363
Less: valuation allowance		(23,275	)		(25,712	)
Total assets		120,091			123,651
Liabilities:
Deferred tax liabilities		(68,630	)		(59,669	)
Net deferred tax assets	$	51,461		$	63,982

Our effective tax rate for the three and nine months ended May 31, 2006 was (47.8)% and 32.4%, respectively, while our effective tax rate for the three and nine months ended May 31, 2005 was 4.0% and 110.0%, respectively. Our effective tax rate of 32.4% for the nine months ended May 31, 2006, reflects a reduction in our estimated effective tax rate for fiscal 2006 as a result of utilization of foreign NOL’s previously reserved and the relative impact of permanent items on reduced earnings primarily resulting from the impact of the recorded reduction in gross profit related to the Wolf Hollow Project (Note 11). The effective rate for the three months ended May 31, 2006 is the sum of earnings for the period at the revised estimated effective tax rate for the year (32.4%) and a catch-up reduction in effective tax rate applied to earnings for the previously reported first six months of 2006.

We believe our deferred tax assets, net of valuation allowances, at May 31, 2006, are realizable through future reversals of existing taxable temporary differences and future taxable income. Uncertainties that affect the ultimate realization of deferred tax assets include the risk of not having future taxable income, which have been considered in determining the valuation allowances.

Note 13 — Contingencies and Commitments

Guarantees

Our lenders issue letters of credit on our behalf to customers or sureties in connection with our contract performance and in limited circumstances on certain other obligations of third parties. We are required to reimburse the issuers of these letters of credit for any payments which they make pursuant to these letters of credit. At May 31, 2006 and August 31, 2005, the amount of outstanding letters of credit was approximately $309.0 million and $247.7 million, respectively. Of the amount of outstanding letters of credit at May 31, 2006, $262.5 million are issued to customers in connection with contracts. Of the $262.5 million, five customers held $204.0 million or 78% of the outstanding letters of credit. The largest letter of credit issued to a single customer on a single project is $58.9 million. There were no draws under these letters of credit for the three and nine months ended May 31, 2006.

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

During the second quarter of fiscal 2005, we entered into a guarantee agreement with a third party to guarantee the performance of one of our unconsolidated entities, American Eagle Northwest, LLC, related to the development and construction phase of the Pacific
Northwest Communities, LLC military housing privatization which is scheduled to be completed in calendar year 2009. Our maximum exposure under this performance guarantee at the time we entered into this guarantee was estimated to be $81.7 million. As of May 31, 2006, the maximum exposure amount has decreased to $60.0 million due to development and construction services already executed, and our exposure will continue to be reduced over the contract term as further project services are provided. We would be able to recover a portion of this exposure through surety bonding provided by our general contractor. We have also committed to fund $6.0 million of the total project costs for which proceeds from the sale of real estate obtained in connection with the contract will be used to fulfill this guarantee. As of May 31, 2006 and August 31, 2005, we have recorded a $0.5 million liability and corresponding asset related to this guarantee.

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During the third quarter of fiscal 2005, we entered into an agreement with a third party to guarantee a revolving line of credit for one of our unconsolidated entities, Shaw YPC Piping (Nanjing) Co. LTD, for its working capital needs. Our maximum exposure under this agreement at the time we entered into this guarantee was estimated at $1.8 million. As of May 31, 2006, we have recorded an immaterial liability and corresponding asset related to this guarantee.

Finally, during the fourth quarter of fiscal 2005, we entered into a guarantee with a third party to guarantee the payment of certain tax contingencies related to Roche Consulting, Group Limited, which was sold during the fourth quarter of fiscal 2005. Our maximum exposure under this guarantee at the time we entered into this guarantee was estimated at $2.3 million. As of May 31, 2006, we had recorded an immaterial liability and corresponding asset related to this guarantee.

SEC Inquiry

On June 1, 2004, we were notified by the staff of the SEC that the staff is conducting an informal inquiry relating to our financial statements. The SEC has not advised us as to either the reason for the inquiry or its precise scope. However, the requests for information we have received to date appear to primarily relate to the purchase method of accounting for various acquisitions. We have been cooperating with the SEC, including providing documents and responding to requests for voluntary production, as well as conducting a detailed review of our accounting for our acquisitions. In addition, if the SEC takes further action, it may escalate the informal inquiry into a formal investigation which may result in an enforcement action or other legal proceedings against us and potentially members of our management. Responding to such actions or proceedings could be costly and could divert the efforts and attention of our management team, including senior officers. If any such action or proceeding is resolved unfavorably to us or any members of management, we or they could be subject to injunctions, fines, increased review and scrutiny by regulatory authorities and other penalties or sanctions, including criminal sanctions, that could materially and adversely affect our business operations, financial performance, liquidity and future prospects and materially adversely affect the trading market and price of our stock. Any unfavorable actions could also result in private civil actions, loss of key personnel or other adverse consequences.

Securities Litigation

We and certain of our current officers have been named as defendants in purported shareholder class action lawsuits alleging violations of federal securities laws. These types of class action lawsuits are not uncommon when there has been a notification of an informal inquiry by the SEC. The first filed lawsuit is styled Earl Thompson v. The Shaw Group Inc. et al and was filed on June 16, 2004 in the United States District Court for the Eastern District of Louisiana, Case No. 04-1685. The complaint filed in the Thompson action alleges claims under Sections 10(b) and Rule 10(b-5) promulgated thereunder and 20(a) of the Securities Exchange Act of 1934 on behalf of a class of purchasers of our common stock during the period from October 19, 2000 to June 10, 2004. The complaint alleges, among other things, that (i) certain of our press releases and SEC filings contained material misstatements and omissions, (ii) that the manner in which we accounted for certain acquisitions was improper and (iii) that we improperly recorded revenue on certain projects, and as a result, our financial statements were materially misstated at all relevant times. The complaint does not specify the amount of damages sought. Since the filing of the Thompson lawsuit, nine additional purported shareholder class action lawsuits have been filed and other actions may also be commenced. Each of the additional lawsuits includes the same defendants, and essentially alleges the same statutory violations based on the same or similar alleged misstatements and omissions. All of these actions have been consolidated under the Thompson caption in the Eastern District of Louisiana and the Court has appointed a lead plaintiff to represent the members of the purported class. The consolidated actions have not been certified as class actions by the Court. We have filed a motion to dismiss the consolidated action, which the trial court denied. We have moved to certify that courts decision for immediate expect to appeal.

In addition, two shareholder derivative actions, styled as Jonathan Nelson v. J.M. Bernhard, Jr., et al. and Larry F. Reusche v. Tim Barfield, Jr., et al., have been filed based on essentially the same allegations as the purported class actions. The derivative actions, which the plaintiffs purport to be bringing on behalf of the Company, name certain of our directors and current and former officers as defendants, and name the Company as a nominal defendant. The derivative suits collectively make claims of breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets and unjust enrichment based on allegations that the named
defendants committed, condoned or failed to identify and disclose the misconduct alleged in the purported class action lawsuits, and that certain defendants sold Company stock while in possession of knowledge of the alleged misconduct. The complaints do not specify the amount of damages sought. These derivative lawsuits have been stayed indefinitely by a court order as of December 14, 2004.

Both the purported shareholder class action lawsuits and the derivative lawsuits are in the early stages of litigation. We believe our financial statements were prepared in accordance with generally accepted accounting principles (GAAP) and that none of our public press releases or public filings contained misrepresentations or omissions. Accordingly, we intend to defend the Company and our directors and officers vigorously against each of these actions. Although it is not possible at this early stage to predict the likely outcome of these actions, an adverse result in any of these lawsuits could have a material adverse effect on us.

Other Litigation

During fiscal 2005, the U.S. District Court in Delaware rendered a judgment against us and in favor of Saudi American Bank in the

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amount of $6.7 million. Saudi American Bank claimed that as part of the acquisition of Stone & Webster in July 2000, we had assumed the estate company’s liability under a loan agreement and guarantee. We have filed a notice of appeal, and we expect to have the judgment overturned. Saudi American Bank has sought to make the judgment final, and has sought interest and attorney’s fees, bringing its total claim to $11.3 million plus legal interest while the appeal is pending. Although we expect to prevail on appeal, in the event we are unsuccessful, there could be a material adverse effect on our financial statements for the period in which any judgment becomes final. We have not recorded any liability for this contingency.

Also on one of our projects, a client claimed damages of approximately $9 million related to the troubleshooting, shutdown, repairs and loss of production. We have reached a tentative agreement to settle this matter, and had accrued an amount for our expected loss. As a result, we do not expect there will be any material impact on our financial statements.

Environmental Liabilities

LandBank Group, Inc. (LandBank), a subsidiary of our E&I segment, acquires and remediates environmentally impaired real estate. The real estate is recorded at cost, which typically reflects some degree of discount due to environmental issues related to the real estate. As remediation efforts are expended, the book value of the real estate is increased to reflect improvements made to the asset. We had $33.0 million and $33.1 million of such real estate assets recorded in other assets on the accompanying balance sheets at May 31, 2006 and at August 31, 2005, respectively. Additionally, LandBank records a liability for estimated remediation costs for real estate that is sold, but for which the environmental obligation is retained. We also record an environmental liability for properties held by LandBank if funds are received from transactions separate from the original purchase to pay for environmental remediation costs. As of May 31, 2006, we had $9.2 million of environmental liabilities recorded in other liabilities in the accompanying condensed consolidated balance sheets compared to $9.7 million at August 31, 2005.

Impairment of Assets

During the nine months ended May 31, 2006, we recorded impairment charges in other expense of $0.8 million, net of estimated insurance proceeds under our replacement cost policy, on certain assets that were damaged as a result of Hurricanes Katrina and Rita.

Note 14 — Assets Held for Sale

The following table presents the assets that were classified as assets held for sale (in thousands), which are recorded in other current assets in the accompanying condensed consolidated balance sheets.

	May 31,		August 31,
	2006		2005
Fabrication facilities in Louisiana and Texas (F&M segment)	$	1,846	$	2,996
Fabrication facilities in Virginia (F&M segment)		1,118		1,518
Facilities in the United Kingdom (E&C segment)		—		5,006
Total assets held for sale	$	2,964	$	9,520

During March 2006 we determined that certain E&C segment assets in the UK and certain F&M segment assets in Texas previously classified as held for sale no longer met that criteria because we ceased efforts to dispose of those assets. These assets were removed from assets held for sale and an immaterial depreciation adjustment to record depreciation expense for the period the assets were held for sale was recorded in our third quarter operating results.

During the first fiscal quarter of 2006, we recorded impairment on our assets held for sale associated with our F&M segment of $0.3 million, net of taxes, which is included in loss from discontinued operations on the accompanying condensed consolidated statements of operations.

Note 15 — Restricted and Escrowed Cash

As of May 31, 2006 and August 31, 2005, we had restricted and escrowed cash of $19.7 million and $171.9 million, respectively, which consisted of:

• $18.6 million and $170.8 million, respectively, in connection with the EPC project to build a combined-cycle energy plant in the United States, for which we have joint authority with another party to the contract.

• $1.1 million in each period related to deposits designated to fund remediation costs associated with a sold property.

Restricted cash is invested in short-term, low-risk investments and investment income is remitted to us on a periodic basis.

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Note 16 — Pension and Other Post Retirement Benefit Plans

The following table sets forth the net periodic pension cost for the three foreign defined benefit plans we have sponsored (in thousands):

	Three Months Ended						Nine Months Ended
	May 31,						May 31,
	2006			2005			2006			2005
Service cost	$	724		$	673		$	2,146		$	2,001
Interest cost		1,718			1,706			5,090			5,012
Expected return on plan assets		(1,705	)		(1,659	)		(5,052	)		(4,921	)
Amortization of net loss		747			455			2,213			1,353
Other		9			8			27			78
Total net periodic benefit cost	$	1,493		$	1,183		$	4,424		$	3,523

The total net periodic benefit cost related to other benefits for the three and nine months ended May 31, 2006 and 2005 were not material. We expect to contribute $4.6 million to our pension plans in fiscal 2006. As of May 31, 2006, $4.0 million in contributions have been made.

Note 17 — Related Party Transactions

During the nine months ended May 31, 2006, we subcontracted a portion of our work, primarily related to the disaster recovery efforts of the Gulf Coast region of the United States, with two companies owned by one of our Directors whom our Board had previously determined is considered non-independent. Payments made to these companies were approximately $2.8 million and $20.2 million during the three and nine months ended May 31, 2006 and amounts due to these companies were $0.3 million as of May 31, 2006. We believe this subcontracted work was performed under similar terms as would have been negotiated with an unrelated party.

A company (the “Related Company”) for whom an executive officer and a significant owner is the brother to our Chief Executive Officer is a subcontractor to several of our subcontractors on various projects related to temporary housing efforts in Louisiana, where the Related Company has operated in its respective field of mechanical contracting since its founding in 1919. We were not involved in the agreements between our subcontractors and the Related Company, and we have not been provided any information about the terms of these contracts.

Note 18 — New Accounting Pronouncements

In April 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FIN 46(R)-6 (“FSP FIN 46(R)-6”), which addresses how a reporting enterprise should determine the variability to be considered in applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46(R)”). The variability that is considered in applying FIN 46(R) affects the determination of (a) whether the entity is a variable interest entity, (b) which interests are variable interests in the entity and (c) which party, if any, is the primary beneficiary of the variable interest entity. That variability will affect any calculation of expected losses and expected residual returns, if such a calculation is necessary. FSP FIN 46(R)-6 provides additional guidance to consider for determining variability. FSP FIN 46(R)-6 is effective beginning the first day of the first reporting period beginning after June 15, 2006. We are currently in the process of evaluating the impact that the adoption of FSP FIN 46(R)-6 will have on our financial position, results of operations and cash flows.

In March 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156, “Accounting for Servicing of Financial Assets – an amendment of FASB Statement No. 140” (“SFAS No. 156”). SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” with respect to accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for fiscal years that begin after September 15, 2006, with early adoption permitted as of the beginning of an entity’s fiscal year. We do not have any servicing assets or servicing liabilities and, accordingly, the adoption of SFAS No. 156 will not have any effect on our results of operations, financial condition or cash flows.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Instruments – an amendment of FASB Statements No. 133 and 140” (“SFAS No. 155”), which changes the financial reporting of certain hybrid financial instruments by eliminating exemptions to allow for a more uniform and simplified accounting treatment for these instruments. This Statement will be effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 16, 2006. SFAS No. 155 will be effective for our 2008 fiscal year. Adoption of this standard is not expected to have a material impact on our consolidated financial position or results of operations.

In February 2006, the FASB issued Staff Position No. FAS 123(R) – 4, “Classification of Options and Similar Instruments Issued as Employee Compensation That Allow For Cash Settlement upon the Occurrence of a Contingent Event” (“FSP 123(R)-4”). FSP 123(R)-4 amends SFAS No. 123(R) to require companies with contingent cash-settlement provisions in their employee share option awards to assess the probability of the contingent event’s occurrence when classifying the instrument as liabilities or equity. The guidance in this FSP shall be applied upon initial adoption of Statement 123(R). Since we adopted SFAS No. 123(R) prior to the issuance of the FSP, we applied the guidance in this FSP in the first reporting period beginning after February 2006. The adoption did not have a material impact on our earnings and financial position.

In October 2005, the FASB issued Staff Position No. FAS 13-1, “Accounting for Rental Costs Incurred During a Construction Period” (“FSP13-1”). FSP 13-1 requires that rental costs associated with ground or building operation leases that are incurred during a construction period be recognized as rental expense. The guidance in this FSP shall be applied to the first reporting period beginning after December 15, 2005. FSP 13-1 was adopted in the third quarter of fiscal 2006 and did not impact our financial statements as rental costs incurred during a construction period were previously expensed.

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In June 2005, the EITF reached consensus on Issue No. 05-6, “Determining the Amortization Period for Leasehold Improvements” (“EITF 05-6”). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception. The guidance in EITF 05-6 will be applied prospectively. We adopted EITF 05-6 effective September 1, 2005. The adoption did not have a material impact on our earnings and financial position.

In December 2004, the FASB issued SFAS No. 123(R), which requires us to expense share-based payments, including employee stock options, based on their fair value. We adopted SFAS No. 123(R) on September 1, 2005. We discuss our adoption in Note 2.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of APB Opinion No. 29” (“SFAS No. 153”). This statement addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. We adopted SFAS No. 153 effective September 1, 2005. The adoption did not have a material impact on our earnings and financial position.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costing” (“SFAS No. 151”). SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS No. 151 requires that those amounts, if abnormal, be recognized as expenses in the period incurred. In addition, SFAS No. 151 requires the allocation of fixed production overheads to the cost of conversion based upon the normal capacity of the production facilities. We adopted SFAS No. 151 effective September 1, 2005. The adoption did not have a material impact on our earnings and financial position.

Note 19 — Unaudited Condensed Consolidating Financial Information

The following presents unaudited condensed consolidating financial information with respect to our financial position as of May 31, 2006 and August 31, 2005, the results of our operations for the three and nine months ended May 31, 2006 and 2005 and our cash flows for the nine months ended May 31, 2006 and 2005.

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

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

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The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
(Unaudited)
(Dollars in thousands)

							Elimination
					Non-		and
	Parent		Guarantor		Guarantor		Consolidation
	Only		Subsidiaries		Subsidiaries		Entries			Consolidated
	As of May 31, 2006
Current assets	$	695,078	$	801,932	$	238,108	$	(42,265	)	$	1,692,853
Intercompany long-term receivables		240		4,115		871		(5,226	)		—
Investments in subsidiaries and joint ventures		776,599		131,381		5,078		(868,146	)		44,912
Property and equipment, net		30,188		108,404		33,727		—			172,319
Other assets		31,338		571,792		32,403		(9,689	)		625,844
Total Assets	$	1,533,443	$	1,617,624	$	310,187	$	(925,326	)	$	2,535,928
Current liabilities	$	69,059	$	793,010	$	193,345	$	(42,265	)	$	1,013,149
Intercompany long-term debt		—		872		4,354		(5,226	)		—
Long-term revolving line of credit		226,397		—		—		—			226,397
Long-term debt and capital leases		16,362		2,300		6,475		—			25,137
Other non-current liabilities		4,859		28,051		30,872		(9,689	)		54,093
Minority interest obligation		—		—		—		386			386
Shareholders’ Equity		1,216,766		793,391		75,141		(868,532	)		1,216,766
Total Liabilities & Shareholders’ Equity	$	1,533,443	$	1,617,624	$	310,187	$	(925,326	)	$	2,535,928

							Elimination
					Non-		and
	Parent		Guarantor		Guarantor		Consolidation
	Only		Subsidiaries		Subsidiaries		Entries			Consolidated
	As of August 31, 2005
Current assets	$	948,096	$	221,955	$	131,150	$	(33,248	)	$	1,267,953
Intercompany long-term receivables		240		484,291		9,708		(494,239	)		—
Investments in subsidiaries and joint ventures		739,737		132,114		6,251		(843,231	)		34,871
Property and equipment, net		30,805		98,756		27,975		—			157,536
Other assets		18,375		560,281		44,772		—			623,428
Total Assets	$	1,737,253	$	1,497,397	$	219,856	$	(1,370,718	)	$	2,083,788
Current liabilities	$	50,482	$	703,944	$	71,828	$	(33,780	)	$	792,474
Intercompany long-term debt		476,429		9,708		8,102		(494,239	)		—
Long-term revolving line of credit		40,850		—		—		—			40,850
Long-term debt and capital leases		15,040		2,977		6,674		—			24,691
Other non-current liabilities		9,899		28,620		27,461		—			65,980
Minority interest obligation		—		—		—		15,240			15,240
Shareholders’ Equity		1,144,553		752,148		105,791		(857,939	)		1,144,553
Total Liabilities & Shareholders’ Equity	$	1,737,253	$	1,497,397	$	219,856	$	(1,370,718	)	$	2,083,788

27

The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
(Unaudited)
(Dollars in thousands)

										Elimination
							Non-			and
	Parent			Guarantor			Guarantor			Consolidation
	Only			Subsidiaries			Subsidiaries			Entries			Consolidated
	For the Three Months Ended May 31, 2006
Revenues	$	—		$	1,075,029		$	165,336		$	(14,251	)	$	1,226,114
Cost of revenues		—			1,066,459			140,981			(14,209	)		1,193,231
Gross profit		—			8,570			24,355			(42	)		32,883
General and administrative expenses		17,406			31,532			3,442			(60	)		52,320
Operating income (loss)		(17,406	)		(22,962	)		20,913			18			(19,437	)
Other income (expense)		17,406			(17,905	)		(4,732	)		(18	)		(5,249	)
Equity in earnings (loss) of subsidiaries		(16,673	)		10,299			—			6,374			—
Income (loss) before income taxes, minority interest, earnings (loss) from unconsolidated entities and income (loss) from discontinued operations		(16,673	)		(30,568	)		16,181			6,374			(24,686	)
Provision (benefit) for income taxes		—			(14,329	)		2,524			—			(11,805	)
Income (loss) before minority interest, earnings (loss) from unconsolidated entities and income (loss) from discontinued operations		(16,673	)		(16,239	)		13,657			6,374			(12,881	)
Minority interest, net of income taxes		—			—			—			(3,435	)		(3,435	)
Earnings (loss) from unconsolidated entities, net of income taxes		—			327			(790	)		—			(463	)
Income (loss) from continuing operations		(16,673	)		(15,912	)		12,867			2,939			(16,779	)
Income (loss) from discontinued operations, net of income taxes		—			106			—			—			106
Net income (loss)	$	(16,673	)	$	(15,806	)	$	12,867		$	2,939		$	(16,673	)

										Elimination
							Non-			and
	Parent			Guarantor			Guarantor			Consolidation
	Only			Subsidiaries			Subsidiaries			Entries			Consolidated
	For the Three Months Ended May 31, 2005
Revenues	$	—		$	843,848		$	61,840		$	(14,671	)	$	891,017
Cost of revenues		—			768,970			57,922			(14,742	)		812,150
Gross profit		—			74,878			3,918			71			78,867
General and administrative expenses		15,423			31,415			2,765			(28	)		49,575
Operating income (loss)		(15,423	)		43,463			1,153			99			29,292
Other income (expense)		15,295			(67,655	)		1,735			(99	)		(50,724	)
Equity in earnings (loss) of subsidiaries		(21,749	)		536			—			21,213			—
Income (loss) before income taxes, minority interest, earnings (loss) from unconsolidated entities and income (loss) from or impairment of discontinued operations		(21,877	)		(23,656	)		2,888			21,213			(21,432	)
Provision (benefit) for income taxes		167			(5,694	)		4,714			—			(813	)
Income (loss) before minority interest, earnings (loss) from unconsolidated entities and income (loss) from or impairment of discontinued operations		(22,044	)		(17,962	)		(1,826	)		21,213			(20,619	)
Minority interest, net of income taxes		—			—			7			(1,197	)		(1,190	)
Earnings (loss) from unconsolidated entities, net of income taxes		295			386			(65	)		—			616
Income (loss) from continuing operations		(21,749	)		(17,576	)		(1,884	)		20,016			(21,193	)
Income (loss) from discontinued operations, net of income taxes		—			16			(572	)		—			(556	)
Net income (loss)	$	(21,749	)	$	(17,560	)	$	(2,456	)	$	20,016		$	(21,749	)

28

The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Statement of Operations
(Unaudited)
(Dollars in thousands)

										Elimination
							Non-			and
	Parent			Guarantor			Guarantor			Consolidation
	Only			Subsidiaries			Subsidiaries			Entries			Consolidated
	For the Nine Months Ended May 31, 2006
Revenues	$	—		$	3,347,788		$	299,123		$	(40,179	)	$	3,606,732
Cost of revenues		—			3,140,070			268,031			(39,766	)		3,368,335
Gross profit		—			207,718			31,092			(413	)		238,397
General and administrative expenses		57,412			95,851			9,559			(570	)		162,252
Operating income (loss)		(57,412	)		111,867			21,533			157			76,145
Other income (expense)		57,412			(61,138	)		(6,314	)		(157	)		(10,197	)
Equity in earnings (loss) of subsidiaries		37,878			5,272			—			(43,150	)		—
Income (loss) before income taxes, minority interest, earnings (loss) from unconsolidated entities and income (loss) from discontinued operations		37,878			56,001			15,219			(43,150	)		65,948
Provision (benefit) for income taxes		—			18,328			3,039			—			21,367
Income (loss) before minority interest, earnings (loss) from unconsolidated entities and income (loss) from discontinued operations		37,878			37,673			12,180			(43,150	)		44,581
Minority interest, net of income taxes		—			—			—			(7,248	)		(7,248	)
Earnings (loss) from unconsolidated entities, net of income taxes		—			2,061			(1,387	)		—			674
Income (loss) from continuing operations		37,878			39,734			10,793			(50,398	)		38,007
Income (loss) from discontinued operations, net of income taxes		—			(129	)		—			—			(129	)
Net income (loss)	$	37,878		$	39,605		$	10,793		$	(50,398	)	$	37,878

										Elimination
							Non-			and
	Parent			Guarantor			Guarantor			Consolidation
	Only			Subsidiaries			Subsidiaries			Entries			Consolidated
	For the Nine Months Ended May 31, 2005
Revenues	$	—		$	2,327,512		$	148,925		$	(29,263	)	$	2,447,174
Cost of revenues		—			2,127,944			129,417			(29,742	)		2,227,619
Gross profit		—			199,568			19,508			479			219,555
General and administrative expenses		40,108			90,588			9,901			(38	)		140,559
Operating income (loss)		(40,108	)		108,980			9,607			517			78,996
Other income (expense)		39,955			(109,018	)		621			(517	)		(68,959	)
Equity in earnings (loss) of subsidiaries		(1,488	)		290			—			1,198			—
Income (loss) before income taxes, minority interest, earnings (loss) from unconsolidated entities and income (loss) from discontinued operations		(1,641	)		252			10,228			1,198			10,037
Provision (benefit) for income taxes		199			8,538			1,365			—			10,102
Income (loss) before minority interest, earnings (loss) from unconsolidated entities and income (loss) from discontinued operations		(1,840	)		(8,286	)		8,863			1,198			(65	)
Minority interest, net of income taxes		—			—			12			(2,739	)		(2,727	)
Earnings (loss) from unconsolidated entities, net of income taxes		352			3,232			(841	)		—			2,743
Income (loss) from continuing operations		(1,488	)		(5,054	)		8,034			(1,541	)		(49	)
Income (loss) from discontinued operations, net of income taxes		—			(803	)		(636	)		—			(1,439	)
Net income (loss)	$	(1,488	)	$	(5,857	)	$	7,398		$	(1,541	)	$	(1,488	)

29

The Shaw Group Inc. and Subsidiaries
Condensed Consolidating Statement of Cash Flows
(Unaudited)
(Dollars in thousands)

							Non-
	Parent			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	For the Nine Months Ended May 31, 2006
Net cash provided by (used in) operating activities	$	34,321		$	(316,340	)	$	43,269		$	—	$	(238,750	)
Net cash provided by (used in) investing activities		(6,269	)		124,267			(6,173	)		—		111,825
Net cash provided by (used in) financing activities		(28,121	)		197,176			14,029			—		183,084
Cash from consolidation of joint venture entities previously unconsolidated		—			—			2,098			—		2,098
Effects of foreign exchange rate changes on cash		—			—			2,583			—		2,583
Net decrease in cash and cash equivalents		(69	)		5,103			55,806			—		60,840
Cash and cash equivalents — beginning of year		870			22,970			32,939			—		56,779
Cash and cash equivalents — end of period	$	801		$	28,073		$	88,745		$	—	$	117,619

							Non-
	Parent			Guarantor			Guarantor
	Only			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	For the Nine Months Ended May 31, 2005
Net cash provided by (used in) operating activities	$	80,150		$	(47,845	)	$	30,687		$	—	$	62,992
Net cash provided by (used in) investing activities		(4,964	)		(129,767	)		(7,394	)		—		(142,125	)
Net provided by cash (used in) financing activities		(116,620	)		153,459			(19,219	)		—		17,620
Cash from consolidation of joint venture entities previously unconsolidated		—			—			1,343			—		1,343
Effects of foreign exchange rate changes on cash		—			—			(1,029	)		—		(1,029	)
Net decrease in cash and cash equivalents		(41,434	)		(24,153	)		4,388			—		(61,199	)
Cash and cash equivalents — beginning of year		47,485			40,888			13,978			—		102,351
Cash and cash equivalents — end of period	$	6,051		$	16,735		$	18,366		$	—	$	41,152

30

PART I—FINANCIAL INFORMATION

ITEM 2.—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion summarizes the financial position of The Shaw Group Inc. and its subsidiaries as of May 31, 2006, and the results of their operations for the three and nine months ended May 31, 2006, and should be read in conjunction with (i) the unaudited condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (ii) the consolidated financial statements and accompanying notes to our Annual Report on Form 10-K for the fiscal year ended August 31, 2005.

Cautionary Statement Regarding Forward Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not historical facts (including without limitation statements to the effect that we “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” or other similar expressions) are forward-looking statements. These forward-looking statements are based on our current expectations and beliefs concerning future developments and their potential effects on us. There can be no assurance that future developments affecting us will be those anticipated by us. These forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions. They are subject to change based upon various factors, including but not limited to the risks and uncertainties summarized below:

• cyclical changes in demand for our products and services;

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

• the dollar amount of our backlog, as stated at any given time, is not indicative of our future earnings;

• delays or difficulties related to our projects including additional costs, reductions in revenues or the payment of liquidated damages;

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

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

• our ability to obtain surety bonds or other means of credit support for projects;

• our ability to obtain waivers or amendments with our lenders or sureties, or to collateralize letters of credit or surety bonds upon non-compliance with covenants in our Credit Facility or surety indemnity agreements;

• covenants in our Credit Facility and surety bond indemnity agreements that restrict our ability to pursue our business strategies;

• our indebtedness, which could adversely affect our financial condition and impair our ability to fulfill our obligations under our Credit Facility;

• various legal, regulatory and litigation risk including but not limited to, class action lawsuits, the outcome of a pending informal inquiry by the SEC and regulatory activities and associated periodic reviews of the SEC and Public Company Accounting Oversight Board;

• the possibility of a downgrade of our debt securities by rating agencies;

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

• risks associated with being a government contractor;

• our ability to collect funds on work performed for emergency response activities from governmental agencies and private sector clients that are facing budgeting challenges;

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

• our dependence on subcontractors and equipment manufacturers;

31

• possible cost escalations associated with our fixed-price contracts;

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

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

• risks associated with our integrated environmental solutions businesses;

• reputation and financial exposure due to the failure of our partners to perform their contractual obligations;

• our dependence on one or a few significant customers;

• delays and/or defaults in customer payments;

• potential professional liability, product liability, warranty and other potential claims, which may not be covered by insurance;

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

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

• work stoppages and other labor problems;

• our liquidity position;

• currency fluctuations;

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

• a determination to write-off a significant amount of intangible assets or long-lived assets;

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

• our failure to attract and retain qualified personnel;

• our ability to retain key members of our management;

• our competitors’ ability to develop or otherwise acquire equivalent or superior technology;

• general economic conditions;

• future changes in accounting standards or interpretations;

• inability to maintain an effective system of internal control, which could result in inaccurate reporting of our financial results or an inability to prevent fraud;

• provisions in our articles of incorporation and by-laws and rights agreement could make it more difficult to acquire us and may reduce the market price of our common stock;

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

• market prices of our equity securities have changed significantly and could change further;

• recent changes in accounting for equity-related compensation could impact our financial statements and our ability to attract and retain key employees;

• increases in employee-related costs and expenses including healthcare and other employee benefits such as unemployment insurance and workers’ compensation;

• closing of any U.S. military bases related to our privatization interests; and

• our dependency on technology in our operations and the possible impact of system and information technology interruptions.

32

Should one or more of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may vary in material respects from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For a more detailed discussion of some of the foregoing risk and uncertainties, see “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2005, as well as the other reports and registration statements filed by us with the SEC and under “Forward Looking Statements” on our website. These documents are available free of charge from the SEC or from our Investor Relations department. All of our annual, quarterly, and current reports and amendments thereto, filed with the SEC are available on our website under “Investor Relations.” For more information about us and the announcements we make from time to time, visit our website at www.shawgrp.com.

General

We offer a broad range of services to clients in the energy, chemical, environmental and infrastructure industries worldwide. We are a vertically integrated provider of comprehensive technology, engineering, procurement, construction, maintenance, pipe fabrication and consulting services to the energy and chemicals industries. We are also a leading provider of consulting, engineering, construction, remediation and facilities management services to the environmental, infrastructure and homeland security markets.

Founded in 1987, we have expanded rapidly through internal growth and the completion and integration of a series of strategic transactions including the Stone & Webster transaction in late fiscal 2000 and the IT Group transaction in fiscal 2002. Our fiscal 2005 revenues were approximately $3.3 billion and our backlog at May 31, 2006 was approximately $8.1 billion. We are headquartered in Baton Rouge, Louisiana with offices and operations in North America, South America, Europe, the Middle East and the Asia-Pacific region and employ approximately 22,000  people.

Comments Regarding Future Operations

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

Critical Accounting Policies

Item 7, included in Part II of our Annual Report on Form 10-K for the fiscal year ended August 31, 2005, presents the accounting policies and related estimates that we believe are the most critical to understanding our consolidated financial statements, financial condition, and results of operations and which require complex management judgment and assumptions, or involve uncertainties.
Information regarding our other accounting policies is included in the notes to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 31, 2005.

A substantial portion of our revenue and profit, particularly for our E&C and E&I segments, is derived from engineering, procurement and construction (EPC) projects. Some of these projects may span several years from start to finish. We recognize revenue and gross profit for many of these contracts on the percentage-of-completion method which requires estimates of the total revenue and total costs at completion as well as the progress towards completion.

These estimates are dependent upon judgments including material costs and quantities, labor productivity, subcontractor performance and other costs. In addition, disputes on our projects can and sometimes do occur with our customers, subcontractors and equipment vendors that require significant judgment as to the ultimate resolution and may take an extended period of time to resolve. As projects are executed, estimates of total revenues and total costs at completion are refined and revised. These estimates change due to factors and events affecting execution and often include estimates for resolution of disputes that may be settled in negotiations or through arbitration, mediation or other legal methods.

The percentage-of-completion method requires that adjustments to estimated revenues and costs, including estimated claim recoveries, be recognized on a cumulative basis, when the adjustments are identified. 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 gross profit on the contract in that period. This can result in a material impact on our results for a single reporting period. Therefore, our discussion of results for each of our segments often includes discussion of significant changes in major projects and their impact on our results.

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

33

Results of Operations

Executive Summary

Nine Months Ended May 31, 2006

The need for disaster relief, emergency response and recovery services in the Gulf Coast area of the U.S. as a result of hurricanes Katrina and Rita, increased activity in the energy markets, consistent demand for clean air and fuels, garrison support services and transmission and distribution services have contributed to our overall revenue growth for the three and nine months ended May 31, 2006.

Gross profit for the first nine months of fiscal 2006 increased compared to the same period for fiscal 2005 primarily due to increased work in our E&I segment driven by disaster relief, emergency response and recovery services in the Gulf Coast area of the U.S., which was offset by a decrease in the E&C segment, primarily due to estimated cost increases on four projects and the unfavorable ruling on litigation related to our Wolf Hollow project. In addition, we recorded gross profit of $4.5 million in the second quarter of fiscal 2006 due to change in estimates for performance liabilities on technology license agreements.

General and administrative expenses for the first nine months of fiscal 2006 increased compared to the same period for fiscal 2005 primarily due to expensing of previously deferred third party financing and equity offering costs and certain due diligence costs related to an acquisition of $4.5 million and due to an increase in employee compensation expense for expensing of stock options under SFAS 123(R) of $4.3 million.

Cash flows from operations were negative during the first nine months of fiscal 2006 as compared to the first nine months of fiscal 2005 primarily due to the cash requirements associated with our disaster recovery efforts and the near completion of one of our energy projects in the United States. These items were partially offset by recoveries on claims during the period.

Three Months Ended May 31, 2006

Disaster relief, emergency response and recovery services in our E&I segment related to the effects of hurricanes Katrina and Rita declined by 62% during the third quarter as compared to the average quarterly revenues for the first two quarters of fiscal 2006 as task orders were cancelled.

The impact of the Wolf Hollow litigation ruling reduced gross profit and gross profit percentage in our E&C segment by $48.2 million in the quarter. Additionally, changes in estimated gross profit on one project in the United States that reduced gross profit by $28.0 million for the third quarter.

General and administrative expenses decreased by $3.2 million during the third quarter as compared to the prior quarter of fiscal 2006 primarily due to the write off of costs associated with certain acquisition activities in the second quarter of fiscal 2006 and the reduction of incentive compensation accruals, including reversal of amounts recorded during the first half of fiscal 2006.

Backlog

Since August 31, 2005, our backlog has increased approximately $1.4 billion to $8.1 billion. The increase is primarily due to increased backlog associated with hurricane response related services, increased activity in the energy markets and increased demand for clean air projects. We expect fiscal 2006 revenues from our energy markets to increase and revenues from our chemicals market to increase substantially. These end markets will drive increased revenues in our E&C, Maintenance and F&M segments, which we expect to increase gross profit overall. We also anticipate increases in revenues in our E&I segment driven by hurricane recovery and restoration work and expect increases in gross profit due to the higher revenues. Finally, we expect significant improvements in net income in fiscal 2006 compared to fiscal 2005, primarily due to higher revenues and gross profit, reduced interest costs from the reduction in our outstanding debt, offset by slightly higher general and administrative costs.

Segment Analysis

The comments and tables that follow compare revenues, gross profit, gross profit percentages and backlog by operating segment for the indicated periods. We have reclassified certain prior-period amounts to conform to the current period’s presentation.

34

Selected summary financial information for our operating segments, for the periods indicated (in millions):

	Three Months Ended						Nine Months Ended
	May 31,						May 31,
	2006			2005			2006			2005
Revenues:
E&I	$	513.4		$	273.3		$	1,700.5		$	837.0
E&C		343.8			327.7			995.6			893.4
Maintenance		295.8			235.6			707.8			578.1
F&M		73.1			54.5			202.8			138.7
Total revenue	$	1,226.1		$	891.1		$	3,606.7		$	2,447.2
Gross profit (loss):
E&I	$	45.6		$	22.2		$	168.8		$	84.5
E&C		(39.9	)		36.3			(4.6	)		85.9
Maintenance		9.6			10.1			29.3			20.1
F&M		17.6			10.3			44.9			29.1
Total gross profit	$	32.9		$	78.9		$	238.4		$	219.6
Gross profit percentage:
E&I		8.9	%		8.1	%		9.9	%		10.1	%
E&C		(11.6	)		11.1			(0.5	)		9.6
Maintenance		3.2			4.3			4.1			3.5
F&M		24.1			18.8			22.2			21.0
Total gross profit percentage:		2.7			8.9			6.6			9.0

The following table presents our revenues by industry sector:

	Three Months Ended										Nine Months Ended
	May 31,										May 31,
	2006					2005					2006					2005
Industry Sector	(In Millions)		%			(In Millions)		%			(In Millions)		%			(In Millions)		%
Environmental and Infrastructure	$	513.4		42	%	$	273.3		31	%	$	1,700.5		47	%	$	837.0		34	%
Energy
E&C		169.1		14			221.3		25			570.3		16			595.7		24
Maintenance		186.6		15			177.5		20			410.0		11			420.4		17
F&M		17.2		1			22.2		2			43.0		1			61.3		3
Chemical
E&C		165.5		14			101.7		11			401.2		11			282.8		12
Maintenance		108.9		9			50.7		6			296.8		8			146.0		6
F&M		30.0		2			23.6		3			97.4		3			54.3		2
Other Industries
E&C		9.2		1			4.7		—			24.1		1			14.9		1
Maintenance		0.3		—			7.4		1			1.0		—			11.7		—
F&M		25.9		2			8.7		1			62.4		2			23.1		1
Total revenue	$	1,226.1		100	%	$	891.1		100	%	$	3,606.7		100	%	$	2,447.2		100	%

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The following table presents our revenues by geographic region:

	Three Months Ended										Nine Months Ended
	May 31,										May 31,
	2006					2005					2006					2005
Geographic Region	(In Millions)		%			(In Millions)		%			(In Millions)		%			(In Millions)		%
United States	$	1,061.3		86	%	$	788.7		89	%	$	3,242.7		90	%	$	2,129.3		87	%
Asia/Pacific Rim		45.5		4			58.0		7			123.1		3			176.6		7
Middle East		95.7		8			18.2		2			167.4		5			64.6		3
Canada		3.8		—			3.8		—			10.5		—			8.9		—
Europe		11.2		1			15.6		2			41.9		1			40.8		2
South America and Mexico		6.4		1			4.8		—			13.0		1			17.5		1
Other		2.2		—			2.0		—			8.1		—			9.5		—
Total revenue	$	1,226.1		100	%	$	891.1		100	%	$	3,606.7		100	%	$	2,447.2		100	%

Our backlog by segment is as follows:

	May 31, 2006					August 31, 2005
	(In Millions)		%			(In Millions)		%
E&I	$	2,660.7		33	%	$	2,244.6		34	%
E&C		3,904.5		48			3,099.9		46
Maintenance		1,214.8		15			1,227.9		18
F&M		275.0		4			130.0		2
Total backlog	$	8,055.0		100	%	$	6,702.4		100	%

Our backlog by industry sector is as follows:

	May 31, 2006					August 31, 2005
Industry Sector	(In Millions)		%			(In Millions)		%
Environmental and Infrastructure	$	2,660.7		33	%	$	2,244.6		34	%
Energy
Nuclear
E&C		67.6		1			85.4		1
Maintenance		901.4		11			877.2		13
Fossil Fuel
E&C		2,104.1		26			1,860.2		28
Maintenance		42.0		1			92.8		1
F&M		95.6		1
Other
E&C		46.4		—			28.1		—
F&M		81.3		1			55.5		1
Chemical
E&C		1,686.4		21			1,126.2		17
Maintenance		267.4		3			257.8		4
F&M		46.8		1			40.4		1
Other Industries
Maintenance		4.0		—			0.1		—
F&M		51.3		1			34.1		—
Total backlog	$	8,055.0		100	%	$	6,702.4		100	%

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	May 31, 2006					August 31, 2005
Status of Contract	(In Millions)		%			(In Millions)		%
Signed contracts and commitments	$	7,106.9		88	%	$	5,194.3		77	%
Letters of intent		948.1		12			1,508.1		23
Total backlog	$	8,055.0		100	%	$	6,702.4		100	%

Backlog includes $965 million of customer furnished materials on two E&C contracts, $887 million of which is classified under letters of intent.

E&I Segment

We provided disaster relief, emergency response and recovery services to federal, state and local governmental entities as well as to not-for-profit and private entities in the hurricane damaged areas of the United States’ Gulf Coast. Each of our segments contributed management, personnel and use of assets to help meet the needs of this work. However, because emergency response and governmental services are contracted through our E&I segment, all revenues and costs are included in our E&I segment.

Revenues

The increases in revenues of $240.1 million and $863.5 million for the three and nine months ended May 31, 2006, respectively as compared to the three and nine months ended May 31, 2005 are primarily attributable to:

• increases in project revenues of $214.9 million and $884.6 million for the three and nine months ended May 31, 2006 associated with providing hurricane recovery and restoration work;

• revenues of $34.0 million and $36.0 million for the three and nine months ended May 31, 2006 from a recently consolidated joint venture providing services to the U.S. Department of Energy;

• increases in environmental and logistic support services for the U.S. Army of $9.0 million and $23.7 million for the three and nine months ended May 31, 2006; and

• increases in commercial construction and engineering services of $8.2 million for the three months ended May 31, 2006.

The increase in revenues for the three and nine months ended May 31, 2006 was partially offset by decreases in revenues attributed to:

• domestic federal environmental remediation work due to a reallocation of federal environmental funding to disaster relief funding, less work being awarded under existing contracts and/or delays in funding under existing contracts;

• the substantial completion of a major fixed price contract in fiscal 2005; and

• project services provided to U.S. Government customers in Iraq due to a competitive bid environment arising from changes in government contracting vehicles to more fixed price opportunities.

Gross Profit and Gross Profit Percentage

Gross profit for the three months of May 31, 2006 was $45.6 million or 8.9% as compared to $22.2 million or 8.1% for the three months ended May 31, 2005. The change in gross profit and related gross profit percentage is due primarily to:

• gross profit of $16.1 million for the three months of May 31, 2006 associated with providing hurricane recovery and restoration work;

• the contract losses recorded on commercial construction projects in the quarter ended May 31, 2005;

• increased gross profit from a recently consolidated joint venture providing services to the U.S. Department of Energy; and

• increased gross profit and related percentage on non-hurricane related work resulting from indirect cost absorption arising from our overall increase in sales volumes.

The increases in gross profit and related percentage are offset by:

• the positive impact in the quarter ended May 31, 2005, of an adjustment to the estimated costs to complete a major fixed price contract, which resulted from cessation of certain operations on the project;

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• lower gross profit and gross profit percentage from domestic federal environmental remediation work being awarded and executed this fiscal year as compared to last fiscal year, together with lower gross profit percentage earned on a higher volume of mission support services work compared to the lower volume of federal remediation work earning a higher gross profit percentage; and

• the positive impact of gross profit and related percentage in the quarter ended May 31, 2005, due to submission of fiscal year indirect rates, negotiation of restructuring cost proposals and other indirect rates to contract direct costs.

Gross profit for the nine months of May 31, 2006 was $168.8 million or 9.9% as compared to $84.5 million or 10.1% for the nine months ended May 31, 2005. The change in gross profit and related gross profit percentage is due primarily to:

• gross profit of $86.6 million for the nine months of May 31, 2006 as compared to $6.5 million for the nine months of May 31, 2005 associated with providing hurricane recovery and restoration work;

• increased gross profit from a recently consolidated joint venture providing services to the U.S. Department of Energy; and

• increased gross profit and related percentage on non-hurricane related work resulting from indirect cost absorption arising from our overall increase in sales volumes.

The increases in gross profit are offset by:

• the positive impact in the nine months ended May 31, 2005, of an adjustment to the estimated costs to complete a major fixed price contract, which resulted from cessation of certain operations on the project;

• the application of revised estimated governmental indirect rates to contract direct costs for the nine months ended May 31, 2006 along with the positive impact of gross profit in the nine months ended May 31, 2005, due to submission of fiscal year indirect rates, negotiation of restructuring cost proposals and other indirect rates to contract direct costs;

• lower gross profit and gross profit percentage from domestic federal environmental remediation work being awarded and executed this fiscal year as compared to last fiscal year, together with lower gross profit percentage earned on a higher volume of mission support services work compared to the lower volume of federal remediation work earning a higher gross profit percentage; and

• decreased project services supporting the U.S. Government customers in Iraq.

Backlog

Backlog for the E&I segment as May 31, 2006 is $2.7 billion, as compared to $2.2 billion as of August 31, 2005. The increase in backlog is primarily attributable to contracts awarded by FEMA, the U.S. Army Corps of Engineers, the Air Force Center for Environmental Excellence (AFCEE), the Department of Energy (DOE) and state and local jurisdictions. These awards have offset backlog reductions in the Middle East where opportunities for the near term have been considerably less than anticipated as funding shifts to domestic project opportunities under global government contracts. Contract work executed through the third quarter of fiscal 2006 was in line with expectations adjusted for disaster relief, emergency response, and recovery services provided by E&I. We expect backlog to remain sensitive to the levels of funding on awards related to disaster relief, emergency response, and recovery services projects through the remainder of fiscal 2006. We believe E&I is well-positioned to capitalize on opportunities in core and emerging markets with both historic and developing services and the E&I backlog will rest on our ability to win new contract awards in this highly competitive environment.

As of May 31, 2006, contracts with government agencies or entities owned by the U.S. Government and state government agencies are a predominant component of the E&I backlog, accounting for $2.4 billion or 92% of the $2.7 billion in backlog.

Revenues for the nine months ended May 31, 2006 are significantly higher than revenues of the comparable period of fiscal 2005, and we anticipate the fiscal 2006 revenues increase over fiscal 2005 will continue to grow in the remaining quarter of fiscal 2006; however we expect that revenues for the upcoming quarter will be less than that generated in any of the previous quarters of fiscal 2006. The fiscal 2006 gross profit percentage is expected to be lower than it was for fiscal 2005 due to lower than historical margins earned on certain significant disaster relief, emergency response and recovery related awards, the changing composition of work executed by E&I and the competitive nature of work won in this industry sector; but gross profit will be significantly higher in fiscal 2006 than fiscal 2005, with core E&I project work enhanced by execution of our disaster relief, emergency response and recovery services in the Gulf Coast region of the United States. In fiscal 2007 we expect that E&I revenues will stabilize at less than fiscal 2006 levels as the current disaster recovery work nears completion; however we expect that fiscal 2007 revenue levels will be well in excess of levels earned in 2005 with increases in federal and mission support services, supported by several DOE projects and from commercial, state and local project work, bolstered by awards from clients in both the public and private sectors. We expect gross profit for fiscal 2007

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to be less than that earned in 2006 as we cannot anticipate the significant disaster recovery work that was earned in the current fiscal year.

E&C Segment

Revenues

The increase of $16.1 million or 5% and $102.2 million or 11% in segment revenues for the three and nine months ended May 31, 2006, respectively, as compared to the three and nine months ended May 31, 2005, respectively, is primarily attributable to:

• increased activity in the Flue Gas Desulphurization (FGD), transmission and distribution and plant services markets of our energy business;

• increased activities relating to major coal energy projects;

• the commencement of major international petrochemical and ethylene plant projects, including $29 million of customer furnished materials; and

• the progress on three refinery projects.

The increase in revenues for the three and nine months ended May 31, 2006 was partially offset by:

• the Wolf Hollow litigation ruling resulting in $48.2 million reduction of revenue and gross profit for the 2006 periods;

• the decrease in estimated revenue on an energy project in the United States;

• the scheduled progress towards completion of two energy projects in the United States; and

• the completion of a chemical project and a refinery project.

Gross Profit and Gross Profit Percentage

Gross profit for the three and nine months ended May 31, 2006 was $(39.9) million or (11.6)% and $(4.6) million or (0.5)% compared to $36.2 million or 11.1% and $85.9 million or 9.6%, respectively, for the three and nine months ended May 31, 2005, is primarily attributable to:

• the Wolf Hollow litigation ruling reducing gross profit by $48.2 million during the 2006 periods; and

• During the quarter ended May 31, 2006, we revised our previously estimated revenues on a project that included a schedule incentive under the contract terms for substantial completion and satisfaction of performance tests before a specified date. During the third quarter of fiscal 2006 we achieved substantial completion and satisfied performance tests after the date specified in the contract to earn the incentive resulting in a reduction of revenues and gross profit of $7.5 million for our E&C segment during the three months ending May 31, 2006. Additionally, the project incurred liquidated damages, additional completion and start-up costs, and additional costs related to subcontractors. Net of unapproved change orders and backcharges recognized in the quarter, the project incurred a charge of $28.0 million in the third quarter, inclusive of the bonus reversal.

• the decrease in estimated revenues and increase in estimated costs on an energy project in the United States.

Five projects in our E&C segment have recorded combined revenues or, in some cases, reductions in costs, to date of $41.1 million ($22.5 million in the quarter ended May 31, 2006) related to unapproved change orders and claims on a percentage of completion basis. The amounts included in our estimated total revenues or, in some cases, reduction in costs, at completion for these five project are estimated to be a combined $51.9 million. These unapproved change orders and claims relate to delays and costs attributable to others as well as force majeure provisions under the contracts. If we collect amounts different from the amounts we have estimated, those differences will be recognized as income or loss.

The decrease in gross profit and gross profit percentage for the three and nine months ended May 31, 2006 was partially offset by:

• higher gross profit associated with our energy projects; and

• increased volume of proprietary technology sales and related engineering work.

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• During fiscal 2006, we changed our estimates for liability provisions related to contractual performance guarantees on sales of our technology paid-up license agreements. Our accounting for these contracts is discussed in our Annual Report on Form 10-K for the fiscal year ended August 31, 2005 filed in “Critical Accounting Policies and Related Estimates That Have a Material Effect on Our Consolidated Financial Statements.” Our revenues related to the sale of these technologies under paid-up license agreements increased with our acquisition of Badger Technologies in 2003 and its then existing portfolio of proprietary technology. Historically, our estimation approach for liability provisions resulted in a reduction of revenues in our percentage of completion computation for each contract generally equal to the maximum contractual performance liability under the contract until performance testing or other factors provided evidence of a reduction in the performance liability. This approach did not take into account historical data for estimating liability provisions on these types of contracts. Our actual experience with performance guarantees on these types of agreements currently supports estimated liability provisions that vary based on our experience with the different type of technologies for which we license and provide engineering (for example, ethyl benzene, styrene, cumene, Bisphenol A) and generally support lower liability provisions for certain technologies. Prior to February of 2006, our estimates of these performance guarantees were recorded at the maximum contractual liability until the related plant became operational, performance tests were met, the guarantee provisions expired or other factors provided evidence that the maximum liability was unlikely to be incurred. After three to six years of experience in addition to the previous experience of companies we acquired, we now believe that our history and experience with these types of guarantees would allow us to make more accurate estimates of the potential liability and, in certain circumstances, revised our recorded performance liability amount below the maximum performance liability. For the three months ended February 28, 2006, and nine months ended May 31, 2006, we recorded gross profit of $4.5 million due to changes in estimates for performance guarantees below the maximum liability. No material changes in estimates relating to performance liabilities was recorded during the quarter ending May 31, 2006. Our total estimated performance liability remaining as of May 31, 2006, is $14.7 million.

During the quarter ending May 31, 2006, $12.6 million of gross profit was recorded related to favorable changes in cost estimates on three projects. On one project the final open book cost estimate was completed, procurement orders committed and all major subcontracts were completed during the quarter; on another project, productivity trends indicated a reduction in craft labor costs; and on a third project, our performance demonstrates favorable project productivity and subcontracted cost containment.

Backlog

Backlog for the E&C segment as of May 31, 2006 is $3.9 billion, as compared to $3.1 billion as of August 31, 2005. The increase in backlog is primarily a result of a new major coal power project, FGD projects, two new ethylene projects, and continued growth of contracts in our Energy Delivery Services (EDS) business. This was partially offset by scheduled progress on major projects.

At May 31, 2006, six customers account for $3.2 billion or 80% of the $3.9 billion in backlog for the E&C segment.

We anticipate fiscal 2007 revenues to be significantly higher than fiscal 2006 levels as the E&C segment continues work on large energy projects and the continuation of work on major international chemical projects. We expect our gross profit to increase in fiscal 2007 with higher gross profit on our EPC FGD and coal projects and the commencement of major international process projects.

Maintenance Segment

Revenues

The increase in revenues of $60.2 million or 26% for the three months ended May 31, 2006 as compared to the three months ended May 31, 2005 and $129.7 million or 22% for the six months ended May 31, 2006 compared to the nine months ended May 31, 2005 is primarily attributable to:

• revenues related to capital construction services for three customers in the chemical industry

• revenues related to maintenance and modification services for a new customer in the energy industry, and

• increased activity and increased scope for one major nuclear project in the United States.

The increase in revenues for the three and nine months ended May 31, 2006 were partially offset by a reduction in the amounts of maintenance services for three customers in the energy industry due to these customers’ seasonal schedules of refueling outages and the successful completion of a decommissioning project in the energy industry.

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Gross Profit and Gross Profit Percentage

Gross profit for the three months ended May 31, 2006 was $9.6 million or 3.2% compared to $10.1 million or 4.3% for the three months ended May 31, 2005. The decrease in gross profit and gross profit percentage is due to a reduction of our estimate of total performance incentive fees on a an energy project in the United States, which resulted in a reduction of revenues and gross profit. This was partially offset by the increase in capital construction services for chemical industry customers, which is being executed at a higher gross profit than the routine maintenance services. In addition, these capital construction service revenues have increased the overall revenue volume of the Maintenance segment without a corresponding increase in operating expenses creating a larger gross profit percentage for the segment.

Gross profit for the nine months ended May 31, 2006 was $29.3 million or 4.1% compared to $20.1 million or 3.5% for the nine months ended May 31, 2005. This increase in gross profit and gross profit percentage is primarily due to the increase in capital construction services in the chemical industry as noted above.

Backlog

Backlog decreased $13.0 million since August 31, 2005. The decrease in backlog was due to progress on existing contracts offset, in part, by two new awards in the chemical industry and two new awards in the energy industry. Our first award in the chemical industry is to provide restoration services on two natural gas processing plants that were damaged by Hurricane Rita. Our second award in the chemical industry is to provide routine maintenance services to an existing customer, which is a result of cross selling efforts across the Company. Our first award in the energy industry is to provide maintenance, modifications, and construction services for two nuclear power plants for a new customer while our second award in the energy industry is to also provide maintenance, modification, and construction services along with other support services to a new customer.

At May 31, 2006, four customers account for $0.8 billion or 67% of the $1.2 billion in backlog for Maintenance.

We anticipate fiscal 2007 revenues to be higher than fiscal 2006 levels as we continue to provide additional services for current and new customers in the energy and chemical industries. We expect our gross profit to increase in fiscal 2007, with a higher volume of capital construction services expected to be performed in fiscal 2007.

F&M Segment

Revenues

The increase in revenues of $18.6 million or 34% and $64.1 million or 46% for the three months and nine months ended May 31, 2006 as compared to the three months and nine months ended May 31, 2005 is primarily attributable to significant new contract awards from the energy and chemical industries and the continued shortage of materials available in the manufacturing and distribution markets worldwide.

The increase in revenues is also due to a change in the method of eliminating intersegment revenues. Our F&M segment performs pipe fabrication work on several E&C jobs. We have previously classified these revenues as “intersegment revenues” and eliminated them from our F&M segment; however, the gross profit from these sales remained within the F&M segment. The company is now segmenting the E&C contracts and the revenue from the pipe fabrication portion of the contract will remain in the F&M segment. As a result, the F&M or E&C’s gross profit and gross profit % is lower for the three and nine month period ended May 31, 2006.

Gross Profit and Gross Profit Percentage

Gross profit for the three months ended May 31, 2006 was $17.6 million or 24.1% compared to $10.3 million or 18.8% for the three months ended May 31, 2005. Gross profit for the nine months ended May 31, 2006 was $44.9 million or 22.2% compared to $29.1 million or 21.0% for the nine months ended May 31, 2005. The increase in gross profit for both periods was primarily attributable to the increase in volume due primarily to the pass through of a significant increase in the price of raw materials, the settlement of a $3 million claim against a customer for delays in the delivery of materials and drawings and an increase in the profitability of the domestic manufacturing and distribution business and the domestic fabrication facilities due to improved cost controls.

Backlog

Backlog for the F&M segment as of May 31, 2006 was $275.0 million, as compared to $130.0 million as of August 31, 2005. The increase in backlog includes approximately $244.5 million in new contracts and increases in scope during the nine months ended May 31, 2006. Based on our market outlook, we expect revenues and gross profit to remain near current levels for the remainder of fiscal 2006 and fiscal 2007 given the increased demand resulting from expected new contract awards and the continued shortage of materials available in the manufacturing and distribution markets worldwide.

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General and Administrative Expenses, Interest Expense and Income, Other Income (Expense), Earnings (loss) from Unconsolidated Entities and Income (loss) from and Impairment of Discontinued Operations

The following table sets forth general and administrative expenses, interest expense and income, other income (expense), earnings (loss) from unconsolidated entities and income (loss) from and impairment of discontinued operations for the indicated periods (in thousands):

	Three Months Ended						Nine Months Ended
	May 31,						May 31,
	2006			2005			2006			2005
General and administrative expenses	$	52,320		$	49,575		$	162,252		$	140,559
Interest expense		(4,897	)		(7,338	)		(13,261	)		(26,683	)
Interest income		794			1,338			4,273			3,789
Other income (expense), net		589			476			(291	)		1,293
Earnings (losses) from unconsolidated entities, net of income taxes		(463	)		616			674			2,743
Income (loss) from and impairment of discontinued operations, net of income taxes		106			(556	)		(129	)		(1,439	)

The increase in general and administrative expenses of $2.7 million and $21.7 million during the three and nine months ended May 31, 2006 compared to the same period in fiscal 2005 includes an increase in other employee compensation and the impact of our adoption of SFAS 123(R) under the modified prospective method. The adoption of SFAS 123(R) requires the recognition of stock-based compensation related to stock options in our results of operations for the three and nine months ended May 31, 2006, as compared to the same period of fiscal 2005 when we accounted for this stock-based compensation in accordance with APB Opinion No. 25. As of May 31, 2006, there was $16.9 million of unrecognized compensation costs related to stock options which is expected to be recognized over a weighted-average period of 2.8 years. We anticipate general and administrative expenses for the remainder of fiscal 2006 to be higher than the comparable periods of fiscal 2005.

Our general and administrative expenses for the third quarter of fiscal 2006 reflect a decrease in our incentive compensation cost to reflect our performance against the plan criteria for the nine month period. The reduction of expense in the current quarter includes amounts recorded during the first half of fiscal 2006.

General and administrative expenses for the nine months ended May 31, 2006 also includes $4.5 million of expenses related to costs associated with a potential acquisition. We defer certain third party costs directly attributable to our efforts on potential acquisitions. During the second quarter of fiscal 2006, we determined that it was unlikely that we would obtain a controlling interest in the potential acquisition and, therefore, expensed all costs including the amounts previously deferred, related to the incremental effort required to obtain the contemplated controlling interest (primarily financing, equity offering costs and certain due diligence costs). A portion of the costs related to due diligence continue to be deferred since we are still pursuing a strategic equity investment in this acquisition target.

The decrease in interest expense reflects the decrease in our long-term debt, which resulted from the repurchase of our Senior Notes during the third quarter of fiscal 2005, which was partially offset by interest due to borrowings on our Credit Facility.

The decrease in other income (expense) for the nine months ended May 31, 2006 was primarily due to the recognition of a $2.0 million gain on the sale of the assets of Shaw Power Technologies, Inc. during the nine months ended May 31, 2005.

Our effective income tax rate (benefit) for the three months and nine months ended May 31, 2006 was (47.8)% and 32.4% respectively compared to 4.0% and 110.0% for the three and nine months ended May 31, 2005, respectively. Our effective tax rate changed in the third quarter of fiscal 2006 as a result of utilization of foreign NOL’s previously reserved and the relative impact of permanent items on reduced earnings resulting primarily from the impact of the Wolf Hollow ruling (Note 11).

The decreased earnings from unconsolidated entities, net reflects the consolidation of a previously unconsolidated entity due to our acquisition of one of our joint venture partners.

Related Party Transactions

During the quarter ended May 31, 2006, we subcontracted a portion of our work, primarily related to the disaster recovery efforts of the Gulf Coast region of the United States, with two companies owned by one of our Directors whom our Board had previously determined is considered non-independent. Payments made to these companies were approximately $2.8 million and $20.2 million during the three and nine months ended May 31, 2006 and amounts due to these companies were $0.3 million as of May 31, 2006. We believe this subcontracted work was performed under similar terms as would have been negotiated with an unrelated party.

A company (the “Related Company”) for whom an executive officer and a significant owner is the brother to our Chief Executive Officer is a subcontractor to several of our subcontractors on various projects related to temporary housing efforts in Louisiana, where the Related Company has operated in its respective field of mechanical contracting since its founding in 1919. We were not involved in the agreements between our subcontractors and the Related Company and we have not been provided any information about the terms of these contracts.

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Liquidity and Capital Resources

Credit Facilities and Revolving Lines of Credit
Amounts outstanding under credit facilities and revolving lines of credit consisted of the following (in millions):

	May 31,			August 31,
	2006			2005
Credit Facility	$	226.4		$	40.9
Foreign subsidiaries’ revolving lines of credit		—			0.1
Credit facilities of consolidated VIEs		5.8			6.3
Total outstanding		232.2			47.3
Less: current maturities		(5.8	)		(6.4	)
Total long-term revolving lines of credit	$	226.4		$	40.9

On October 3, 2005, we entered into Amendment I to increase our Credit Facility dated April 25, 2005, from $450.0 million to $550.0 million, then on February 27, 2006 we entered into Amendment II, which increased our Credit Facility from $550.0 million to $750.0 million, and increased our sublimits for revolving credit and financial letters of credit from $325.0 million to $425.0 million, which will retract to $375.0 million on August 27, 2007. The amendments retained the original term of the agreement, which is five years and commenced on April 25, 2005. Readers should refer to Note 8 of the notes to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 31, 2005 for a more detailed description of our Credit Facility.

The following table presents our available credit under our amended Credit Facility as of May 31, 2006 (in millions), which is subject to a borrowing base calculation as mentioned in Note 8 of the notes to our consolidated financial statements in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year ended August 31, 2005.

Total Credit Facility	$	750.0
Less: outstanding performance letters of credit		(262.5	)
Less: outstanding financial letters of credit		(43.1	)
Less: outstanding revolving credit loans		(226.4	)
Remaining availability for performance letters of credit	$	218.0

Portion of Credit Facility available for financial letters of credit and revolving credit loans	$	425.0
Less: outstanding financial letters of credit		(43.1	)
Less: outstanding revolving credit loans		(226.4	)
Remaining availability for financial letters of credit and revolving credit loans	$	155.5

In addition to the calculation presented above, the portion of the Credit Facility available for financial letters of credit and revolving credit loans is also limited to the lesser of the total Credit Facility ($750.0 million as of May 31, 2006) less outstanding performance letters of credit or the portion of the Credit Facility ($425.0 million as of May 31, 2006) available for financial letters of credit and revolving credit loans. The Credit Facility availability is also subject to a borrowing base calculation as mentioned above.

The Credit Facility will be used, from time to time, for working capital needs including funding disaster relief, emergency response and recovery services and to fund fixed asset purchases, acquisitions and investments in joint ventures. During fiscal 2006, we have and we expect we will continue to periodically borrow under our Credit Facility for our working capital needs to fund the hurricane disaster recover work and general corporate purposes.

The interest rates for revolving credit loans under the Credit Facility may be in a range of (i) LIBOR plus 1.50% to 3.00% or (ii) the defined base rate plus 0.00% to 0.50%. The weighted-average interest rate on the Credit Facility was 7.16% and 7.04% for the three and nine months ended May 31, 2006. As of May 31, 2006, we had outstanding letters of credit (inclusive of both domestic financial and domestic performance) of approximately $305.6 million under our Credit Facility as compared to $243.6 million as of August 31, 2005. The total amount of fees associated with these letters of credit was approximately $1.3 million and $3.4 million for the three and nine months ended May 31, 2006 compared to $1.4 million and $2.4 million for the three and nine months ended May 31, 2005.

As of May 31, 2006, we were in compliance with the covenants contained in the Credit Facility.

The following table sets forth the outstanding letters of credit and short-term revolving lines of credit for our foreign subsidiaries, excluding our VIEs (in thousands, except percentages):

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	May 31,			August 31,
	2006			2005
Capacity of foreign letters of credit and short-term revolving lines of credit	$	6,552		$	6,253
Outstanding:
Letters of credit		(3,417	)		(4,072	)
Short-term revolving lines of credit		(15	)		(57	)
Total outstanding		(3,432	)		(4,129	)
Remaining availability for foreign letters of credit and short-term revolving lines of credit	$	3,120		$	2,124
Weighted-average interest rate		6.50	%		6.75	%

As of May 31, 2006, borrowings under the short-term revolving lines of credit and term loan of one of our consolidated VIEs were $5.8 million and $1.2 million, respectively, with no outstanding performance bonds. Interest rates under this credit facility vary and ranged from 7.4% to 7.6% as of May 31, 2006. We also have a 50% guarantee related to this credit facility. As of August 31, 2005, this VIE had borrowings under the short-term revolving line of credit and term loan of $6.3 million and $1.2 million, respectively, with no outstanding performance bonds. Interest rates under this credit facility vary and ranged from 6.25% to 6.50% as of August 31, 2005.

On March 21, 2006, one of our foreign subsidiaries entered into a $27.0 million unsecured standby letter of credit facility with a bank. The term of the facility is one year, renewable on an annual basis. Quarterly fees are calculated using a base rate of 2% plus local bank charges. As of May 31, 2006, there were no outstanding letters of credit under this facility.

Liquidity

Our liquidity position is impacted by cash generated from operations, customer advances on contracts in progress and access to capital financial markets. As customer advances are reduced through project execution, if not replaced by advances on new projects, our cash position will be reduced. We expect the level of cash advances as a percentage of total contract value on new EPC projects to be lower than the level that resulted in the significant advance payment received on our EPC power project in the Northeast area of the U.S. Cash is used to fund operations, capital expenditures, acquisitions, and debt service.

As of May 31, 2006, we had cash and cash equivalents of $137.3 million, which included $19.7 million of restricted and escrowed cash, and $155.5 million of availability under our $750.0 million Credit Facility to fund operations. We also have a shelf registration statement with $236.1 million available for the issuance of any combination of equity or debt securities if needed. In addition, the hurricane disaster recovery work has increased the amounts due from government agencies or entities owned by the U.S. Government, primarily FEMA and the U.S. Army Corps of Engineers. While we have a significant history of recovering amounts related to work performed for the U.S. government, the current circumstances increase the uncertainties in estimating the amounts we will actually recover under existing contracts for work we have already performed. If our estimated amounts recoverable on these projects differ from the amounts ultimately collected, those differences will be recognized as income or loss and our earnings and cash flows could be materially impacted. Management believes cash generated from operations, the sale of certain non-core or under performing assets, available borrowings under our Credit Facility, and if necessary, available sales of equity or debt under our shelf registration will be sufficient to fund operations for the next twelve months.

Cash flow for Nine Months ended May 31, 2006 versus Nine Months ended May 31, 2005

The following table sets forth the cash flows for the nine months ended May 31, (in thousands):

	2006			2005
Cash flow provided by (used in) operations	$	(238,750	)	$	62,992
Cash flow provided by (used in) investing		111,825			(142,125	)
Cash flow provided by (used in) financing		183,084			17,620
Cash from consolidation of variable interest entities previously unconsolidated		2,098			1,343
Effect of foreign exchange rate changes on cash		2,583			(1,029	)

Operating Cash Flow

Net operating cash flows decreased by $301.7 million during the nine months ended May 31, 2006 compared to the same period in fiscal 2005. The decrease is due primarily to providing hurricane disaster recovery work. In executing our disaster recovery work associated with Hurricanes Katrina and Rita, we have experienced payment terms with subcontractors generally shorter than historical levels reflecting a tight market for delivery of services and supplies into the disaster affected area. In contrast, we have experienced significantly slower historical receipts for our services as final contract terms are resolved with customers and our state and local government customers await federal relief funds. The extended periods to collect payment for our services combined with a significant

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increase in the volume of work on these disaster relief efforts have resulted in a use of cash and reduction in operating cash flows during the fiscal year. The decrease in net operating cash flows in fiscal 2006 was also impacted by the disbursement of funds associated with one project in the United States, which achieved substantial completion during the third quarter of fiscal year 2006. Partially offsetting these decreases were cash receipts related to claims recovery of approximately $59.3 million.

We expect that the terms negotiated on new major EPC projects will include arrangements for significant retainage of amounts billed by us or significant other financial security in forms including performance bonds and letters of credit or a combination of retainage and other security. Our expectations may vary materially from what is actually received as the timing of these new projects is uncertain and a single or group of large projects could have a significant impact on sources and uses of cash.

Investing Cash Flows

Cash provided by investing activities increased $254.0 million from the first nine months of fiscal 2005 to the first nine months of fiscal 2006. Significant cash was deposited into restricted and escrowed cash accounts, primarily to set aside funding for one project in the United States during the first half of fiscal 2005 as compared to significant cash received from the withdrawal of funds from restricted and escrowed cash accounts associated with completion of that project during the three quarters ended May 31, 2006.

Financing Cash Flows

Net financing cash flows increased $165.5 million from the first nine months of fiscal 2005 to the first nine months of fiscal 2006. Higher amounts of cash were provided by net proceeds from our revolving credit agreements during the first half of fiscal 2006 as compared to the first half of fiscal 2005.

Off Balance Sheet Arrangements

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

During the second quarter of fiscal 2005, we entered into a guarantee agreement with a third party to guarantee the performance of one of our unconsolidated entities, American Eagle Northwest, LLC, related to the development and construction phase of the Pacific Northwest Communities, LLC military housing privatization which is scheduled to be completed in calendar year 2009. Our maximum exposure under this performance guarantee at the time we entered into this guarantee was estimated to be $81.7 million. As of May 31, 2006, the maximum exposure amount has decreased to $60.0 million due to development and construction services already executed, and our exposure will continue to be reduced over the contract term as further project services are provided. We would also be able to recover a portion of this exposure through surety bonding provided by our general contractor. We have also committed to fund $6.0 million of the total project costs for which proceeds from the sale of real estate obtained in connection with the contract will be used to fulfill this guarantee. As of May 31, 2006 and August 31, 2005, we have recorded a $0.5 million liability and corresponding asset related to this guarantee.

During the third quarter of fiscal 2005, we entered into an agreement with a third party to guarantee a revolving line of credit for one of our unconsolidated entities, Shaw YPC Piping (Nanjing) Co. LTD, for its working capital needs. Our maximum exposure under this agreement at the time we entered into this guarantee was estimated at $1.8 million. As of May 31, 2006, we have recorded an immaterial liability and corresponding asset related to this guarantee.

Finally, during the fourth quarter of fiscal 2005, we entered into a guarantee with a third party to guarantee the payment of certain tax contingencies related to Roche Consulting, Group Limited, which was sold during the fourth quarter of fiscal 2005. Our maximum exposure under this guarantee at the time we entered into this guarantee was estimated at $2.3 million. As of May 31, 2006, we had recorded an immaterial liability and corresponding asset related to this guarantee.

Commercial Commitments

Our lenders issue letters of credit on our behalf to customers or sureties in connection with our contract performance and in limited circumstances, certain other obligations to third parties. We are required to reimburse the issuers of these letters of credit for any payments which they make pursuant to these letters of credit. At May 31, 2006, we had both letter of credit commitments and bonding obligations, which were generally issued to secure performance and financial obligations on certain of our construction contracts, which expire as follows (in millions):

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	Amounts of Commitment Expiration by Period (In Millions)
			Less Than
	Total		1 Year		1-3 Years		4-5 Years		After 5 Years
Letters of Credit — Domestic and Foreign	$	309.0		15.9		223.7		42.4		27.0
Surety bonds		479.5		268.1		201.0		0.1		10.3
Total Commercial Commitments	$	788.5	$	284.0	$	424.7	$	42.5	$	37.3

Commercial Commitments above exclude any letters of credit or surety bonding obligations associated with outstanding bids or proposals or other work not awarded prior to May 31, 2006.

As of May 31, 2006 and August 31, 2005, we had total letters of credit of $309.0 million and $247.7 million, respectively. Of the amount of outstanding letters of credit at May 31, 2006, $262.5 million were issued to customers in connection with contracts. Of the $262.5 million, five customers held $204.0 million or 78% of the outstanding letters of credit. The largest letter of credit issued to a single customer on a single project is $53.0 million. There were no draws under these letters of credit for the three and nine months ended May 31, 2006.

As of May 31, 2006 and August 31, 2005, we had total surety bonds of $479.5 million and $420.8 million, respectively. However, based on our percentage of completion on contracts covered by these surety bonds, our estimated potential liability as of May 31, 2006 and August 31, 2005 was $319.2 million and $123.1 million, respectively. The $196.1 million increase is due primarily to required surety bond coverage on one of our large projects during the second fiscal quarter of 2006 as well as additional required coverage for our disaster relief, emergency response and recovery services.

Fees related to these commercial commitments were $2.9 million and $15.7 million for the three and nine months ended May 31, 2006 as compared to $2.2 million and $7.6 million for the same periods in fiscal 2005 and were recorded in the accompanying condensed consolidated statements of operations.

See Note 8 to our condensed consolidated financial statements for a discussion of long-term debt, and Note 13 for a discussion of contingencies and commitments.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements and the effect they could have on our financial statements, refer to Note 18 in Part I.

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not enter into derivative financial instruments for trading, speculation or other purposes that would expose us to market risk. In the normal course of business, we have exposure to both interest rate risk and foreign currency risk.

Interest Rate Risk

We are exposed to the risk of changes in interest rates, primarily in the U.S. Our policy is to manage interest rates through the use of a combination of fixed and floating rate debt and short-term fixed rate investments. We currently do not use any derivative financial instruments to manage our exposure to interest rate risk.

Our Credit Facility provides that both revolving credit loans and letters of credit may be issued within the $750.0 million limit of this facility. At May 31, 2006, letters of credit of approximately $305.6 million were outstanding and long-term revolving credit loans outstanding under the Credit Facility were $226.4 million. At May 31, 2006, the interest rate on our primary Credit Facility was 7.36% with an availability of $155.5 million (see Note 8 to our condensed consolidated financial statements).

As of May 31, 2006, our variable rate debt was $223.7 million, with a weighted average interest rate of 7.36%. A change in the interest rate by a 1% increase or decrease would not have a material impact on the results of our operations or financial position.

The estimated fair value of our long-term debt, excluding capital leases and borrowings on our Credit Facility, as of May 31, 2006 and August 31, 2005 was approximately $25.1 million and $24.0 million, respectively, based generally on the current market prices of such debt.

Foreign Currency Risk

The majority of our transactions are in U.S. dollars; however, some of our subsidiaries conduct their operations in various foreign

46

currencies. Currently, when considered appropriate, we use hedging instruments to manage the risk associated with our subsidiaries’ operating activities when they enter into a transaction in a currency that is different than their local currency. In these circumstances, we will frequently utilize forward exchange contracts to hedge the anticipated purchases and/or revenues. We attempt to minimize our exposure to foreign currency fluctuations by matching revenues and expenses in the same currency for our contracts. As of May 31, 2006, we had nine forward exchange contracts outstanding as hedges of certain commitments of foreign subsidiaries.

ITEM 4. — CONTROLS AND PROCEDURES

Management’s Quarterly Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Such information is also accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Management of the Company, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the most recent fiscal quarter reported on herein. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective at the reasonable assurance level as of May 31, 2006.

During the third quarter, we discovered that the recognition of revenue on one contract accounted for under the percentage-of-completion method was overstated due to a clerical error in the computation. The error occurred because a key control, the review of the calculation, that would have detected the overstatement did not operate correctly. In addition, we misapplied GAAP related to consolidation accounting under FIN 46(R) for a minority interest in one variable interest entity for which we are the primary beneficiary. The appropriate accounting personnel did not identify the misapplication of the accounting guidance in FIN 46(R), which led to a misallocation of minority interest losses on the income statement, resulting in an overstatement of net income. The Company’s condensed consolidated financial statements for the three-month and six-month periods ended February 28, 2006 have been restated to correct these two errors described above.

The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, or that the degree of compliance with the policies or procedures may not deteriorate. Because of its inherent limitations, disclosure controls and procedures may not prevent or detect all misstatements. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the third quarter of the fiscal year ending August 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, management and the Audit Committee are currently evaluating the remediation steps necessary to address the two material weaknesses discussed above. Subsequent to May 31, 2006, we have initiated an assessment of our internal controls to determine the recommendations to be presented to our Chief Executive Officer, Chief Financial Officer and the Audit Committee in order to remediate these two material weaknesses.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Note 11 and Note 13 of our condensed consolidated financial statements in Part I, Item��1, “Financial Statements” for a detail of our legal proceedings.

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K for Fiscal Year Ending August 31, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

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None.

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

None.

ITEM 5. OTHER INFORMATION

On July 6, 2006, The Shaw Group Inc. (the “Company”) entered into an Employment Agreement with G. Patrick Thompson, the Senior Vice President and Chief Administrative Officer of the Company (the “Agreement”). This Agreement supercedes and replaces the Employment Agreement of G. Patrick Thompson, as amended through May 17, 2006, a summary of which was included in the Company’s Current Report on Form 8-K filed on May 17, 2006. The Agreement is filed herewith as Exhibit 10.3 to this Quarterly Report on Form 10-Q and is incorporated herein by reference to such Exhibit 10.3.

The terms and conditions contained in the Agreement that are material to the Company are that: (1) Mr. Thompson will serve as the Senior Vice President and Chief Administrative Officer of the Company, with such duties and responsibilities as assigned by the Board of Directors; provided that, such duties are consistent with the customary duties of such position, for a two year term that automatically renews each day for two years so that on any given day, the remaining term of such Agreement is two years; (2) Notwithstanding the foregoing, the Company or Mr. Thompson may give notice at any time that the Agreement will not be further renewed from and after a subsequent date specified in the notice, in which event the term of the Agreement shall become fixed and the Agreement shall terminate on the third anniversary of the fixed term date; (3) Mr. Thompson’s base salary will be his base salary as of the date of the Agreement, which may be increased by the Board of Directors but may not be decreased unless Mr. Thompson consents; (4) Mr. Thompson will participate in the Company’s bonus plan; (5) Mr. Thompson will receive additional benefits including participation in the various employee benefit plans or programs that are made available to employees; (6) The Agreement may be terminated prior to the end of its term for various reasons set forth and defined in the Agreement including Resignation other than for Good Reason, Resignation for Good Reason, Death, Disability and Discharge for various reasons including Misconduct and Disability (as such terms are defined in the Agreement); (7) Mr. Thompson will receive (i) a lump sum cash payment in the amount equal to the product of his base compensation in effect immediately prior to his termination multiplied by the remaining term, and (ii) a lump sum cash payment equal to the product of his highest bonus paid during the most recent two years immediately prior to the date of termination multiplied by the remaining term, and (iii) he will be considered immediately and totally vested in all options, restricted stock and similar awards previously made to him upon the occurrence of any of the following: his resignation for Good Reason (as defined in the Agreement) or discharge for any reason other than Misconduct or Disability (as defined in the Agreement); (8) If Mr. Thompson’s employment is terminated due to his death, his surviving spouse or estate will receive one year of his base compensation and one year of paid group health and dental insurance benefits shall be paid for his surviving spouse and minor children, and in addition, Mr. Thompson shall be considered as immediately and totally vested in any and all options, restricted stock and similar awards; and (9) During and after the term of the his employment, to the extent allowed by applicable law, Mr. Thompson will not disclose any of the Company’s confidential, proprietary or non-public information and will not compete with the Company or solicit the Company’s customers or distributors for a period of two years after termination of his employment.

On April 6, 2006, at a regular meeting of the Board of Directors of The Shaw Group Inc., a Louisiana corporation (the “Company”), the Company’s Board of Directors approved (i) an amendment to the Company’s 2001 Employee Incentive Compensation Plan (the “2001 Employee Plan”) to provide for a minimum three-year vesting period for restricted stock awards made under the 2001 Employee Plan after the date of the amendment, subject to certain exceptions as described in more detail below; (ii) an amendment to the existing form of award agreement for outstanding and new awards of stock options under the 2001 Employee Plan to provide for acceleration of the vesting of all unexpired, but unvested options upon the death of an employee/participant; and (iii) an amendment to the Company’s 2005 Non-Employee Director Stock Incentive Plan (the “2005 Director Plan”) to provide for an increase in the vesting period for phantom shares awarded after the date of the amendment from one (1) to three (3) years.

2001 Employee Plan

Restricted Stock

Pursuant to an amendment to the 2001 Employee Plan adopted by the Company’s Board of Directors, each award of restricted stock made pursuant to such plan after the date of such amendment must have a minimum vesting period of three (3) years provided, that over such three (3) year period, vesting of the award may be in three (3) equal annual installments of 33¹/₃% each, beginning one (1) year from the date of grant; provided, however, that such minimum three-year period shall not apply to restricted stock awards made in connection with a participant’s hiring by the Company or any of its subsidiaries. Restricted stock awards made in connection with a participant’s hiring and not subject to the three-year minimum vesting period must not, however, in the aggregate, exceed five (5%) percent of the total number of shares of common stock reserved for issuance under the 2001 Employee Plan.

A copy of the 2001 Employee Plan, as amended and restated through April 6, 2006, is filed as Exhibit 10.4 to this Quarterly Report on Form 10-Q and is incorporated herein by reference to such Exhibit 10.4.

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Stock Options

The Company’s Board of Directors has also approved an amendment to the existing form of agreements for outstanding and future awards of stock options under the 2001 Employee Plan to provide that any unexpired, unvested portion of a stock option awarded under the 2001 Employee Plan shall automatically accelerate and become fully vested and exercisable in the event of the death of the employee/participant.

The amended and restated forms of Non-Qualified Stock Option Agreement and Incentive Stock Option Agreement are attached to this Quarterly Report or Form 10-Q as Exhibits 10.5 and 10.6, respectively and are incorporated herein by reference to such Exhibits.

2005 Director Plan

The Company’s Board of Directors approved an amendment to the 2005 Director Plan to provide that future awards of phantom shares thereunder shall vest in three (3) equal annual installments of 33¹/₃% each, rather than the one (1) year vesting period presently provided under the 2005 Director Plan; provided, however, that such vesting period shall be automatically accelerated in the event a director for any reason ceases to be a member of the Board of Directors more than one (1) year from the effective date of the applicable phantom stock award.

A copy of the 2005 Director Plan, as amended and restated through April 6, 2006, is attached to this Quarterly Report or Form 10-Q as Exhibit 10.7, and is incorporated herein by reference to such Exhibit. A revised award agreement for phantom stock awards under the 2005 Director Plan, reflecting such amendment to the 2005 Director Plan, is attached to this Quarterly Report on Form 10-Q as Exhibit 10.8, and is incorporated herein by reference to such Exhibit.

ITEM 6. EXHIBITS

Exhibits.

3.1	Composite of the Restatement of the Articles of Incorporation of The Shaw Group Inc. (the “Company”), as amended by (i) Articles of Amendment dated January 22, 2001 and (ii) Articles of Amendment dated July 31, 2001 (incorporated by reference to the designated Exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2001).
3.2	Articles of Amendment of the Restatement of the Articles of Incorporation of the Company dated January 22, 2001 (incorporated by reference to the designated Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2001).
3.3	Articles of Amendment to Restatement of the Articles of Incorporation of the Company dated July 31, 2001 (incorporated by reference to the designated Exhibit to the Company’s Registration Statement on Form 8-A filed on July 30, 2001).
3.4	Amended and Restated By-Laws of the Company, a composite including all amendments and supplements through October 16, 2003 (incorporated by reference to the designated Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2006).
3.5	Supplement to Amended and Restated By-Laws of the Company dated October 16, 2003 (incorporated by reference to the designated Exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2005, as amended).
10.1	Amendment No. 3 dated June 20, 2006, to that certain $450,000,000 Credit Agreement dated April 25, 2005, by and among The Shaw Group Inc., BNP Paribas and The Other Lenders Signatory Thereto, BNP Paribas Securities Corp., Bank of Montreal, Credit Suisse First Boston, UBS Securities LLC, Regions Bank and Merrill Lynch Pierce, Fenner & Smith, Incorporated (filed herewith).
10.2	Employment Agreement of David P. Barry, effective as of March 13, 2006 (incorporated by reference to the designated Exhibit to the Company’s Current Report on Form 8-K filed on March 14, 2006).
10.3	Employment Agreement of G. Patrick Thompson effective as of July 6, 2006 (filed herewith).
10.4	2001 Employee Incentive Compensation Plan (as amended and restated through April 6, 2006) (filed herewith).
10.5	Form (as amended and restated) of Non-Qualified Stock Option Agreement under the 2001 Employee Incentive Compensation Plan (filed herewith).
10.6	Form (as amended and restated) of Incentive Stock Option Agreement under the 2001 Employee Incentive Compensation Plan (filed herewith).
10.7	2005 Non-Employee Director Stock Incentive Plan (as amended and restated through April 6, 2006) (filed herewith).
10.8	Form (as amended and restated) of Phantom Stock Agreement under the 2005 Non-Employee Director Stock Incentive Plan (filed herewith).
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of

49

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

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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized

	THE SHAW GROUP INC.
Dated:  July 10, 2006	/s/ Robert L. Belk
	Robert L. Belk
	Chief Financial Officer (Authorized Officer and Principal Financial Officer)

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THE SHAW GROUP INC.

EXHIBIT INDEX

     Form 10-Q Quarterly Report for the Quarterly Period ended May 31, 2006.

A. Exhibits.

3.1	Composite of the Restatement of the Articles of Incorporation of The Shaw Group Inc. (the “Company”), as amended by (i) Articles of Amendment dated January 22, 2001 and (ii) Articles of Amendment dated July 31, 2001 (incorporated by reference to the designated Exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2001).
3.2	Articles of Amendment of the Restatement of the Articles of Incorporation of the Company dated January 22, 2001 (incorporated by reference to the designated Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2001).
3.3	Articles of Amendment to Restatement of the Articles of Incorporation of the Company dated July 31, 2001 (incorporated by reference to the designated Exhibit to the Company’s Registration Statement on Form 8-A filed on July 30, 2001).
3.4	Amended and Restated By-Laws of the Company, a composite including all amendments and supplements through October 16, 2003 (incorporated by reference to the designated Exhibit to the Company’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2006).
3.5	Supplement to Amended and Restated By-Laws of the Company dated October 16, 2003 (incorporated by reference to the designated Exhibit to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2005, as amended).
10.1	Amendment No. 3 dated June 20, 2006, to that certain $450,000,000 Credit Agreement dated April 25, 2005, by and among The Shaw Group Inc., BNP Paribas and The Other Lenders Signatory Thereto, BNP Paribas Securities Corp., Bank of Montreal, Credit Suisse First Boston, UBS Securities LLC, Regions Bank and Merrill Lynch Pierce, Fenner & Smith, Incorporated (filed herewith).
10.2	Employment Agreement of David P. Barry effective as of March 13, 2006 (incorporated by reference to the designated Exhibit to the Company’s Current Report on Form 8-K filed on March 14, 2006).
10.3	Employment Agreement of G. Patrick Thompson effective as of July 6, 2006 (filed herewith).
10.4	2001 Employee Incentive Compensation Plan (as amended and restated through April 6, 2006) (filed herewith).
10.5	Form (as amended and restated) of Non-Qualified Stock Option Agreement under the 2001 Employee Incentive Compensation Plan (filed herewith).
10.6	Form (as amended and restated) of Incentive Stock Option Agreement under the 2001 Employee Incentive Compensation Plan (filed herewith).
10.7	2005 Non-Employee Director Stock Incentive Plan (as amended and restated through April 6, 2006) (filed herewith).
10.8	Form (as amended and restated) of Phantom Stock Agreement under the 2005 Non-Employee Director Stock Incentive Plan (filed herewith).
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

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