MCDERMOTT INTERNATIONAL INC (Form: 10-Q, Received: 11/05/2008 17:14:52)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

(Mark One)

F O R M 1 0–Q

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

For the quarterly period ended September 30, 2008

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

For the transition period from ______________to______________

Commission File No. 001-08430

McDERMOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

REPUBLIC OF PANAMA	72-0593134
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)

777 N. ELDRIDGE PKWY.
HOUSTON, TEXAS	77079
(Address of Principal Executive Offices)	(Zip Code)

Registrant's Telephone Number, Including Area Code (281) 870-5901

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ü ] Accelerated filer [ ]

Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ P ]

The number of shares of the registrant's common stock outstanding at October 31, 2008 was 227,944,920

Table of Contents

M c D E R M O T T I N T E R N A T I O N A L , I N C.

I N D E X - F O R M 1 0 - Q

PAGE

PART I - FINANCIAL INFORMATION

Item 1 – Condensed Consolidated Financial Statements

	Condensed Consolidated Balance Sheets September 30, 2008 and December 31, 2007	4

	Condensed Consolidated Statements of Income Three and Nine Months Ended September 30, 2008 and 2007	6

	Condensed Consolidated Statements of Comprehensive Income Three and Nine Months Ended September 30, 2008 and 2007	7

	Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2008 and 2007	8

	Notes to Condensed Consolidated Financial Statements	9

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Item 4 – Controls and Procedures

PART II - OTHER INFORMATION

	Item 1 – Legal Proceedings	28

	Item 1A – Risk Factors	29

	Item 5 – Other Information	29

	Item 6 – Exhibits	29

SIGNATURES

Amended and Restated Articles of Incorporation

Form of Change-In-Control Agreement to be entered into between McDermott International, Inc. and John A. Fees

Form of Change-In-Control Agreement to be entered into between McDermott International, Inc. and several of its executive officers

Amended and Restated Supplemental Executive Retirement Plan

Rule 13A-14(A) / 15D-14(A) Certification of Chief Executive Officer
Rule 13A-14(A) / 15D-14(A) Certification of Chief Financial Officer

Section 1350 Certification of Chief Executive Officer

Section 1350 Certification of Chief Financial Officer

Table of Contents

PART I

McDERMOTT INTERNATIONAL, INC.

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Table of Contents

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

ASSETS

	September 30,			December 31,
	2008			2007
	(Unaudited)
	(In thousands)


Current Assets:
Cash and cash equivalents	$	614,348		$	1,001,394
Restricted cash and cash equivalents (Note 1)		68,517			64,786
Investments		226,792			300,092
Accounts receivable – trade, net		734,617			770,024
Accounts and notes receivable – unconsolidated affiliates		4,134			2,303
Accounts receivable – other		126,083			116,744
Contracts in progress		294,414			194,292
Inventories (Note 1)		120,127			95,208
Deferred income taxes		77,582			160,783
Other current assets		66,275			51,874

Total Current Assets		2,332,889			2,757,500

Property, Plant and Equipment		2,151,980			2,004,138
Less accumulated depreciation		(1,147,745	)		(1,090,400	)

Net Property, Plant and Equipment		1,004,235			913,738

Investments		298,104			162,069

Goodwill		175,144			158,533

Deferred Income Taxes		120,059			134,292

Investments in Unconsolidated Affiliates		82,116			62,241

Other Assets		246,338			223,113

TOTAL	$	4,258,885		$	4,411,486

See accompanying notes to condensed consolidated financial statements.

Table of Contents

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY

	September 30,			December 31,
	2008			2007
	(Unaudited)
	(In thousands)


Current Liabilities:
Notes payable and current maturities of long-term debt	$	9,331		$	6,599
Accounts payable		472,602			455,659
Accrued employee benefits		255,870			343,812
Accrued liabilities – other		218,308			175,557
Accrued contract cost		97,964			93,281
Advance billings on contracts		1,044,409			1,463,223
Accrued warranty expense		109,638			101,330
Income taxes payable		57,380			57,071

Total Current Liabilities		2,265,502			2,696,532

Long-Term Debt		6,007			10,609

Accumulated Postretirement Benefit Obligation		90,337			96,253

Self-Insurance		84,815			82,525

Pension Liability		73,964			188,748

Other Liabilities		154,334			169,814

Commitments and Contingencies (Note 3)

Stockholders’ Equity:
Common stock, par value $1.00 per share, authorized 400,000,000 shares; issued 233,620,079 and 231,722,659 shares at September 30, 2008 and December 31, 2007, respectively		233,620			231,723
Capital in excess of par value		1,191,712			1,145,829
Retained earnings		521,589			135,289
Treasury stock at cost, 5,842,014 and 5,852,248 shares at September 30, 2008 and December 31, 2007, respectively		(63,045	)		(63,903	)
Accumulated other comprehensive loss (Note 1)		(299,950	)		(281,933	)

Total Stockholders’ Equity		1,583,926			1,167,005

TOTAL	$	4,258,885		$	4,411,486

See accompanying notes to condensed consolidated financial statements.

Table of Contents

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Unaudited)
	(In thousands, except shares and per share amounts)


Revenues	$	1,664,851		$	1,324,018		$	4,907,923		$	4,105,594

Costs and Expenses:
Cost of operations		1,445,749			1,067,437			4,067,181			3,278,055
(Gain) loss on asset disposals – net		138			(630	)		(11,322	)		(2,380	)
Selling, general and administrative expenses		139,512			114,538			404,298			327,525
Total Costs and Expenses		1,585,399			1,181,345			4,460,157			3,603,200

Equity in Income of Investees		12,521			12,477			32,443			27,026

Operating Income		91,973			155,150			480,209			529,420

Other Income (Expense):
Interest income		7,001			17,272			29,541			45,411
Interest expense		(1,850	)		(3,476	)		(5,749	)		(18,431	)
Other income (expense) – net		2,718			(205	)		552			(5,050	))
Total Other Income		7,869			13,591			24,344			21,930

Income before Provision for Income Taxes		99,842			168,741			504,553			551,350

Provision for Income Taxes		14,271			28,333			118,253			103,507

Net Income	$	85,571		$	140,408		$	386,300		$	447,843

Earnings per Share:
Basic	$	0.38		$	0.63		$	1.70		$	2.01
Diluted	$	0.37		$	0.61		$	1.68		$	1.96

Shares used in the computation of earnings per share (Note 6):
Basic		227,440,858			224,480,807			226,645,175			222,944,800
Diluted		230,463,651			228,865,885			230,328,423			228,402,589

See accompanying notes to condensed consolidated financial statements.

Table of Contents

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Unaudited)
	(In thousands)


Net Income	$	85,571		$	140,408		$	386,300		$	447,843

Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments		(15,016	)		6,337			(8,849	)		13,598
Unrealized gains (losses) on derivative financial instruments:
Unrealized gains (losses) on derivative financial instruments		(18,923	)		7,178			(15,709	)		12,152
Reclassification adjustment for (gains) losses included in net income		1,058			(741	)		(2,692	)		(3,272	)
Amortization of benefit plan costs		5,275			8,547			18,304			23,705
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during the period		(1,989	)		748			(7,611	)		1,145
Reclassification adjustment for net (gains) losses included in net income		(358	)		(16	)		(1,460	)		74

Other Comprehensive Income (Loss)		(29,953	)		22,053			(18,017	)		47,402

Comprehensive Income	$	55,618		$	162,461		$	368,283		$	495,245

See accompanying notes to condensed consolidated financial statements.

Table of Contents

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended
	September 30,
	2008			2007
	(Unaudited)
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	386,300		$	447,843
Non-cash items included in net income:
Depreciation and amortization		95,059			67,108
Income of investees, less dividends		(12,592	)		(10,196	)
Gains on asset disposals – net		(11,322	)		(2,380	)
Provision for deferred taxes		87,512			73,485
Amortization of pension and postretirement costs		28,424			38,061
Excess tax benefits from FAS 123(R) stock-based compensation		(6,404	)		(27,234	)
Other, net		34,922			27,954
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable		21,412			(129,353	)
Income tax receivable		10,666			262,185
Net contracts in progress and advance billings on contracts		(516,623	)		287,980
Accounts payable		19,544			46,522
Income taxes		(5,335	)		(22,514	)
Accrued and other current liabilities		57,586			47,003
Pension liability, accumulated postretirement benefit obligation and accrued employee benefits		(207,672	)		(116,827	)
Other, net		(88,562	)		(30,359	)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES		(107,085	)		959,278
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted cash and cash equivalents		(3,731	)		8,379
Purchases of property, plant and equipment		(189,384	)		(181,803	)
Acquisition of businesses, net of cash acquired		(33,731	)		(334,457	)
Net increase in available-for-sale securities		(70,992	)		(106,151	)
Proceeds from asset disposals		12,023			4,582
Other, net		(2,029	)		(2,016	)
NET CASH USED IN INVESTING ACTIVITIES		(287,844	)		(611,466	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt		(4,660	)		(255,629	)
Increase in short-term borrowing		2,920			-
Issuance of common stock		8,069			12,683
Payment of debt issuance costs		(1,611	)		(3,468	)
Excess tax benefits from FAS 123(R) stock-based compensation		6,404			27,234
Other, net		-			4
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		11,122			(219,176	)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH		(3,239	)		6,120
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(387,046	)		134,756
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		1,001,394			600,843
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	614,348		$	735,599

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)	$	5,967		$	23,896
Income taxes (net of refunds)	$	49,193		$	(223,285	)

See accompanying notes to condensed consolidated financial statements.

Table of Contents

McDERMOTT INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2008

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

We have presented our condensed consolidated financial statements in U.S. Dollars in accordance with the interim reporting requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Financial information and disclosures normally included in our financial statements prepared annually in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted. Readers of these financial statements should, therefore, refer to the consolidated financial statements and the notes in our annual report on Form 10-K for the year ended December 31, 2007.

We have included all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. These condensed consolidated financial statements include the accounts of McDermott International, Inc. and its subsidiaries and controlled entities consistent with Financial Accounting Standards Board (“FASB”) Interpretation No. 46(R), Consolidation of Variable Interest Entities (revised December 2003). We use the equity method to account for investments in entities that we do not control, but over which we have significant influence. We generally refer to these entities as “joint ventures.” We have eliminated all significant intercompany transactions and accounts. We have reclassified certain amounts previously reported to conform to the presentation at September 30, 2008 and for the three and nine months ended September 30, 2008. We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.

McDermott International, Inc. (“MII”), incorporated under the laws of the Republic of Panama in 1959, is an engineering and construction company with specialty manufacturing and service capabilities and is the parent company of the McDermott group of companies, including J. Ray McDermott, S.A. (“JRMSA”) and The Babcock & Wilcox Company (“B&W”). In this quarterly report on Form 10-Q, unless the context otherwise indicates, “we,” “us” and “our” mean MII and its consolidated subsidiaries.

We operate in three business segments: Offshore Oil and Gas Construction, Government Operations and Power Generation Systems, further described as follows:

Offshore Oil and Gas Construction includes the business and operations of JRMSA, J. Ray McDermott Holdings, LLC and their respective subsidiaries. This segment supplies services primarily to offshore oil and gas field developments worldwide, including the front-end design and detailed engineering, fabrication and marine installation of offshore drilling and production facilities and installation of marine pipelines and subsea production systems. This segment operates in most major offshore oil and gas producing regions, including the United States, Mexico, Canada, the Middle East, India, the Caspian Sea and Asia Pacific.

Government Operations includes the business and operations of BWX Technologies, Inc., Babcock & Wilcox Nuclear Operations Group, Inc., Babcock & Wilcox Technical Services Group, Inc. and their respective subsidiaries. This segment manufactures nuclear components and provides various services to the U.S. Government, including uranium processing, environmental site restoration services and management and operating services for various U.S. Government-owned facilities, primarily within the nuclear weapons complex of the U.S. Department of Energy.

Power Generation Systems includes the business and operations of Babcock & Wilcox Power Generation Group, Inc. (“B&W PGG”), Babcock & Wilcox Nuclear Power Generation Group, Inc. and their respective subsidiaries. This segment manufactures fossil-fired steam generating systems, commercial nuclear steam generators, environmental equipment and components, and related services to customers around the world. It designs, engineers, manufactures and services large utility and industrial power generation systems, including boilers used to generate steam in electric power plants, pulp and paper making, chemical and process applications and other industrial uses.

Operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2007.

Table of Contents

Comprehensive Loss

The components of accumulated other comprehensive loss included in stockholders' equity are as follows:

	September 30,			December 31,
	2008			2007
	(Unaudited)
	(In thousands)
Currency Translation Adjustments	$	16,479		$	25,328
Net Unrealized Gain (Loss) on Investments		(8,087	)		984
Net Unrealized Gain on Derivative Financial Instruments		2,475			20,876
Unrecognized Losses on Benefit Obligations		(310,817	)		(329,121	)
Accumulated Other Comprehensive Loss	$	(299,950	)	$	(281,933	)

Inventories

The components of inventories are as follows:

	September 30,		December 31,
	2008		2007
	(Unaudited)
	(In thousands)
Raw Materials and Supplies	$	88,683	$	65,857
Work in Progress		11,342		10,757
Finished Goods		20,102		18,594
Total Inventories	$	120,127	$	95,208

Restricted Cash and Cash Equivalents

At September 30, 2008, we had restricted cash and cash equivalents totaling $68.5 million, of which $67.2 million is held in restricted foreign accounts and $1.3 million is required to meet reinsurance reserve requirements of our captive insurance companies.

Recently Adopted Accounting Standards

In September 2006, the Financial Accounting Standards Board (the “FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 157, Fair Value Measurements , which is intended to increase consistency and comparability in fair value measurements by defining fair value, establishing a framework for measuring fair value and expanding disclosures about fair value measurements. SFAS No. 157 applies to other accounting pronouncements that require or permit fair value measurements and is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. On January 1, 2008, we adopted the provisions of SFAS No. 157 for our measurement of the fair value of financial instruments and recurring fair value measurements of nonfinancial assets and liabilities. The adoption of these provisions did not have a material impact on our consolidated financial statements.

In February 2008, the FASB issued: (1) FASB Staff Position (“FSP”) FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement Under Statement 13 , which removes certain leasing transactions from the scope of SFAS No. 157; and (2) FSP FAS 157-2, Effective Date of FASB Statement

No. 157 , which defers the effective date of SFAS No. 157 for one year for certain nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.

SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The majority of our investments have observable inputs and are included in the first and second level of the hierarchy. We have one investment included in the third level of the hierarchy, as pricing of some of the underlying securities cannot be obtained through either direct quotes or through quotes from independent pricing vendors and are priced using estimates based upon similar securities with observable pricing data.

Table of Contents

Our derivative financial instruments consist primarily of foreign currency forward contracts. Fair value is derived using valuation models, which take into account the contract terms, such as maturity, as well as other inputs (i.e., exchange rates, foreign currency forward curves and creditworthiness of the counterparty). The data sources utilized in these valuation models that are significant to the fair value measurement are Level 2 in the fair value hierarchy.

Recently Issued Accounting Standards

In October of 2008, the FASB issued FSP No. 157-3 Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active. This FSP applies to financial assets within the scope of accounting pronouncements that require or permit fair value measurements in accordance with SFAS No. 157. FSP No. 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. We do not expect FSP No. 157-3 to have a material impact on our consolidated financial statements.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles . SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with generally accepted accounting principles in the United States. This Statement is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect SFAS 162 to have a material impact on our consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities— an amendment of FASB Statement No. 133 . SFAS No. 161 requires enhanced disclosures about derivative and hedging activities and is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 will become effective for us January 1, 2009.

Other than as disclosed above, there have been no material changes to the recent pronouncements discussed in our annual report on Form 10-K for the year ended December 31, 2007.

NOTE 2 – PENSION PLANS AND POSTRETIREMENT BENEFITS

Components of net periodic benefit cost included in net income are as follows:

	Pension Benefits												Other Benefits
	Three Months Ended						Nine Months Ended						Three Months Ended				Nine Months Ended
	2008			2007			2008			2007			2008		2007		2008		2007
	(Unaudited)
	(In thousands)
Service cost	$	9,105		$	7,630		$	28,645		$	28,092		$	81	$	88	$	246	$	212
Interest cost		37,856			38,177			115,506			111,653			1,416		1,532		4,259		4,480
Expected return on plan assets		(46,859	)		(42,641	)		(138,479	)		(128,699	)		-		-		-		-
Amortization of prior service cost		517			665			2,054			2,317			18		20		56		53
Amortization of transition obligation		-			-			-			-			71		75		218		205
Recognized net actuarial loss		7,193			13,091			25,008			34,200			363		427		1,091		1,287
Net periodic benefit cost	$	7,812		$	16,922		$	32,734		$	47,563		$	1,949	$	2,142	$	5,870	$	6,237

Table of Contents

NOTE 3 – COMMITMENTS AND CONTINGENCIES

Other than as noted below, there have been no material changes during the period covered by this Form 10-Q in the status of the legal proceedings disclosed in Note 11 to the consolidated financial statements in Part II of our annual report on Form 10-K for the year ended December 31, 2007.

Investigations and Litigation

Apollo/Parks Township Claims – Hall Litigation

The matter of Donald F. Hall and Mary Ann Hall, et al., v. Babcock & Wilcox Company, et al. (the “Hall Litigation”), pending in the United States District Court for the Western District of Pennsylvania, presently involves approximately 500 separate claims for compensatory damages against B&W PGG and Babcock & Wilcox Technical Services Group, Inc., formerly known as B&W Nuclear Environmental Services, Inc., (“B&W TSG”) (collectively, the “B&W Parties”), alleging, among other things, death, personal injury, property damage and other damages as a result of alleged radioactive and non-radioactive emissions from two former nuclear fuel processing facilities located in Apollo and Parks Township, Pennsylvania. These facilities were previously owned by Nuclear Materials and Equipment Company (“Numec”), a subsidiary of Atlantic Richfield Company (“ARCO”).

In September 2008, the parties advised the District Court that they were pursuing a negotiated resolution of the Hall Litigation and requested that the Court suspend all pre-trial requirements and obligations. The parties have negotiated the principle terms of a settlement that, if consummated, would resolve all claims against the B&W Parties. Specifically, the settlement contemplates, among other things:

The B&W Parties would be provided releases from each of the “Apollo/Parks Township Releasors,” as that term will be defined in the final settlement agreement generally to mean the existing claimants in the Hall Litigation, including full and complete releases from each of the Apollo/Parks Township Releasors asserting personal injury claims and property damage releases from each of the Apollo/Parks Township Releasors asserting property damage only claims;

·	The B&W Parties would make a $52.5 million cash payment to the Apollo/Parks Township Releasors after certain conditions precedent to such payment, as set forth in the final written settlement agreement, have been satisfied; and

·	The B&W Parties would retain all insurance rights and may pursue their insurers to collect any of the amounts paid in settlement.

A binding settlement remains subject to the negotiation and execution of a final settlement agreement and the satisfaction of all conditions precedent. B&W PGG previously has negotiated prior settlement arrangements with the Apollo/Parks Township Releasors that have not been consummated. The proposed settlement is within amounts provided for in Other Liabilities at September 30, 2008.

At the time of ARCO’s sale of Numec to B&W PGG, B&W PGG received an indemnity and hold harmless agreement from ARCO from claims or liabilities arising as a result of pre-closing Numec or ARCO actions. In December 2007, B&W PGG filed an action against ARCO for breach of contract and seeking a declaratory judgment that ARCO is obligated to indemnify B&W PGG under the indemnity agreement between the two parties against any losses that B&W PGG may incur arising out of the nuclear fuel processing facilities at issue in the Hall Litigation (the “Indemnity Action”). The Indemnity Action is also pending in the United States District Court for the Western District of Pennsylvania.

In September 2008, B&W PGG and ARCO advised the District Court that they were pursuing a negotiated resolution of the Indemnity Action. The parties have negotiated the principle terms of a settlement that, if consummated, would resolve all claims between ARCO and B&W PGG with respect to the claims of the present Apollo/Parks Township Releasors. Specifically, the settlement contemplates, among other things, that

·	ARCO would assign to B&W PGG its rights to recover insurance proceeds/amounts arising out of the claims alleged in the Hall Litigation in the amount of not less than $17,500,000, which amount would increase if the total ARCO insurance proceeds recovered exceed $30 million;

·	ARCO would retain its rights to recover insurance proceeds/amounts arising out of the claims alleged in the Hall Litigation in the amount of not less than $12,500,000, which amount would increase if the total ARCO insurance proceeds recovered exceed $30 million; and

·	The parties would dismiss with prejudice and release all claims between B&W PGG and ARCO that arise out of the present claims of the Apollo/Parks Township Releasors; any other claims between ARCO and B&W PGG are preserved and are unaffected by the proposed agreement.

A binding settlement remains subject to the negotiation and execution of a final settlement agreement and the satisfaction of all conditions precedent.

For further information regarding the Hall Litigation and the Indemnity Action, see Note 11 to the consolidated financial statements included in Part II of our annual report on Form 10-K for the year ended December 31, 2007 and Note 3 to the condensed consolidated financial statements included in Part I of our quarterly reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008.

Table of Contents

Other Litigation and Settlements

In the matter of Iroquois Falls Power Corp. v. Jacobs Canada Inc., et al., the claims against the defendants have been concluded in favor of the defendants, subject to the appeal right of Iroquois Falls Power Corp. (“Iroquois”). Iroquois filed suit filed in June 2005 in the Superior Court of Justice, in Ontario, Canada seeking damages as a result of an alleged breach by one of our former subsidiaries in connection with the supply and installation of the heat recovery steam generator enclosure. McDermott Incorporated, which provided a guarantee to certain obligations of the former subsidiary, and two bonding companies with whom MII entered into an indemnity arrangement, were also named as defendants. In March 2007, the Superior Court granted summary judgment in favor of all defendants and dismissed all claims of Iroquois, which appealed the ruling. In April 2008, the Court of Appeals for Ontario upheld the summary judgment, but sent the case back to the Superior Court of Justice to allow Iroquois an opportunity to amend its complaint to assert new claims. On October 30, 2008, the Superior Court of Justice denied Iroquois’ request to amend its complaint and add new claims against the defendant. Iroquois has 30 days to appeal the Superior Court’s ruling.

On November 3, 2008, we executed a binding settlement agreement for our claims related to a project in India completed in the 1980s. The gross settlement totals approximately $45 million and we anticipate our expenses and related taxes associated with the settlement to be approximately 35% of the settlement. We received the cash proceeds on November 4, 2008 and will record the settlement in our statement of income in the three months ended December 31, 2008, which will conclude this matter in full.

For a detailed description of these and other pending legal proceedings, please refer to Note 11 to the consolidated financial statements included in Part II of our annual report on Form 10-K for the year ended December 31, 2007.

Additionally, due to the nature of our business, we are, from time to time, involved in routine litigation or subject to disputes or claims related to our business activities, including, among other things:

·	performance-related or warranty-related matters under our customer and supplier contracts and other business arrangements; and

·	workers’ compensation claims, Jones Act claims, premises liability claims and other claims.

In our management’s opinion, based upon our prior experience, none of these other routine litigation proceedings, disputes and claims are expected to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Other

Some of our contracts have milestone due dates that must be met or we may be subject to penalties for liquidated damages if claims are asserted and we are ultimately responsible for the delays. These penalties relate to specified activities within a project that must be completed by a set contractual date. The applicable contracts define the conditions under which our customers may make claims against us for liquidated damages. In most cases in which we have had potential exposure for liquidated damages, such damages ultimately were not asserted by our customers. We have not accrued for potential liquidated damages totaling approximately $110 million at September 30, 2008, all in our Offshore Oil and Gas Construction segment, that we could incur based upon completing certain projects as currently forecasted, as we do not believe that claims for these liquidated damages are probable of being assessed. The trigger dates for the majority of these liquidated damages presently occur in the fourth quarter of 2008. We are in active discussions with our customers on the issues giving rise to delays in these projects and we believe we will be successful in obtaining schedule extensions which will resolve the potential for liquidated damages being assessed. While we believe we will be successful in negotiations with our customers, it is possible we may not achieve schedule relief on some or all of the issues. For certain other projects, all in our Offshore Oil and Gas Construction segment, we have currently provided for approximately $25 million in liquidated damages in our estimates of revenues and gross profit, of which approximately $17 million has been recognized in our financial statements to date through percentage of completion accounting, as we believe, based on the individual facts and circumstances, they are probable.

We were advised in 2006 by the IRS of potential proposed unfavorable tax adjustments related to the 2001 through 2003 tax years. We reviewed the IRS positions and disagreed with certain proposed adjustments. Accordingly, we filed a protest with the IRS regarding the resolution of these issues, and the process has proceeded through an appeals hearing with an IRS appellate conferee. We have provided for any amounts that we believe will ultimately be payable for these proposed adjustments. In the three and nine months ended September 30, 2008, we recorded certain tax assets and benefits totaling approximately $45 million and $55 million, respectively, primarily from the release of state valuation allowances and as a result of audit activity.

In the three and nine months ended September 30, 2008, we recorded contract losses of approximately $90 million attributable to changes in our estimates on the expected costs to complete various projects, primarily in the Middle East region.

On October 28, 2008, one of our Canadian subsidiaries received a Warranty Notice on one of its projects on a contract executed in 1998. We responded to the Notice on November 3, 2008 disagreeing with the matters stated in the Notice and disputing the claim. See Note 11 to the consolidated financial statements included in Part II of our annual report on Form 10-K for the year ended December 31, 2007 for further information.

Table of Contents

NOTE 4 – STOCK-BASED COMPENSATION

Total stock-based compensation expense recognized for the three and nine months ended September 30, 2008 and 2007 was as follows:

	Compensation			Tax			Net
	Expense			Benefit			Impact
	(Unaudited)
	(In thousands)

	Three Months Ended September 30, 2008
Stock Options	$	14		$	(5	)	$	9
Restricted Stock		1,127			(305	)		822
Performance Shares		8,084			(2,578	)		5,506
Performance and Deferred Stock Units		(37	)		14			(23	)
Total	$	9,188		$	(2,874	)	$	6,314

	Three Months Ended September 30, 2007
Stock Options	$	660		$	(139	)	$	521
Restricted Stock		35			-			35
Performance Shares		6,448			(2,035	)		4,413
Performance and Deferred Stock Units		1,618			(520	)		1,098
Total	$	8,761		$	(2,694	)	$	6,067

	Nine Months Ended September 30, 2008
Stock Options	$	780		$	(239	)	$	541
Restricted Stock		3,343			(691	)		2,652
Performance Shares		26,429			(8,488	)		17,941
Performance and Deferred Stock Units		3,060			(1,006	)		2,054
Total	$	33,612		$	(10,424	)	$	23,188

	Nine Months Ended September 30, 2007
Stock Options	$	2,157		$	(584	)	$	1,573
Restricted Stock		869			(21	)		848
Performance Shares		13,497			(4,255	)		9,242
Performance and Deferred Stock Units		4,877			(1,563	)		3,314
Total	$	21,400		$	(6,423	)	$	14,977

Table of Contents

NOTE 5 – SEGMENT REPORTING

An analysis of our operations by segment is as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
	(Unaudited)
	(In thousands)

REVENUES:
Offshore Oil and Gas Construction	$	814,701		$	582,168		$	2,332,918		$	1,712,414
Government Operations		222,434			177,215			638,792			506,340
Power Generation Systems		630,955			567,173			1,945,324			1,896,178
Adjustments and Eliminations (1)		(3,239	)		(2,538	)		(9,111	)		(9,338	)
	$	1,664,851		$	1,324,018		$	4,907,923		$	4,105,594

(1) Segment revenues are net of the following intersegment
transfers and other adjustments:
Offshore Oil and Gas Construction Transfers	$	3,007		$	2,390		$	8,400		$	8,713
Government Operations Transfers		232			148			656			602
Power Generation Systems Transfers		-			-			55			23
	$	3,239		$	2,538		$	9,111		$	9,338

OPERATING INCOME:
Segment Operating Income (Loss) :
Offshore Oil and Gas Construction	$	(18,655	)	$	88,701		$	132,187		$	302,672
Government Operations		26,585			18,578			87,491			68,397
Power Generation Systems		78,998			42,340			249,498			157,766
	$	86,928		$	149,619		$	469,176		$	528,835

Gains (Losses) on Asset Disposals – Net:
Offshore Oil and Gas Construction	$	(110	)	$	524		$	1,732		$	668
Government Operations		-			14			-			1,631
Power Generation Systems		(25	)		92			9,593			81
	$	(135	)	$	630		$	11,325		$	2,380

Equity in Income (Loss) of Investees :
Offshore Oil and Gas Construction	$	(921	)	$	(1,082	)	$	(2,671	)	$	(2,938	)
Government Operations		7,966			6,615			27,513			19,607
Power Generation Systems		5,476			6,944			7,601			10,357
	$	12,521		$	12,477		$	32,443		$	27,026

Segment Income (Loss) :
Offshore Oil and Gas Construction	$	(19,686	)	$	88,143		$	131,248		$	300,402
Government Operations		34,551			25,207			115,004			89,635
Power Generation Systems		84,449			49,376			266,692			168,204
		99,314			162,726			512,944			558,241
Corporate		(7,341	)		(7,576	)		(32,735	)		(28,821	)
Total Operating Income	$	91,973		$	155,150		$	480,209		$	529,420

Table of Contents

NOTE 6 – EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per share:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2008		2007		2008		2007
	(Unaudited)
	(In thousands, except per share amounts)

Basic:

Net income for basic computation	$	85,571	$	140,408	$	386,300	$	447,843

Weighted average common shares		227,441		224,481		226,645		222,945

Basic earnings per common share	$	0.38	$	0.63	$	1.70	$	2.01

Diluted:

Net income for diluted computation	$	85,571	$	140,408	$	386,300	$	447,843

Weighted average common shares (basic)		227,441		224,481		226,645		222,945
Effect of dilutive securities:
Stock options, restricted stock and performance shares		3,023		4,385		3,683		5,458
Adjusted weighted average common shares and assumed exercises of stock options and vesting of stock awards		230,464		228,866		230,328		228,403

Diluted earnings per common share	$	0.37	$	0.61	$	1.68	$	1.96

NOTE 7 – BUSINESS ACQUISITIONS

Acquisition of the Intech Group of Companies

On July 15, 2008, certain B&W subsidiaries completed their acquisition of the Intech group of companies (“Intech”) for approximately $21 million. Intech consists of Intech, Inc., Ivey-Cooper Services, L.L.C. and Intech International Inc. Intech, Inc. provides nuclear inspection and maintenance services, primarily for the U.S. market. Ivey-Cooper Services, L.L.C. provides non-destructive inspection services to fossil-fueled power plants, as well as chemical, pulp and paper, and heavy fabrication facilities. Intech International Inc. provides non-destructive testing, field engineering and repair and specialized tooling services, primarily for the Canadian nuclear power generation industry. In connection with the acquisition of Intech, we recorded goodwill of approximately $7.9 million. We also recorded other intangible assets of approximately $10.0 million. Those intangible assets consist of the following (amounts in thousands):

			Amortization
	Amount		Period
Unpatented Technology	$	5,600	10 years
Customer Relationship	$	2,600	10 years
Trade Name	$	1,800	10 years

Acquisition of Delta Power Services, LLC

On August 1, 2008, a B&W subsidiary completed its acquisition of Delta Power Services, LLC (“DPS”) for approximately $13 million. DPS is a provider of operation and maintenance services for the U.S. power generation industry. Headquartered in Houston, Texas, DPS has approximately 200 employees at nine gas, biomass or coal-fired power plants in Virginia, California, Texas, Florida, Michigan and Massachusetts. In connection with the acquisition of DPS, we recorded goodwill of approximately $3.7 million. We also recorded other intangible assets of approximately $9.3 million, which have a weighted-average amortization period of 19.0 years. Those intangible assets consist of the following (amounts in thousands):

			Amortization
	Amount		Period
Customer Relationship	$	8,760	1.4-20 years
Trade Name	$	250	25 years
Non-Compete Agreement	$	240	3 years

Definitive Agreement to Acquire Nuclear Fuel Services, Inc.

On August 8, 2008, B&W’s subsidiary entered into a definitive agreement to acquire Nuclear Fuel Services, Inc. (“NFS”), contingent upon obtaining regulatory approvals and satisfying other closing conditions. NFS is a provider of specialty nuclear fuels and related services and is a leader in the conversion of Cold War-era government stockpiles of highly enriched uranium into commercial nuclear reactor fuel. NFS also owns and operates a nuclear fuel fabrication facility licensed by the U.S. Nuclear Regulatory Commission in Erwin, Tennessee and has approximately 700 employees. The acquisition is expected to be completed by the end of 2008.

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included under Item 1 and the audited consolidated financial statements and the notes thereto and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2007.

In this quarterly report on Form 10-Q, unless the context otherwise indicates, “we,” “us” and “our” mean MII and its consolidated subsidiaries.

We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords.

From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.

In addition, various statements in this quarterly report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:

·	general economic and business conditions and industry trends;

·	general developments in the industries in which we are involved;

·	decisions about offshore developments to be made by oil and gas companies;

·	decisions on spending by the U.S. Government and electric power generating companies;

·	the highly competitive nature of most of our businesses;

·	cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings;

·	the ability of our suppliers to deliver raw materials in sufficient quantities and in a timely manner;

·	our ability to comply with covenants in our credit agreements and other debt instruments and availability, terms and deployment of capital;

·	the continued availability of qualified personnel;

·	the operating risks normally incident to our lines of business, including the potential impact of liquidated damages;

·	changes in, or our failure or inability to comply with, government regulations;

·	adverse outcomes from legal and regulatory proceedings;

·	impact of potential regional, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future;

·	changes in, and liabilities relating to, existing or future environmental regulatory matters;

·	rapid technological changes;

·	the realization of deferred tax assets, including through a reorganization we completed in December 2006;

·	the consequences of significant changes in interest rates and currency exchange rates;

·	difficulties we may encounter in obtaining regulatory or other necessary approvals of any strategic transactions;

·	the risks of successfully integrating our acquisitions;

·	social, political and economic situations in foreign countries where we do business, including countries in the Middle East and Asia Pacific and the former Soviet Union;

·	the possibilities of war, other armed conflicts or terrorist attacks;

·	our ability to obtain surety bonds, letters of credit and financing;

·	our ability to maintain builder’s risk, liability, property and other insurance in amounts and on terms we consider adequate and at rates that we consider economical;

·	the aggregated risks retained in our insurance captives; and

·	the impact of the loss of certain insurance rights as part of the Chapter 11 Bankruptcy settlement.

We believe the items we have outlined above are important factors that could cause estimates in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2007. These factors are not

necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

Table of Contents

GENERAL

In general, our business segments are composed of capital-intensive businesses that rely on large contracts for a substantial amount of their revenues. Each of our business segments is currently financed on a stand-alone basis. Our debt covenants limit using the financial resources of or the movement of excess cash from one segment for the benefit of the other. For further discussion, see “Liquidity and Capital Resources” below.

As of September 30, 2008, in accordance with the percentage-of-completion method of accounting, we have provided for our estimated costs to complete all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. The risk on fixed-priced contracts is that revenue from the customer does not rise to cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, pipeline lay rates or steel and other raw material prices. In some instances, we guarantee completion dates related to our projects. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated results of operations, financial condition and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated results of operations, financial condition and cash flows.

Some of our contracts have milestone due dates that must be met or we may be subject to penalties for liquidated damages if claims are asserted and we are ultimately responsible for the delays. These penalties relate to specified activities within a project that must be completed by a set contractual date. The applicable contracts define the conditions under which our customers may make claims against us for liquidated damages. In most cases in which we have had potential exposure for liquidated damages, such damages ultimately were not asserted by our customers. We have not accrued for potential liquidated damages totaling approximately $110 million at September 30, 2008, all in our Offshore Oil and Gas Construction segment, that we could incur based upon completing certain projects as currently forecasted, as we do not believe that claims for these liquidated damages are probable of being a ssessed. The trigger dates for the majority of these liquidated damages presently occur in the fourth quarter of 2008. We are in active discussions with our customers on the issues giving rise to delays in these projects and we believe we will be successful in obtaining schedule extensions which will resolve the potential for liquidated damages being assessed. While we believe we will be successful in negotiations with our customers, it is possible we may not achieve schedule relief on some or all of the issues. For certain other projects, all in our Offshore Oil and Gas Construction segment, we have currently provided for approximately $25 million in liquidated damages in our estimates of revenues and gross profit, of which approximately $17 million has been recognized in our financial statements to date through percentage of completion accounting, as we believe, based on the individual facts and circumstances, they are probable.

Due to the extreme volatility and substantial decline experienced in the stock market in 2008, the assets of our major domestic qualified pension plans have experienced a loss of approximately 12% for the nine months ended September 30, 2008. Should this trend continue through December 31, 2008, we expect to record a significant reduction in stockholders’ equity in other comprehensive income at December 31, 2008. In addition, we would expect to record greater pension expense in 2009 as compared to 2008.

Offshore Oil and Gas Construction Segment

The demand for our Offshore Oil and Gas Construction segment’s products and services depends primarily on the capital expenditures of the world’s major oil and gas producing companies and national oil companies of foreign governments for construction of development projects in the regions in which we operate. In recent years, the worldwide demand for energy, along with high prices for oil and gas, has led to strong levels of capital expenditures by the major oil and gas producing companies and national oil companies of foreign governments.

The decision-making process for major oil and gas producing companies and national oil companies of foreign governments in making capital expenditures on offshore construction services for a development project differs depending on whether the project involves new or existing development. In the case of new development projects, the demand for offshore construction services generally follows the exploratory drilling and, in some cases, initial development drilling activities. Based on the results of these activities and evaluations of field economics, customers determine whether to install new platforms and new infrastructure, such as subsea gathering lines and pipelines. For existing development projects, demand for offshore construction services is generated by decisions to, among other things, expand development in existing fields and expand existing infrastructure.

Government Operations Segment

The revenues of our Government Operations segment are largely a function of defense spending by the U.S. Government. As a supplier of major nuclear components for certain U.S. Government programs, this segment is a significant participant in the defense industry. With its unique capability of full life-cycle management of special nuclear materials, facilities and technologies, our Government Operations segment is well positioned to continue to participate in the continuing cleanup, operation and management of the nuclear sites and weapons complexes maintained by the U.S. Department of Energy.

Power Generation Systems Segment

Our Power Generation Systems segment’s overall activity depends mainly on the capital expenditures of electric power generating companies and other steam-using industries. This segment’s products and services are capital intensive. As such, customer demand is heavily affected by the variations in each customer’s business cycles and by the overall economies of the countries in which it operates.

For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited condensed consolidated financial statements, see Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2007. There have been no material changes to these policies during the nine months ended September 30, 2008, except as disclosed in the notes to condensed consolidated financial statements included in this report.

Table of Contents

RESULTS OF OPERATIONS – THREE MONTHS ENDED SEPTEMBER 30, 2008 VS. THREE MONTHS ENDED SEPTEMBER 30, 2007

McDermott International, Inc. (Consolidated)

Revenues increased approximately 26%, or $340.9 million, to $1,664.9 million in the three months ended September 30, 2008 compared to $1,324.0 million for the corresponding period in 2007. Our Offshore Oil and Gas Construction segment generated a $232.5 million, or 40%, increase in its revenues during the third quarter of 2008 compared to the third quarter of 2007. This increase was primarily attributable to increased activities in our Asia Pacific and Middle East regions. Additionally, in the third quarter of 2008, as compared to the corresponding period in 2007, our Government Operations segment generated a $45.2 million, or 26%, increase in its revenues, and our Power Generation Systems segment generated a $63.8 million, or 11%, increase in its revenues.

Segment operating income decreased $62.7 million to $86.9 million in the three months ended September 30, 2008 from $149.6 million for the corresponding period in 2007. The segment operating income of our Offshore Oil and Gas Construction segment decreased $107.4 million primarily attributable to delays and associated cost increases related to projects primarily in the Middle East region. Our Government Operations and Power Generation Systems segments increased $8.0 million and $36.7 million, respectively, in the third quarter of 2008, as compared to the corresponding period in 2007.

For purpose of this discussion and the discussions that follow, segment operating income is before equity in income (loss) of investees and gains (losses) on asset disposals – net.

Offshore Oil and Gas Construction

Revenues increased 40%, or $232.5 million, to $814.7 million for three months ended September 30, 2008, compared to $582.2 million for the comparable period in 2007, primarily due to increased marine installation activities on engineer, procure, construct and install projects in our Asia Pacific region ($217.9 million) and increased fabrication and marine installation activities in our Middle East region ($122.8 million). These increases were partially offset by decreased activities in our Caspian region ($61.2 million). Revenues from all other activities decreased by approximately $47.0 million in the three months ended September 30, 2008 compared to the corresponding period in 2007.

Segment operating income decreased $107.4 million in the three months ended September 30, 2008 from income of $88.7 million for the three months ended September 30, 2007 to a loss of $18.7 million. This decrease was primarily attributable to recognition of approximately $90 million of contract losses in the three months ended September 30, 2008 on the expected costs to complete various projects, primarily in the Middle East region. These losses are attributable to revised cost estimates due to lower experienced and forecasted productivity, combined with an increase in downtime on our marine vessels and third-party costs, primarily on the Middle East pipeline installation projects. Because of these project delays we expect to experience scheduling issues and increased costs due to vessel mobilization in future periods. In addition we also experienced increased costs for fuel and labor in all areas and increased charter costs for support vessels in our marine operations. General and Administrative expenses increased $9.8 million for the three months ended September 30, 2008 as compared to the comparable period in 2007 primarily attributable to increased employee headcount necessary to support our operations. Also, hurricanes Ike and Gustav had a negative impact on our operating results for the three months ended September 30, 2008 totaling approximately $4.8 million attributable to reduced productivity and miscellaneous repairs.

Government Operations

Revenues increased approximately 26%, or $45.2 million, to $222.4 million in the three months ended September 30, 2008 compared to $177.2 million for the corresponding period in 2007, primarily attributable to higher volumes in the manufacture of nuclear components for certain U.S. Government programs ($24.6 million), including increased contract procurement activities. In addition, we experienced higher volumes in the manufacture of commercial nuclear components ($22.5 million).

Segment operating income increased $8.0 million to $26.6 million in the three months ended September 30, 2008 compared to $18.6 million for the corresponding period in 2007, primarily attributable to higher volumes in the manufacture of nuclear components for certain U.S. Government programs, including increased contract procurement. In addition we experienced higher volumes related to commercial nuclear components and a decrease in our pension plan expense. These improvements were partially offset by the end of a management and operating (“M&O”) contract at a government site and higher selling, general and administrative expenses, primarily due to increased proposal costs.

Table of Contents

Power Generation Systems

Revenues increased approximately 11%, or $63.8 million, to $631.0 million in the three months ended September 30, 2008 compared to $567.2 million for the corresponding period in 2007, primarily attributable to increased revenues from our fabrication, repair and retrofit of existing facilities ($27.9 million), nuclear service business ($18.0 million), and our boiler auxiliary equipment business ($12.4 million). These increases were partially offset by decreased revenues from our utility steam and system fabrication business ($5.7 million) and our replacement nuclear steam generator business ($5.1 million).

Segment operating income increased $36.7 million to $79.0 million in the three months ended September 30, 2008 compared to $42.3 million for the corresponding period in 2007, primarily attributable to improved margins in our utility steam and system fabrication business, increased volume and margins in our fabrication, repair and retrofit of existing facilities, increased volume in our nuclear service, boiler auxiliary, and replacement parts businesses, lower pension plan expense and contract improvements. Partially offsetting these improvements were lower volume and margins in our replacement nuclear steam generator business and higher selling general and administrative expenses, including higher stock-based compensation expense.

Corporate

Unallocated Corporate expenses decreased approximately $0.3 million to $7.3 million in the three months ended September 30, 2008, as compared to $7.6 million for the corresponding period in 2007, primarily attributable to improved results from our captive insurers. These improvements were partially offset by increased retirement expenses, increased labor expenses attributable to higher headcount and higher expenses associated with our development of a global human resources management system.

Other Income Statement Items

Interest income decreased $10.3 million to $7.0 million in the three months ended September 30, 2008, primarily due to a decrease in average cash equivalents and investments and prevailing interest rates.

Interest expense decreased $1.6 million to $1.8 million in the three months ended September 30, 2008, primarily due to lower amortization of debt issuance costs on our credit facilities.

Other income (expense) – net improved by $2.9 million to income of $2.7 million in the three months ended September 30, 2008 from expense of $0.2 million for the corresponding period in 2007, primarily due to higher currency exchange gains.

Provision for Income Taxes

We are subject to U.S. federal income tax at a rate of 35% on our U.S. operations, plus the applicable state income taxes on our profitable U.S. subsidiaries. Our non-U.S. earnings are subject to tax at various tax rates and different tax regimes, such as a deemed profits tax regime. These variances, along with variances in our mix of income from these jurisdictions, contribute to shifts in our effective tax rate.

In the three months ended September 30, 2008, the provision for income taxes decreased $14.1 million to $14.3 million, and income before provision for income taxes decreased $68.9 million to $99.8 million. Our effective tax rate for the three months ended September 30, 2008 was approximately 14.3%, as compared to 16.8% for the corresponding period in 2007. The decrease in our effective tax rate was primarily attributable to certain tax assets and benefits totaling approximately $45 million which we recognized in the three months ended September 30, 2008 from the release of state valuation allowances and as a result of audit activity. These tax benefits were partially offset by a higher mix of U.S. versus non-U.S. income and an unfavorable mix within our non-U.S. operations, including losses in certain tax jurisdictions that were not tax benefited, resulting in a larger proportion of the total book income being taxed at higher rates in the third quarter of 2008 compared to the same period in 2007.

Income before provision for income taxes, provision for income taxes and effective tax rates for our U.S. and non-U.S. jurisdictions are as shown below:

	Income before Provision for Income Taxes				Provision for (Benefit from) Income Taxes					Effective Tax Rate
	For the three months ended September 30,
	2008		2007		2008			2007		2008			2007
	(In thousands)				(In thousands)

United States	$	99,139	$	66,333	$	(2,980	)	$	19,288		(3.01	%)		29.08	%
Non-United States		703		102,408		17,251			9,045		2453.91	%		8.83	%

Total	$	99,842	$	168,741	$	14,271		$	28,333		14.29	%		16.79	%

Table of Contents

RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2008 vs. NINE MONTHS ENDED SEPTEMBER 30, 2007

McDermott International, Inc. (Consolidated)

Revenues increased approximately 20%, or $802.3 million, to $4,907.9 million in the nine months ended September 30, 2008 compared to $4,105.6 million for the corresponding period in 2007. Our Offshore Oil and Gas Construction segment generated a $620.5 million, or 36%, increase in its revenues in the nine months ended September 30, 2008 compared to the same period in 2007, primarily attributable to increased activities in our Asia Pacific and Middle East regions. In addition, our Government Operations segment generated an $132.5 million, or 26%, increase in its revenues in the nine months ended September 30, 2008, as compared to the same period in 2007. Our Power Generation Systems segment also experienced an increase in revenues of approximately $49.1 million, or 3%, in the nine months ended September 30, 2008, as compared to the corresponding period in 2007.

Segment operating income decreased $59.6 million to $469.2 million in the nine months ended September 30, 2008 from $528.8 million for the corresponding period in 2007. Our Offshore Oil and Gas Construction segment experienced a decrease in segment operating income totaling $170.5 million in the nine months ended September 30, 2008 compared to the comparable period in 2007 primarily attributable to delays and associated cost increases related to projects primarily in the Middle East region. The segment operating income of our Government Operations and Power Generation Systems segments increased $19.1 million and $91.7 million, respectively, in the nine months ended September 30, 2008, as compared to the corresponding period in 2007. The segment operating income of our Power Generation Systems segment in the nine months ended September 30, 2007 included a high level of income related to settlements, change orders and contract close-outs.

Offshore Oil and Gas Construction

Revenues increased 36%, or $620.5 million, to $2,332.9 million in the nine months ended September 30, 2008 compared to $1,712.4 million in the corresponding period in 2007, primarily due to increased marine installation activities on engineer, procure, construct, and install projects in our Asia Pacific region ($416.5 million) and increased fabrication and marine installation activities in our Middle East region ($303.5 million). In addition, we experienced increased revenues related to the additional vessels we acquired in July 2007 from Secunda International Limited ($41.8 million) and increased revenues related to activity at our new fabrication yard in Altamira, Mexico ($23.4 million). These increases were partially offset by decreased activities in our Caspian region ($158.7 million). Revenues from other activities decreased by approximately $6.0 million in the nine months ended September 30, 2008 compared to the comparable period in 2007.

Segment operating income decreased $170.5 million to $132.2 million in the nine months ended September 30, 2008 from $302.7 million in the comparable period in 2007. This decrease was primarily attributable to recognition of approximately $90 million of contract losses in the nine months ended September 30, 2008 on the expected costs to complete various projects, primarily in the Middle East region. These losses are attributable to revised cost estimates due to lower experienced and forecasted productivity, combined with an increase in downtime on our marine vessels and third-party costs, primarily on the Middle East pipeline installation projects. Because of these project delays we expect to experience scheduling issues and increased costs due to vessel mobilization in future periods. In addition, we realized benefits from project close-outs, change orders and settlements totaling approximately $38 million for the nine months ended September 30, 2008 compared to approximately $86 million for the corresponding period in 2007. We also experienced increased costs for fuel and labor in all areas and increased charter costs for support vessels in our marine operations. General and Administrative expenses increased $35 million for the nine months ended September 30, 2008 compared to the comparable period in 2007 primarily attributable to increased employee headcount necessary to support our operations and higher stock based compensation. Also, hurricanes Ike and Gustav had a negative impact on our operating results for the nine months ended September 30, 2008 totaling approximately $4.8 million attributable to reduced productivity and miscellaneous repairs.

Gain (loss) on asset disposals and impairments – net increased $1.1 million in the nine months ended September 30, 2008 primarily attributable to the sale of cranes at our fabrication yard in Batam, Indonesia.

Government Operations

Revenues increased approximately 26%, or $132.5 million, to $638.8 million in the nine months ended September 30, 2008 compared to $506.3 million for the corresponding period in 2007, primarily attributable to higher volumes in the manufacture of nuclear components for certain U.S. Government programs ($65.8 million), including increased contract procurement activities and additional volume from Marine Mechanical Corporation, which we acquired in May 2007. Additionally, we experienced higher volumes in the manufacture of commercial nuclear components ($60.4 million) and higher volumes in M&O contracts. These increases were partially offset by decreased activities for governmental components contracts ($8.9), lower contract man-hour volumes in our commercial nuclear environmental services business and lower revenues from our terminated fuel cell development project.

Segment operating income increased $19.1 million to $87.5 million in the nine months ended September 30, 2008 compared to $68.4 million for the corresponding period in 2007, primarily attributable to higher volumes in the manufacture of nuclear components for certain U.S. Government programs, including increased contract procurement activities and additional volume from our acquisition of Marine Mechanical Corporation. In addition, we experienced higher volumes related to commercial nuclear components and a decrease in our pension plan expense. These improvements were partially offset by the completion in 2007 of a subcontract at a DOE site cleanup in Ohio and the end of an M&O contract at a government site .We also experienced higher selling, general and administrative expenses, primarily due to increased proposal costs.

Equity in income of investees increased $7.9 million to $27.5 million in the nine months ended September 30, 2008, primarily due to increased profitability from our joint ventures in Idaho, Tennessee and Louisiana.

Table of Contents

Power Generation Systems

Revenues increased approximately 3%, or $49.1 million, to $1,945.3 million in the nine months ended September 30, 2008 compared to $1,896.2 million for the corresponding period in 2007, primarily attributable to increased revenues from our fabrication, repair and retrofit of existing facilities ($74.6 million), nuclear service business ($44.9 million), boiler auxiliary equipment ($20.1 million), industrial boilers ($15.3 million), replacement parts ($12.5 million), and our replacement nuclear steam generator business ($5.4 million). These increases were partially offset by decreased revenues from our utility steam and system fabrication business ($137.7 million) due to approximately $243 million in revenues recognized for the five terminated TXU units in 2007.

Segment operating income increased $91.7 million to $249.5 million in the nine months ended September 30, 2008 compared to $157.8 million for the corresponding period in 2007, primarily attributable to improved margins in our utility steam and system fabrication business, increased volume and margins in our fabrication, repair and retrofit of existing facilities and replacement parts businesses, increased volume in our nuclear service business, contract improvements and lower pension plan expense. Partially offsetting these improvements were lower volume in our utility steam and system fabrication business, and lower margins in our industrial boilers, boiler auxiliary equipment, and our operations and maintenance businesses. In addition we experienced higher selling, general and administrative expenses including higher stock-based compensation expenses in 2008. The 2007 results for our utility steam system fabrication and industrial boiler projects business included particularly high levels of related settlements, change orders and contract close-outs.

Gains (losses) on asset disposals – net increased by $9.5 million for the nine months ended September 30, 2008 primarily attributable to the sale of our facility in Dumbarton, Scotland.

Equity in income of investees decreased $2.8 million to $7.6 million for the nine months ended September 30, 2008, primarily attributable to material cost increases at our joint venture in China.

Corporate

Unallocated corporate expenses increased approximately $3.9 million to $32.7 million in the nine months ended September 30, 2008, as compared to $28.8 million for the corresponding period in 2007, primarily attributable to increased stock-based compensation expense, increased labor expenses attributable to higher headcount, increased retirement expenses and higher expenses associated with our development of a global human resources management system. These increases were partially offset by improved results from our captive insurers.

Other Income Statement Items

Interest income decreased $15.9 million to $29.5 million in the nine months ended September 30, 2008, primarily due to a decrease in average cash equivalents and investments and prevailing interest rates.

Interest expense decreased $12.7 million to $5.7 million in the nine months ended September 30, 2008, primarily due to interest during the nine months ended September 30, 2007 on the B&W PGG term loan that was retired in April 2007 and lower amortization and costs on our credit facilities.

Other income (expense) – net improved by $5.6 million to income of $0.6 million in the nine months ended September 30, 2008 from expense of $5.0 million for the corresponding period in 2007, primarily due to currency exchange gains in the current period compared to currency exchange losses in 2007 as well as gains on the sale of securities in the current period.

Provision for Income Taxes

In the nine months ended September 30, 2008, the provision for income taxes increased $14.7 million to $118.2 million, and income before provision for income taxes decreased $46.8 million to $504.5 million. Our effective tax rate for the nine months ended September 30, 2008 was approximately 23.4%, as compared to 18.8% for the corresponding period in 2007. The increase in our effective tax rate was primarily attributable to a higher mix of U.S. versus non-U.S. income and an unfavorable mix within our non-U.S. operations, resulting in a larger proportion of the total book income being taxed at higher rates in the nine months ended September 30, 2008 compared to the same period in 2007. This increase was partially offset by certain tax assets and benefits totaling approximately $55 million which we recognized in the nine months ended September 30, 2008 associated primarily with the release of state valuation allowances and as a result of audit activity.

Table of Contents

Income before provision for income taxes, provision for income taxes and effective tax rates for our U.S. and non-U.S. jurisdictions are as shown below:

	Income before Provision for Income Taxes				Provision for Income Taxes				Effective Tax Rate
	For the nine months ended September 30,
	2008		2007		2008		2007		2008			2007
	(In thousands)				(In thousands)

United States	$	281,105	$	183,503	$	59,369	$	67,504		21.12	%		36.79	%
Non-United States		223,448		367,847		58,884		36,003		26.35	%		9.79	%

Total	$	504,553	$	551,350	$	118,253	$	103,507		23.44	%		18.77	%

Backlog

Backlog is not a measure recognized by generally accepted accounting principles. It is possible that our methodology for determining backlog may not be comparable to methods used by other companies. We generally include expected revenue in our backlog when we receive written confirmation from our customers. Backlog may not be indicative of future results.

	September 30,		December 31,
	2008		2007
	(Unaudited)
	(In millions)
Offshore Oil and Gas Construction	$	4,956	$	4,753
Government Operations		1,642		1,791
Power Generation Systems		2,834		3,276

Total Backlog	$	9,432	$	9,820

Of the September 30, 2008 backlog, we expect to recognize revenues as follows:

		Q4 2008	2009		Thereafter
	(Unaudited)
	(In approximate millions)
Offshore Oil and Gas Construction	$	850	$	2,500	$	1,600
Government Operations		150		600		800
Power Generation Systems		500		1,100		1,200

Total Backlog	$	1,500	$	4,200	$	3,600

At September 30, 2008 the Offshore Oil and Gas Construction backlog included approximately $1.3 billion related to contracts in or near loss positions, which are estimated to recognize future revenues with approximately one percent gross margins on average. Typical of our business, our estimates of gross profit may improve based on improved productivity, decreased downtime and the successful settlement of change orders and claims with our customers.

At September 30, 2008, Government Operations' backlog with the U. S. Government was $1.6 billion, which was substantially fully funded. Only $7.2 million had not been funded as of September 30, 2008.

At September 30, 2008, Power Generation Systems’ backlog with the U. S. Government was $23.9 million, all of which was fully funded.

Table of Contents

Liquidity and Capital Resources

Offshore Oil and Gas Construction

On June 6, 2006, one of our subsidiaries, J. Ray McDermott, S.A., entered into a senior secured credit facility with a syndicate of lenders (the “JRMSA Credit Facility”). The JRMSA Credit Facility now provides for borrowings and issuances of letters of credit in an aggregate amount of up to $800 million and matures on June 6, 2011. The proceeds of the JRMSA Credit Facility are available for working capital needs and other general corporate purposes of our Offshore Oil and Gas Construction segment.

JRMSA’s obligations under the JRMSA Credit Facility are unconditionally guaranteed by substantially all of our wholly owned subsidiaries comprising our Offshore Oil and Gas Construction segment and secured by liens on substantially all the assets of those subsidiaries (other than cash, cash equivalents, equipment and certain foreign assets), including their major marine vessels.

Other than customary mandatory prepayments on certain contingent events, the JRMSA Credit Facility requires only interest payments on a quarterly basis until maturity. JRMSA is permitted to prepay amounts outstanding under the JRMSA Credit Facility at any time without penalty.

The JRMSA Credit Facility contains customary financial covenants relating to leverage and interest coverage and includes covenants that restrict, among other things, debt incurrence, liens, investments, acquisitions, asset dispositions, dividends, prepayments of subordinated debt, mergers, transactions with affiliates and capital expenditures. At September 30, 2008, JRMSA was in compliance with all of the covenants set forth in the JRMSA Credit Facility.

At September 30, 2008, there were no borrowings outstanding and letters of credit issued under the JRMSA Credit Facility totaled $277.3 million. At September 30, 2008, there was $522.7 million available for borrowings or to meet letter of credit requirements under the JRMSA Credit Facility. If there had been borrowings under this facility, the applicable interest rate at September 30, 2008 would have been 5.43% per year. In addition, JRMSA and its subsidiaries had $289.2 million in outstanding unsecured letters of credit under separate arrangements with financial institutions at September 30, 2008.

In December 2005, JRMSA, as guarantor, and its subsidiary, J. Ray McDermott Middle East, Inc. (“JRM Middle East”), entered into a $105.2 million unsecured performance guarantee issuance facility with a syndicate of commercial banking institutions to provide credit support for bank guarantees issued in connection with three major projects. On February 3, 2008, JRM Middle East entered into a new $88.8 million unsecured performance guarantee issuance facility to replace the $105.2 million facility, which it terminated on February 14, 2008. The outstanding amount under the new facility is included in the $289.2 million of outstanding letters of credit referenced above. This new facility continues to provide credit support for bank guarantees for the duration of the three projects. On an annualized basis, the average commission rate of the new facility is less than 1.5%, compared to less than 4.5% for the former facility. JRMSA is also a guarantor of the new facility.

Based on the liquidity position of our Offshore Oil and Gas Construction segment, we believe this segment has sufficient cash and letter of credit and borrowing capacity to fund its operating requirements for at least the next 12 months.

Government Operations

On December 9, 2003, one of our subsidiaries, BWX Technologies, Inc. (“BWXT”), entered into a senior unsecured credit facility with a syndicate of lenders (the “BWXT Credit Facility”), which is currently scheduled to mature March 18, 2010. This facility provides for borrowings and issuances of letters of credit in an aggregate amount of up to $135 million. The proceeds of the BWXT Credit Facility are available for working capital needs and other general corporate purposes of our Government Operations segment.

The BWXT Credit Facility contains customary financial and nonfinancial covenants and reporting requirements. The financial covenants require maintenance of a maximum leverage ratio, a minimum fixed charge coverage ratio and a maximum debt to capitalization ratio within our Government Operations segment.

At September 30, 2008, BWXT was in compliance with all of the covenants set forth in the BWXT Credit Facility.

The BWXT Credit Facility only requires interest payments on a quarterly basis until maturity. Amounts outstanding under the BWXT Credit Facility may be prepaid at any time without penalty.

At September 30, 2008, there were no borrowings outstanding and letters of credit issued under the BWXT Credit Facility totaled $42.7 million. At September 30, 2008, there was $92.3 million available for borrowings or to meet letter of credit requirements under the BWXT Credit Facility. If there had been borrowings under this facility, the applicable interest rate at September 30, 2008 would have been 5.18 % per year.

Based on the liquidity position of our Government Operations segment, we believe this segment has sufficient cash and letter of credit and borrowing capacity to fund its operating requirements for at least the next 12 months.

Table of Contents

Power Generation Systems

On February 22, 2006, one of our subsidiaries, Babcock & Wilcox Power Generation Group, Inc., entered into a senior secured credit facility with a syndicate of lenders (the “B&W PGG Credit Facility”). This facility provides for borrowings and issuances of letters of credit in an aggregate amount of up to $400 million. The proceeds of the B&W PGG Credit Facility are available for working capital needs and other similar corporate purposes of our Power Generation Systems segment.

B&W PGG’s obligations under the B&W PGG Credit Facility are unconditionally guaranteed by all of our domestic subsidiaries included in our Power Generation Systems segment and secured by liens on substantially all the assets of those subsidiaries, excluding cash and cash equivalents.

The B&W PGG Credit Facility only requires interest payments on a quarterly basis until maturity. Amounts outstanding under the B&W PGG Credit Facility may be prepaid at any time without penalty.

The B&W PGG Credit Facility contains customary financial covenants, including maintenance of a maximum leverage ratio and a minimum interest coverage ratio within our Power Generation Systems segment and covenants that, among other things, restrict the ability of this segment to incur debt, create liens, make investments and acquisitions, sell assets, pay dividends, prepay subordinated debt, merge with other entities, engage in transactions with affiliates and make capital expenditures. At September 30, 2008, B&W PGG was in compliance with all of the covenants set forth in the B&W PGG Credit Facility.

As of September 30, 2008, there were no outstanding borrowings and letters of credit issued under the B&W PGG Credit Facility totaled $199 million. At September 30, 2008, there was $201 million available for borrowings or to meet letter of credit requirements under the B&W PGG Credit Facility. If there had been borrowings under this facility, the applicable interest rate at September 30, 2008 would have been 4.93% per year.

Based on the liquidity position of our Power Generation Systems segment, we believe this segment has sufficient cash and letter of credit and borrowing capacity to fund its operating requirements for at least the next 12 months.

Other

In aggregate, our cash and cash equivalents, restricted cash and cash equivalents and investments decreased by approximately $ 320.6 million to $ 1,207.7 million at September 30, 2008 from $1,528.3 million at December 31, 2007, primarily due to (1) cash used in operations, resulting from net contracts in progress and advance billings and pension liabilities and (2) purchases of property, plant and equipment.

Our working capital, excluding cash and cash equivalents and restricted cash and cash equivalents, increased by approximately $389.7 million to a negative $615.5 million at September 30, 2008 from a negative $1,005.2 million at December 31, 2007, primarily due to the increase in the net amount of contracts in progress and advance billings.

Our net cash used in operations was approximately $107.1 million in the nine months ended September 30, 2008, compared to net cash provided by operations of approximately $959.3 million in corresponding period of 2007. This decrease was primarily attributable to changes in net contracts in progress and advance billings and a federal tax refund in April 2007 of $274 million reflected in the change in income taxes receivable.

Our net cash used in investing activities decreased by approximately $323.7 million to approximately $287.8 million in the nine months ended September 30, 2008 from approximately $611.5 million in the corresponding period for 2007. This decrease in net cash used in investing activities was primarily attributable to a greater use of cash in 2007 relating to acquisitions.

Our net cash provided by (used in) financing activities changed by approximately $230.3 million to net cash provided by financing activities of $11.1 million in the nine months ended September 30, 2008 from net cash used in financing activities of $219.2 million in the corresponding period of 2007, primarily due to the repayment of $250 million in borrowings under the B&W PGG Credit Facility in April 2007.

At September 30, 2008, we had restricted cash and cash equivalents totaling $ 68. 5 million, $67.2 of which is held in restricted foreign accounts. and $1.3 million is required to meet reinsurance reserve requirements of our captive insurance companies.

At September 30, 2008, we had investments with a fair value of $524.9 million. Our investment portfolio consists primarily of investments in government obligations and other highly liquid money market instruments. As of September 30, 2008, we had pledged approximately $30.6 million fair value of these investments in connection with certain reinsurance agreements.

Our investments are classified as available for sale and are carried at fair value with unrealized gains and losses, net of tax, reported as a component of other comprehensive loss. Our net unrealized gain (loss) on investments is currently in an unrealized loss position totaling approximately $8.1 million at September 30, 2008. At December 31, 2007 we had unrealized gains on our investments totaling approximately $1.0 million. The major components of our investments in an unrealized loss position are corporate bonds, asset-backed obligations, and commercial paper. Based on our analysis of these investments, we believe that none of our available for sale securities are permanently impaired at September 30, 2008.

See Note 1 to our unaudited condensed consolidated financial statements included in this report for information on new accounting standards.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposures to market risks have not changed materially from those disclosed in Item 7A included in Part II of our annual report on Form 10-K for the year ended December 31, 2007.

Table of Contents

Item 4. Controls and Procedures

As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures were developed through a process in which our management applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. You should note that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on the evaluation referred to above, our Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of September 30, 2008 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management as appropriate to allow timely decisions +regarding disclosure. There has been no change in our internal control over financial reporting during the quarter ended September 30, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

For information regarding ongoing investigations and litigation, see Note 3 to our unaudited condensed consolidated financial statements in Part I of this report, which we incorporate by reference into this Item.

Item 1A. Risk Factors

The volatility and uncertainty of the credit markets may negatively impact us

We intend to finance our existing operations and initiatives with cash and cash equivalents, investments, cash flows from operations, and potential borrowings on our credit facilities. If adverse national and international economic conditions continue or deteriorate further, it is possible that we may not be able to fully draw upon our existing credit facilities and we may not be able to obtain financing at favorable terms. In addition, while we believe our current liquidity is adequate, continued deterioration in the credit markets could adversely affect the ability of our non-U.S. Government customers to pay us on time and the ability of our suppliers to meet our needs on a competitive basis.

Item 5. Other Information

(a) On November 3, 2008, the Compensation Committee of our Board of Directors approved an amended form of Change-In-Control agreement for use with the following officers: John A. Fees, Michael S. Taff, Brandon C. Bethards, Robert A. Deason, Liane K. Hinrichs, Preston Johnson, Jr., and John T. Nesser III. Under these agreements generally, we would pay the officer a cash severance payment of two times the officer's annual base salary and bonus, a prorated bonus payment and, if applicable, a tax gross-up payment, if the officer is terminated for specified reasons within one year following a change in control. The form of agreement was amended to (1) provide an additional payment of two times the annual cost of medical, dental and vision benefits and (2) conform the definition of “change in control” within the agreement to the definition used in our 2001 Directors and Officers Long-Term Incentive Plan. Additionally, the Compensation Committee amended the form agreement for Mr. Fees to provide for a cash severance payment of 2.99 times the officer's salary and bonus, in addition to the other payments.

On November 4, 2008, our Board of Directors reviewed the annual base salary of our Chief Executive Officer, John A. Fees, and approved an increase in his salary, effective January 1, 2009, from $750,000 to $900,000. Finally, on the same date, our Board of Directors approved an amended and restated Supplemental Executive Retirement Plan (the “SERP”) that was amended to (1) comply with the requirements of Section 409(A) of the Internal Revenue Code of 1986, as amended, and (2) conform the definition of “change in control” within the plan to the definition used in our 2001 Directors and Officers Long-Term Incentive Plan.

Table of Contents

Item 6. Exhibits

Exhibit 3.1 - McDermott International, Inc.'s Amended and Restated Articles of Incorporation.

Exhibit 3.2* - McDermott International, Inc.’s Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to McDermott International, Inc.'s Current Report on Form 8-K dated May 3, 2006 (File No. 1-08430)).

Exhibit 3.3* - Amended and Restated Certificate of Designation of Series D Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 1-08430)).

Exhibit 10.1* - Separation Agreement dated as of September 30, 2008 by and between McDermott Incorporated and Bruce W. Wilkinson (incorporated by reference to Exhibit 10.1 to McDermott International, Inc.’s Current Report on Form 8-K dated September 30, 2008 (File No. 1-08430)).

Exhibit 10.2* - Consultancy Agreement dated as of October 1, 2008 by and between McDermott Incorporated and Bruce W. Wilkinson (incorporated by reference to Exhibit 10.2 to McDermott International, Inc.’s Current Report on Form 8-K dated September 30, 2008 (File No. 1-08430)).

Exhibit 10.3 – Form of Change-In-Control Agreement to be entered into between McDermott International, Inc. and John A. Fees.

Exhibit 10.4 – Form of Change-In-Control Agreement to be entered into between McDermott International, Inc. and several of its executive officers.

Exhibit 10.5 – McDermott International, Inc. Amended and Restated Supplemental Executive Retirement Plan.

Exhibit 31.1 - Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.

Exhibit 31.2 - Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.

Exhibit 32.1 - Section 1350 certification of Chief Executive Officer.

Exhibit 32.2 - Section 1350 certification of Chief Financial Officer.

* Incorporated by reference to the filing indicated.

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

		McDERMOTT INTERNATIONAL, INC.


		/s/ Michael S. Taff

	By:	Michael S. Taff
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer and Duly Authorized
		Representative)


		/s/ Dennis S. Baldwin

	By:	Dennis S. Baldwin
		Vice President and Chief Accounting Officer
		(Principal Accounting Officer and Duly Authorized
		Representative)

November 5, 2008

EXHIBIT INDEX

Exhibit

Number

Description

3.1	McDermott International, Inc.'s Amended and Restated Articles of Incorporation.

3.2*	McDermott International, Inc.’s Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to McDermott International, Inc.'s Current Report on Form 8-K dated May 3, 2006 (File No. 1-08430)).

3.3*	Amended and Restated Certificate of Designation of Series D Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 1-08430)).

10.1*	Separation Agreement dated as of September 30, 2008 by and between McDermott incorporated and Bruce W. Wilkinson (incorporated by reference to Exhibit 10.1 to McDermott International, Inc.’s Current Report on Form 8-K dated September 20, 2008 (File No. 1-08430)).

10.2*	Consultancy Agreement dated as of October 1, 2008 by and between McDermott Incorporated and Bruce W. Wilkinson (incorporated by reference to Exhibit 10.2 to McDermott International, Inc.’s Current report on Form 8-K dated September 30, 2008 (File No. 1-08430)).

10.3	Form of Change-In-Control Agreement to be entered into between McDermott International, Inc. and John A. Fees.

10.4	Form of Change-In-Control Agreement to be entered into between McDermott International, Inc. and several of its executive officers.

10.5	McDermott International, Inc. Amended and restated Supplemental Executive Retirement Plan.

31.1	Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.

31.2	Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.

32.1	Section 1350 certification of Chief Executive Officer.

32.2	Section 1350 certification of Chief Financial Officer.

* Incorporated by reference to the filing indicated.

I, John A. Fees, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of McDermott International, Inc. for the quarterly period ended September 30, 2008;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Chief Executive Officer

I, Michael S. Taff, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of McDermott International, Inc. for the quarterly period ended September 30, 2008;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

c.	evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a.	all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Chief Financial Officer

MCDERMOTT INTERNATIONAL, INC.

Certification Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, John A. Fees, Chief Executive Officer of McDermott International, Inc., a Panamanian corporation (the “Company”), hereby certify, to my knowledge, that:

(1)

the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 5, 2008	/s/ John A. Fees
	John A. Fees
	Chief Executive Officer

MCDERMOTT INTERNATIONAL, INC

Certification Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Michael S. Taff, Senior Vice President and Chief Financial Officer of McDermott International, Inc., a Panamanian corporation (the “Company”), hereby certify, to my knowledge, that:

(1)

(2)

information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 5, 2008	/s/ Michael S. Taff
	Michael S. Taff
	Senior Vice President and Chief Financial Officer

AMENDED AND RESTATED

ARTICLES OF INCORPORATION

McDERMOTT INTERNATIONAL, INC.

(as amended to May 9, 2008)

1. The name of the Corporation is: McDERMOTT INTERNATIONAL, INC.

2. The nature of the business which the Corporation may initiate, transact, promote and carry on both within and outside the Republic of Panama and in any part of the world without restriction or limitation is as follows:

To engage in and carry on a general contracting, building, construction and engineering business, and to excavate, dredge, grade, pave and construct, build, erect, repair, wreck, remodel, and equip in whole or in part, drilling rigs, highways, roads, streets, sidewalks, platforms, bridges, viaducts, approaches, pavements, dams, locks, sewers, tunnels, subways, canals, levees, aqueducts, channels, and other waterways, foundations, piers, caissons, vaults, wharves, marine ways and docks, ditches, conduits, reservoirs, railways, pipelines and other systems of transportation; systems of water works; buildings of every description; public and private works of all kinds; electric, hydraulic, power and gas plants, telephone, telegraph, and lighting systems, factories and all structures built in whole or in part of wood, stone, brick, cement, iron, steel, or combinations thereof, and incidentally thereto to buy, sell, and otherwise deal in royalty interests in petroleum and other mineral or sub-oil rights and/or other interest in lands and/or the products thereof. To drill, exploit, mine and otherwise explore land for petroleum, rock or carbon oil, natural gas and other minerals and mineral products or by-products.

To manufacture, purchase or otherwise acquire, own, mortgage, pledge, sell, assign and transfer, or otherwise dispose of, to invest, trade, deal in and deal with goods, wares and merchandise and personal property of every class and description.

To acquire, and pay for in cash, stock or bonds of the Corporation or otherwise, the good will, rights, assets and property, and to undertake or assume the whole or any part of the obligations or liabilities of any person, firm, association or corporation.

To acquire, hold, use, sell, assign, lease, grant licenses in respect of, mortgage or otherwise dispose of letters patent of the Republic of Panama or any foreign country, patent rights, licenses and privileges, inventions, improvements and processes, copyrights, trade-marks and trade names, relating to or useful in connection with any business of the Corporation.

To guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of shares of the capital stock of, or any bonds, securities or evidences of indebtedness created by any other corporation or corporations organized under the laws of the Republic of Panama or any other country, nation or government, and while the owner thereof to exercise all the rights, powers and privileges or ownership, including the right to vote thereon.

To enter into, make and perform contracts of every kind and description with any person, firm, association, corporation, municipality, county, state, body politic or government or colony or dependency thereof.

To borrow or raise moneys for any of the purposes of the Corporation and, from time to time, without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment of any thereof and of the interest thereon by mortgage upon or pledge, conveyance or assignment in trust of the whole or any part of the property of the Corporation, whether at the time owned or thereafter acquired and to sell, pledge or otherwise dispose of such bonds or other obligations of the Corporation for its corporate purposes.

To buy, sell or otherwise deal in notes, open accounts, and other similar evidences of debt, or to loan money and take notes, open accounts, and other similar evidences of debt as collateral security therefore.

To purchase, hold, sell and transfer the shares of its own capital stock; provided it shall not use its funds or property for the purchase of its own shares of capital stock when such use would cause any impairment of its capital except as otherwise permitted by law, and provided further that shares of its own capital stock belonging to it shall not be voted upon directly or indirectly.

To have one or more offices, to carry on all or any of its operations and business and without restriction or limit as to amount to purchase or otherwise acquire, hold, own, mortgage, sell, convey, or otherwise dispose of real and personal property of every class and description in the Republic of Panama and in any and all foreign countries.

In general, to carry on any other business in connection with the foregoing, and to have and exercise all the powers conferred by the laws of Panama upon corporations formed under the act hereinafter referred to, and to do any or all of the things hereinbefore set forth to the same extent as natural persons might or could do.

The objects and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in these Articles of Incorporation, but the objects and purposes specified in each of the foregoing clauses of this Article 2 shall be regarded as independent objects and purposes; the Corporation shall have all the powers authorized in Article 19 of Law 32 of 1927 of the Republic of Panama as well as any other powers which may be granted to the Corporation by any other Articles of the aforesaid Law and any other Laws in force.

3. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is Four-hundred-twenty-five-million (425,000,000) shares, of which Four-hundred-million (400,000,000) shares shall be Common Stock of the par value of ONE DOLLAR ($1.00 U.S. Cy.) per share and twenty-five-million (25,000,000) shares shall be Preferred Stock of the par value of ONE DOLLAR ($1.00 U.S. Cy.) per share.

PART A. Provisions Relating to Preferred Stock.

(1) The Preferred Stock may be issued from time to time in one or more series, each of such series to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as are stated and expressed herein and in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors as hereinafter provided.

(2) Authority is hereby expressly granted to the Board of Directors, subject to the provisions of this Part A, to authorize the issue of one or more series of Preferred Stock and with respect to each series to fix by resolution or resolutions providing for the issue of such series;

(a) The number of shares to constitute such series and the distinctive designation thereof, provided that unless stated in any resolution or resolutions relating to such series, such number of shares may be increased or decreased by the Board of Directors in connection with any classification or reclassification of unissued shares of Preferred Stock;

(b) The annual dividend rate on the shares of such series and the date or dates from which dividends shall accumulate as herein provided;

(c) Whether the holders of such series are or are not entitled to participate in earnings of the Corporation through dividends in excess of (or in lieu of) dividends at an annual rate and the terms of any such right to participate.

(d) Whether or not the shares of such series shall be subject to redemption, the limitations and restrictions with respect to such redemption, if any, and the times of redemption of the shares of such series and the amounts (or method of calculating such amounts) which the holders of such series shall be entitled to receive upon the redemption thereof, which amounts (or method of calculating such amounts) may vary at different redemption dates and may also, with respect to shares redeemed through the operation of any retirement or sinking fund be different from the amounts (or method of calculating such amounts) with respect to shares otherwise redeemed;

(e) The amount (or method of calculating the amount) which the holders of such series shall be entitled to receive upon the voluntary or involuntary liquidation, dissolution or winding up of the Corporation;

(f) Whether or not the shares of such series shall be subject to the operation of a retirement or sinking fund, and, if so, the extent to and manner in which it shall be applied to the purchase or redemption of the shares of such series for retirement or to other corporate purposes and the terms and provisions relative to the operation thereof;

(g) Whether or not the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or classes, or of any other series of the same class, and if so convertible or exchangeable, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and the other terms and conditions of such conversion or exchange;

(h) The voting rights, if any, of holders of shares of such series in addition to the voting rights provided for in this Part A and by applicable law;

(i) The limitations and restrictions, if any, in addition to those provided in paragraph (11) (a) hereof, to be effective while any shares of such series are outstanding upon the payment of dividends or making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation of the Common Stock or any other class or classes of stock of the Corporation ranking junior to the shares of such series;

(j) The conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issue of any additional stock (including additional shares of such series or of any other series or of any other class) ranking on a parity with or prior to the shares of such series as to dividends or upon liquidation; and

(k) Any other preference and relative, participating, option, or other special rights, and qualifications, limitations or restrictions thereof, as shall not be inconsistent with this Part A.

(3) All shares of any one series of Preferred Stock shall be identical with each other in all respects, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall be cumulative if dividends on such series accumulate; and all series shall rank equally and be identical in all respects, except as permitted by the foregoing provisions of paragraph 2 of this Part A.

(4) Before any dividends or distribution in cash or other property (other than dividends payable in stock ranking junior to the Preferred Stock) on any class of stock of the Corporation ranking junior to the Preferred Stock as to dividends or on liquidation shall be declared or paid or set apart for payment, the holders of shares or Preferred Stock of each series shall be entitled to receive cash dividends, when and as declared by the Board of Directors at the annual rate fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series, payable in each year on such dates as may be fixed in such resolution or resolutions to holders of record on the respective dates not exceeding sixty days preceding such dividend payment dates as may be determined by the Board of Directors in advance of the payment of each particular dividend. No dividend or distribution in cash or other property or any other class of stock of the Corporation shall be declared or paid or set apart for payment, unless there has simultaneously been declared or paid or set apart for payment to the holders of shares of Preferred Stock of each series entitled to participate in earnings of the Corporation together with the holders of such other class of stock of the Corporation the dividend to which the holders of the shares of such series of Preferred Stock are entitled pursuant to their rights to so participate.

Dividends with respect to each series of the Preferred Stock shall be cumulative from the date or dates fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series, which date or dates shall in no instance be more than ninety days before or after the date of the issuance of the particular shares of such series then to be issued.

No fixed dividend shall be declared on any series of the Preferred Stock in respect of any dividend period unless there shall likewise be or have been declared on all shares of Preferred Stock of each other series at the time outstanding like dividends for all dividend periods coinciding with or ending before such dividend period, ratably in proportion to the respective annual dividend rates fixed therefore as hereinbefore provided. Accruals of dividends shall not bear interest.

(5) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, before any payment or distribution of the assets of the Corporation (whether capital or surplus) shall be made to or set apart for the holders of any class of stock of the Corporation ranking junior to the Preferred Stock upon liquidation, the holders of the shares of each series of the Preferred Stock shall be entitled to receive payment of the amount payable upon such liquidation, dissolution or winding up as fixed in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series for the shares of the respective series to the date of final distribution to such holders, but they shall be entitled to no further payment. If, upon any liquidation, dissolution or winding up of the Corporation, the assets of the Corporation, or proceeds thereof, distributable among the holders of the Preferred Stock shall be insufficient to pay in full the preferential amount aforesaid, then such assets, or the proceeds thereof, shall be distributed among such holders ratably in accordance with the respective amounts which would be payable on such shares if all amounts payable thereon were paid in full. For the purpose of this paragraph 5, the voluntary sale, lease, exchange or transfer (for cash, shares of stock, securities, or other consideration) of all or substantially all of the property or assets of the Corporation to, or a consolidation or merger of the Corporation with, one or more corporations (whether or not the Corporation is the corporation surviving such consolidation or merger) shall not be deemed to be a liquidation, dissolution or winding up, voluntary or involuntary.

(6) The Corporation, at the option of the Board of Directors, may, at any time permitted by the resolution or resolutions adopted by the Board of Directors providing for the issue of any series of the Preferred Stock and at the redemption price or prices stated in said resolution or resolutions, redeem the whole or any part of the shares of such series then outstanding (the total sum, including accrued dividends, so payable on any such redemption being herein referred to as the “redemption price”). Notice of every such redemption shall be mailed to the holders of record of the shares of Preferred Stock so to be redeemed at their respective addresses as their names shall appear on the books of the Corporation. Such notice shall be mailed at least 30 but no more than 90 days in advance of the date designated for such redemption to such holders. In case of the redemption of a part only of any series of Preferred Stock then outstanding, the shares of such series so to be redeemed shall be selected by lot or in such other manner as the Board of Directors may determine to be equitable.

(7) If, on the redemption date specified in a notice pursuant to paragraph (6), the funds necessary for such redemption shall have been set aside by the Corporation, separate and apart from its other funds, in trust for the pro rata benefit of the holders of the shares so called for redemption, then, notwithstanding that any certificates for shares of Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding, the right to receive dividends thereon shall cease to accrue from and after the date of redemption so designated and all rights of the holder of any share of Preferred Stock so called for redemption shall, forthwith after such redemption date, cease and terminate, excepting only the right of the holder thereof to receive the redemption price therefore but without interest. Any moneys so set aside by the Corporation and unclaimed at the end of four years from the date designated for such redemption shall revert to the general funds of the Corporation, after which reversion the holders of any share so called for redemption shall look only to the Corporation for payment of the redemption price. Any interest accrued on funds so deposited shall be paid to the Corporation from time to time.

(8) If, after giving of a notice pursuant to paragraph (6) but before the redemption date specified therein, the Corporation shall deposit with a bank or trust company in the Borough of Manhattan, the City of New York, having a capital and surplus of at least $50,000,000, in trust to be applied to the redemption of the shares of Preferred Stock so called for redemption, the funds necessary for such redemption, then from and after the date of such deposit all rights of the holders of the shares of Preferred Stock so called for redemption shall cease and terminate, excepting only the right to receive the redemption price therefore, but without interest, and the right to exercise on or before the date designated for redemption privileges of conversion or exchange, if any, not theretofore expired, and such shares shall not be deemed to be outstanding.

Any funds so deposited which shall not be required for such redemption because of the exercise of any such right of conversion or exchange subsequent to the date of such deposit shall be returned to the Corporation. In case the holders of shares of Preferred Stock which shall have been called for redemption shall not, within four years after the date fixed for redemption, claim the amount deposited with respect to the redemption thereof, any such bank or trust company shall, to the extent permitted by applicable law, upon demand, pay over to the Corporation such unclaimed amounts and thereupon such bank or trust company shall be relieved of all responsibility in respect thereof to such holder and such holder shall look only to the Corporation for the payment thereof.

Any interest accrued on funds so deposited shall be paid to the Corporation from time to time.

(9) Shares of Preferred Stock which have been issued and reacquired in any manner by the Corporation (excluding, until the Corporation elects to retire them, shares which are held as treasury shares but including shares redeemed, shares purchased and retired, whether through the operation of a retirement or sinking fund, or otherwise, and shares which, if convertible or exchangeable, have been converted into or exchanged for shares of stock of any other class or classes or series) may, subject to any applicable provisions of the laws of the Republic of Panama, have the status of authorized and unissued shares of Preferred Stock and be reissued as a part of the Series of which they were originally a part or be reclassified and reissued as part of a new series of Preferred Stock created by resolution or resolutions of the Board of Directors or as part of any other series of Preferred Stock, all subject to the conditions or restrictions on issuance set forth in any resolution or resolutions adopted by the Board of Directors providing for the issue of any series of Preferred Stock.

(10) If at any time the Corporation shall have failed to pay dividends in full on the Preferred Stock, thereafter and until dividends in full, including all accrued and unpaid dividends on the Preferred Stock outstanding, shall have been declared and set apart for payment or paid, (a) the Corporation, without the affirmative vote or consent of the holders of at least 66 2/3% in interest of the Preferred Stock at the time outstanding, regardless of series, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, at which the holders of the Preferred Stock, regardless of series, shall vote separately as a class, shall not redeem less than all of the Preferred Stock at such time outstanding, other than in accordance with paragraph (16) hereof; (b) the Corporation shall not purchase any Preferred Stock except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Preferred Stock of all series upon such terms as the Board of Directors, in their sole discretion after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series, shall determine (which determination shall be final and conclusive) will result in fair and equitable treatment among the respective series; provided, that (i) unless prohibited by the provisions applicable to any series, the Corporation, to meet the requirements of any retirement or sinking fund provisions with respect to any series, may use shares of such series acquired by it prior to such failure and then held by it as treasury stock and (ii) nothing shall prevent the Corporation from completing the purchase or redemption of shares of Preferred Stock for which a purchase contract was entered into for any retirement or sinking fund purposes, or the notice of redemption of which was initially published, prior to such default, and (c) this paragraph (10) shall not apply to any obligation of the Corporation to purchase any share or shares of Preferred Stock pursuant to the exercise of rights which arise under an agreement if the holders of 66 2/3% in interest of the Preferred Stock of the Corporation outstanding when such agreement was executed were parties to such agreement.

(11) So long as any Preferred Stock is outstanding the Corporation will not:

(a) Declare, or pay, or set apart for payment any dividends (other than dividends payable in stock ranking junior to the Preferred Stock) or make any distribution on any other class of stock of the Corporation ranking junior to the Preferred Stock either as to dividends or upon liquidation and will not redeem, purchase or otherwise acquire, any shares of any such junior class if at the time of making such declaration, payment, distribution, redemption, purchase or acquisition the Corporation shall be in default with respect to any dividend payable on, or any obligation to retire shares of, Preferred Stock, provided that, notwithstanding the foregoing, the Corporation may at any time redeem, purchase or otherwise acquire shares of stock of any such junior class in exchange for, or out of the net cash proceeds from the sale of, other shares of stock of any junior class;

(b) Without the affirmative vote or consent of the holders of at least 66 2/3% of all the Preferred Stock then outstanding regardless of series, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, at which the holders of the Preferred Stock, regardless of series, shall vote separately as a class, amend, alter or repeal any of the provisions of this Part A so as adversely to affect the preferences, rights, or powers of the Preferred Stock; provided that the creation of any class of stock ranking prior to the Preferred Stock either as to dividends or upon liquidation or any increase in the authorized number of shares of any such class of stock shall not be deemed to adversely affect the preferences, rights or powers of the Preferred Stock within the meaning of this subparagraph (b);

(c) Without the affirmative vote or consent of the holders of at least 50% of all the Preferred Stock then outstanding, regardless of series, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, at which the holders of the Preferred Stock, regardless of series, shall vote separately as a class, create any class or classes of stock ranking prior to the Preferred Stock either as to dividends or upon liquidation, or increase the authorized number of shares of any such class of stock; or

(d) Without the affirmative vote or consent of the holders of at least 66 2/3% of any series of the Preferred Stock at the time outstanding, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting called for the purpose, at which the holders of such series of the Preferred Stock shall vote separately as a series, amend, alter or repeal any of the provisions in the resolution or resolutions adopted by the Board of Directors providing for the issue of such series so as adversely to affect the preferences, rights or powers of the Preferred Stock of such series;

and any vote or consent required by subparagraph (b) above may, to the extent permitted by applicable law, be given and made effective by the filling of an appropriate amendment of the Corporation’s Articles of Incorporation without obtaining the vote or consent of the holders of the Common Stock of the Corporation, the right to give such vote or consent being expressly waived, to the extent permitted by applicable law, by all holders of such Common Stock, unless the action to be taken would substantially adversely affect the rights or powers of the Common Stock; and further, any vote or consent required by subparagraph (d) above may, to the extent permitted by applicable law, be given and made effective by the filing of an appropriate amendment of the Corporation’s Articles of Incorporation without obtaining the vote or consent of the holders of any other series of Preferred Stock or of the holders of the Common Stock of the Corporation, the right to give such vote or consent being expressly waived, to the extent permitted by applicable law, by all holders of such other series of Preferred Stock and Common Stock, unless the action to be taken would substantially adversely affect the rights or powers of such other series of Preferred Stock or Common Stock, as the case may be.

(12) Whenever dividends payable on any series of Preferred Stock remain unpaid in an aggregate amount equivalent to six full quarterly dividends, the holders of the Preferred Stock shall have the exclusive and special right, voting separately as a class and without regard to series, to elect two directors of the Corporation. Such right shall be in addition to any other rights which the holders of the Preferred Stock may have to vote in the election of directors. Whenever such right of the holders of the Preferred Stock shall have vested, such right may be exercised initially either at a special meeting of such holders of the Preferred Stock called as provided in paragraph (13) or at any annual meeting of stockholders, and thereafter at annual meetings of stockholders. The right of the holders of the Preferred Stock voting separately as a class to elect members of the Board of Directors of the Corporation as aforesaid shall continue until such time as all dividends accumulated on the Preferred Stock shall have been paid in full, at which time the special right of the holders of the Preferred Stock so to vote separately as a class for the election of directors shall terminate, subject to revesting each and every time the conditions stated in the first sentence of this paragraph (12) occur.

(13) Whenever special voting power has vested in the holders of the Preferred Stock pursuant to paragraph (12), a proper officer of the Corporation shall, upon the written request of the holders of record of at least 10% of the Preferred Stock then outstanding, regardless of series, addressed to the Secretary of the Corporation, call a special meeting of the holders of the Preferred Stock and of any other class or classes of stock having voting power, for the purpose of electing directors. Such meeting shall be held at the earliest practicable date at such place as may be specified in the notice of meeting. If such meeting shall not be called by the proper officers of the Corporation within twenty days after personal service of said written request upon the Secretary of the Corporation, or within twenty days after depositing the same with the Postal Service of the United States of America, by registered or certified mail addressed to the Secretary of the Corporation at its principal office, then the holders of record at least 10% of the Preferred Stock then outstanding, regardless of series, may designate in writing one of their number to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the place for the holding of annual meetings of stockholders of the Corporation. Any holder of Preferred Stock so designated shall have access to the stock books of the Corporation for the purpose of causing meetings of stockholders to be called pursuant to these provisions. Notwithstanding the other provisions of this paragraph (13), no such special meeting shall be called during the ninety days immediately preceding the date fixed for an annual meeting of stockholders.

(14) At any meeting held for the purpose of electing directors at which the holders of the Preferred Stock shall have the special right, voting separately as a class, to elect directors as provided in paragraph (12), the presence, in person or by proxy, of the holders of 33 1/3% of the Preferred Stock then outstanding shall be required to constitute a quorum of such class for the election of any director by the holders of the Preferred Stock as a class. At any such meeting or adjournment thereof, (a) the absence of a quorum of the Preferred Stock shall not prevent the election of directors other than those to be elected by the Preferred Stock voting as a class and the absence of a quorum for the election of such other directors shall not prevent the election of the directors to be elected by the Preferred Stock voting as a class, and (b) in the absence of either or both such quorums, a majority of the holders present in person or by proxy of the stock or stocks which lack a quorum shall have power to adjourn the meeting for the election of directors which they are entitled to elect from time to time without notice other than announcement at the meeting until a quorum shall be present.

(15) Any director elected pursuant to paragraphs (12), (13) and (14) shall continue in office until the next annual meeting or until his successor shall have been so elected or until termination of the right of the holders of the Preferred Stock to vote as a class for directors. Whenever special voting power pursuant to paragraph (12) is vested in the holders of the Preferred Stock, any vacancy in the Board of Directors shall be filled only by vote of a majority (even if that be only a single director) of the remaining directors theretofore elected by the holders of the class or classes of stock which elected the director whose office shall have become vacant. To the extent permitted by applicable law, immediately upon any termination of the right of the holders of the Preferred Stock to vote as a class for directors as provided in paragraph (12) the term of office of the directors then in office so elected by the holders of the Preferred Stock shall terminate.

(16) If the amounts payable with respect to any obligations to retire shares of the Preferred Stock are not paid in full to the holders of the shares of all series with respect to which such obligations exist, the number of shares of each series to be retired shall be in proportion to the amount which would be payable to the holders of the shares of such series on account of such obligations if all amounts payable in respect of all such obligations were discharged in full.

(17) No holder of Preferred Stock as such shall have any preemptive or preferential right to purchase or subscribe to stock, obligations, warrants, rights to subscribe to stock or other securities of the Corporation of any class, whether now or hereafter authorized or issued.

(18) Except as may be required under the applicable statutes or may be set forth in the resolution or resolutions providing for the issue of any series adopted by the Board of Directors as hereinabove provided and except for the voting powers provided with respect to all shares of the Preferred Stock set forth above, no holder of Preferred Stock as such shall have any voting powers on any matters upon which stockholders of the Corporation have the right to vote.

(19) For the purpose hereof and of any resolution of the Board of Directors providing for the classification or reclassification of any shares of Preferred Stock or for the purpose of any certificate filed with the Republic of Panama (unless otherwise provided in any such resolution or certificate):

(a) The term “outstanding”, when used in reference to shares of stock, shall mean issued shares, excluding shares held by the Corporation and shares called for redemption funds for the redemption of which shall have been deposited in trust;

(b) The amount of dividends “accrued” on any share of Preferred Stock of any series as at any dividend date shall be deemed to be the amount of any unpaid dividends accumulated thereon to and including such dividend date, whether or not earned or declared, and the amount of dividends “accrued” on any share of Preferred Stock of any series as at any date other than a dividend date shall be calculated thereon to and including the last preceding dividend date, whether or not earned or declared, plus an amount equivalent to the pro rata portion of the periodic dividend with respect thereto at the annual dividend rate fixed for the shares of such series for the period after such last preceding dividend date to and including the date as of which the calculation is made;

(i) prior to the Preferred Stock either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in preference or priority to the holders of the Preferred Stock;

(ii) on a parity with the Preferred Stock either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates, or redemption or liquidation prices per share thereof be different from those of the Preferred Stock, if the holders of such class or classes of stock shall be entitled to the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be, in proportion to their respective dividend rates or liquidation prices, without preference or priority one over the other with respect to the holders of the Preferred Stock;

(iii) junior to the Preferred Stock either as to dividends or upon liquidation if the rights of the holders or such class or classes shall be subject or subordinate to the rights of the holders of the Preferred Stock in respect of the receipt of dividends or of amounts distributable upon liquidation, dissolution or winding up, as the case may be.

PART B. Provisions Relating to Common Stock.

(1) At all times (subject to the special voting rights of the Preferred Stock pursuant to paragraph (12) of Part A), each holder of Common Stock of the Corporation shall be entitled to one vote for each share of such stock outstanding in the name of such holder on the books of the Corporation on the record date designated for the purpose of such vote.

(2) No holder of shares of Common Stock shall have, as such holder, any preemptive right to purchase or subscribe to stock, obligations, warrants, rights to subscribe to stock or other securities of the Corporation of any class, whether now or hereafter authorized or issued.

The liability of the shareholders is limited to the amount unpaid on the shares subscribed.

4. The Stock Register required by law shall be kept at the places fixed by the Board of Directors.

5. The domicile of the Corporation shall be in Panama City, Republic of Panama, but the Corporation may engage in business and establish branches in any part of the world.

6. The duration of the Corporation shall be perpetual.

7. The number of directors constituting the entire Board shall be such as shall be fixed from time to time by vote of a majority of the entire Board of Directors, provided, however, that the number of directors shall not be reduced so as to shorten the term of any director at the time in office, and provided further, that the number of directors constituting the entire Board of Directors shall be fourteen until otherwise fixed by a majority of the entire Board of Directors.

Until the 2010 annual meeting of stockholders of the Corporation, the Board of Directors shall be divided into three classes, respectively designated “Class I”, “Class II” and “Class III”, as nearly equal in number as the then total number of directors constituting the entire Board of Directors permits. The director elected at the 2008 annual meeting of stockholders of the Corporation shall be elected for a term expiring at the 2009 annual meeting of stockholders of the Corporation or until their respective successors are duly elected and qualified; the directors elected at the 2009 annual meeting of stockholders of the Corporation shall be elected for a term expiring at the 2010 annual meeting of stockholders of the Corporation or until their respective successors are duly elected and qualified; and at each annual meeting of stockholders of the Corporation thereafter, all directors shall be elected annually for a term expiring at the next succeeding annual meeting of stockholders of the Corporation or until their respective successors are duly elected and qualified.

Subject to the provisions of Part A of Article 3, any vacancy in the Board of Directors for any reason, and any created directorships resulting from any increase in the number of directors, may be filled only by the Board of Directors, acting by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and any director so chosen shall hold office until the next election of directors and until their successors shall be duly elected and qualified.

Subject to the foregoing, at each annual meeting of stockholders the successors to the directors shall be elected for a term expiring at the next succeeding annual meeting or until their respective successors are duly elected and qualified.

Meetings of directors may be held in the Republic of Panama or in any other country, and any director may be represented and vote by proxy or proxies at any and all meetings of directors.

A majority of the directors then in office, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the Board of Directors.

The business and affairs of the Corporation shall be managed by its Board of Directors. In furtherance, and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized:

To make, alter or repeal the by-laws of the Corporation.

To authorize and cause to be executed mortgages and liens upon the real and personal property of the Corporation.

To set apart out of any of the funds of the Corporation available for dividends a reserve or reserves for any proper purpose or to abolish any such reserve in the manner in which it was created.

By resolution or resolutions, passed by a majority of the whole board to designate one or more committees, each committee to consist of two or more of the directors of the Corporation, which, to the extent provided in said resolution or resolutions or in the by-laws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to any document which requires it. Such committee or committees shall have such name or names as may be stated in the by-laws of the Corporation or as may be determined from time to time by resolution adopted by the Board of Directors.

The Corporation may in its by-laws confer powers upon the Board of Directors in addition to the foregoing, and in addition to the powers and authorities expressly conferred upon it by statute.

8. Meetings of stockholders may be held within or without the Republic of Panama. The books of the Corporation may be held outside the Republic of Panama at such place or places as may be from time to time designated by the Board of Directors. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or for the purpose of any other lawful action, the Board of Directors may fix in advance a record date, which record date shall not be more than sixty (60) days nor less than twenty (20) days before the date of such meeting or other lawful action.

9. The Corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation.

Whenever by statute the vote or consent of the stockholders of the Corporation shall be required to authorize or approve a sale, lease, or exchange of all or substantially all the Corporation’s property or assets or to adopt or approve an agreement of merger or consolidation of the Corporation with or into any other corporation or to merge any other corporation into the Corporation, the vote of two-thirds of the outstanding stock of the Corporation entitled to vote thereon shall be required for any such authorization, adoption or approval.

The vote of two-thirds of the outstanding stock of the Corporation entitled to vote thereon shall be required to amend, alter, change or repeal any of the provisions of Article 7 hereof or of the second paragraph of this Article 9. The required vote for any other amendment to these Articles of Incorporation shall be such as may now or hereafter be prescribed by statute.

10. The Registered Agent of the Corporation in the City of Panama, until the Board of Directors shall otherwise provide, shall be the law firm of Durling & Durling, whose domicile is at Via España 120 in the City of Panama.

11. A Director of the Corporation shall not be personally liable to the Corporation or its shareholders for monetary damages for breach of fiduciary duty as a Director, except for liability (i) for any breach of the Director’s duty of loyalty to the corporation or its shareholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) for unlawful payment of dividend or unlawful stock purchase or redemption, or (iv) for any transaction from which the Director derived any improper personal benefit. If any applicable law is amended after approval by the shareholders of this article to authorize corporate action further eliminating or limiting the personal liability of Directors, then the liability of a Director of the Corporation shall be eliminated or limited to the fullest extent permitted by the laws of the Republic of Panama.

Any repeal or modification of the foregoing paragraph by the shareholders of the Corporation shall not adversely affect any right or protection of a Director of the Corporation existing at the time of such repeal or modification.

THIS AGREEMENT is made as of the _____ day of ____, 20___ by and between McDermott International, Inc., a corporation duly organized under the laws of the Republic of Panama (the “Company”) and ________________ (“Executive”.)

In consideration of the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby expressly acknowledged, the parties hereto agree as follows:

I.	Obligations of the Company Upon Termination of Executive After Change In Control.

Following the Effective Date of a Change In Control, in the event Executive’s employment by the Company is terminated before the one-year anniversary of the Effective Date of a Change In Control either (i) by the Company for any reason other than Cause, or (ii) by the Executive for Good Reason, then subject to the provisions of paragraph (b) below, the Company shall:

(a)	Pay to the Executive within thirty days after the date of termination of Executive’s employment (or such earlier time as may be required by law) the Accrued Benefits;

(b)

In the event that a bonus is paid after the date of Executive’s termination of employment under the Company’s Executive Incentive Compensation Plan (“EICP”) for the year prior to the year in which the termination takes place (the “Measurement Period”), pay to the Executive in a lump sum, at the same time such bonus is paid to other EICP participants, a cash bonus equal to the product of the multiplier used for Executive’s position during the Measurement Period and Executive’s annual base salary for the Measurement Period.

(c)

Pay to Executive in a lump sum in cash within thirty days after the date of termination of Executive’s employment a payment equal to the product of Executive’s target bonus under EICP as in effect immediately prior to the date of termination and a fraction, the numerator of which is the number of days that have elapsed in the year in which the termination takes place through the date of termination of Executive’s employment and the denominator of which is 365.

(d)

Pay to Executive in a lump sum in cash as soon as administratively practicable after the date of termination of Executive’s employment 299% of the sum of (1) Executive’s annual base salary as in effect immediately prior to the date of termination of Executive’s employment, and (2) Executive’s target bonus under EICP as in effect immediately prior to the date of termination.

(e)

Pay to Executive in a lump sum in cash within thirty days after the date of termination of Executive’s employment a payment equal to two times the full annual cost of coverage for medical, dental and vision benefits provided to Executive and Executive’s covered dependents by Company for the year in which Executive’s termination takes place.

(f)

In the event that it is determined that any payment or distribution of any type to or for the benefit of the Executive made by the Company, by any of its affiliates, by any person who acquires ownership or effective control or ownership of a substantial portion of the Company’s assets (within the meaning of section 280G of the Internal Revenue Code of 1986, as amended, and the regulations thereunder (the “Code”)) or by any affiliate of such person, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise (the “Total Payments”) would be subject to the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then the Executive shall be entitled to receive an additional payment (an “Excise Tax Restoration Payment”) in an amount that shall fund the payment by the Executive of any Excise Tax on the Total Payments as well as all income taxes imposed on the Excise Tax Restoration Payment, and any Excise Tax imposed on the Excise Tax Restoration Payment.

II.	Participation In Other Company Programs.

Nothing in this Agreement shall prevent or limit Executive’s continuing or future participation in any plan, program, policy or practice provided by the Company for which Executive may qualify, nor, subject to paragraph (d) of Section X, shall anything herein limit or otherwise affect such rights as Executive may have under any contract or agreement with the Company. Amounts which are vested benefits or which Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company at or subsequent to the date of termination of Executive’s employment shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. Notwithstanding the foregoing, it is expressly understood and acknowledged by Executive that any payment by the Company under Section I hereof shall be in lieu of any obligation on the part of the Company for payment of severance benefits under the Severance Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies or any successor thereto or any other plan, policy or agreement of the Company in the event of termination of Executive’s employment as provided in Section I hereof with the Company during the one-year period following the Effective Date of a Change In Control.

III.	Confidential and Proprietary Information.

Executive acknowledges and agrees that any and all non-public information regarding the Company, any of its Subsidiaries and its or their customers (including but not limited to any and all information relating to its or their business practices, products, services, finances, management, strategy, profits and overhead) is confidential and the unauthorized disclosure of such confidential information will result in irreparable harm to the Company. Executive shall not, during his employment by the Company or any of its Subsidiaries and for a period of five years after termination of such employment (or such shorter period as may be required by law), disclose or permit the disclosure of any such confidential information to any person other than an employee or director of the Company or its Subsidiaries or any successor thereto or an individual engaged by the Company or its Subsidiaries or any successor thereto to render professional services to the Company or its Subsidiaries under circumstances that require such person to maintain the confidentiality of such information, except as such disclosure may be required by law. The provisions of this Section III shall survive any termination of this Agreement. For purposes of this Section III, the term “confidential information” shall not include information that was or becomes generally available to the public other than as a result of disclosure by Executive. Executive acknowledges that the execution of this Agreement and the payments described in Section I herein constitute consideration for the limitations on activities set forth in this Section III, the adequacy of which is hereby expressly acknowledged by Executive. Executive understands and agrees that the Company shall suffer irreparable harm if Executive breaches Section III hereof, and that monetary damages shall be inadequate to address any such breach. Accordingly, Executive agrees that the Company shall have the right, to the extent permitted by applicable law, and in addition to any other rights or remedies it may have, to obtain from any court of competent jurisdiction, injunctive relief to restrain any breach or threatened breach hereof or otherwise to specifically enforce the provisions hereof.

All notices and other communications provided for by this Agreement shall be in writing and shall be deemed to have been duly given when (a) delivered by hand, (b) sent by facsimile or email to the facsimile number or email address given below, provided that a copy is also sent by a nationally recognized overnight delivery service, (c) the day after being sent by a nationally recognized overnight delivery service, or (d) three days after being mailed by United States Certified Mail, return receipt requested, postage prepaid, addressed as follows:

If to Executive: __________________

Email: ___________________

Facsimile: ___________________

McDermott International, Inc.

Senior Vice President, Human Resources

777 N. Eldridge Parkway

Email: pjj@mcdermott.com

Facsimile: 281-870-5095

or to such other address as any party may have furnished to the other in writing in accordance with this Agreement.

The provisions of this Agreement shall be interpreted and construed in accordance with, and enforcement may be made under, the law of the State of Texas without reference to principles of conflict of laws.

VI.	Successors and Assigns.

(a)	This Agreement is personal to Executive and, without the prior written consent of the Company, shall not be assignable by Executive otherwise than by will or the laws of descent and distribution.

(b)	This Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns.

(c)

The Company will require that any successor to all or substantially all of its business and/or assets (whether such successor acquires such business and/or assets directly or indirectly, and whether by purchase, merger, consolidation or otherwise) expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, “Company” shall mean the Company as herein defined and any successor to its business and/or assets.

VII.	Employment by Subsidiaries.

If Executive is not employed by McDermott International, Inc., but is only employed by one or more Subsidiaries of McDermott International, Inc., then (a) the “Company” as defined herein shall be deemed to include such Subsidiary or Subsidiaries, and (b) termination of employment shall be determined with reference to Executive’s employment by all such Subsidiaries. Further, the Company agrees that it will perform its obligations hereunder without regard to whether Executive is employed by the Company or by a Subsidiary or Subsidiaries of the Company.

VIII.

Severability.

If any provision or portion of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect to the fullest extent permitted by applicable law.

IX.	Entire Agreement; Amendment.

This Agreement sets forth the entire Agreement of the parties hereto and supersedes all prior agreements, understandings and covenants between the parties with respect to the subject matter hereof. Except as provided in Section X, paragraphs (d) and (f) or Section XI, this Agreement may be amended or terminated only by mutual agreement of the parties in writing.

(a)	The captions and headings of this Agreement are not part of the provisions hereof and shall have no force or effect.

(b)	The Company shall be entitled to withhold from any amounts payable under this Agreement such Federal, state, local, foreign or excise taxes as shall be required or permitted to be withheld pursuant to any applicable law or regulation.

(c)

Executive’s or the Company’s failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right Executive or the Company may have hereunder, including, without limitation, the right of Executive to terminate employment for Good Reason pursuant to paragraph (g) of Section XII of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement.

(d)

Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between Executive and the Company, the employment of Executive by the Company is “at will” and, subject to the last sentence of paragraph (f) of Section XII hereof, Executive’s employment may be terminated by either Executive or the Company at any time prior to the Effective Date of a Change In Control, in which case this Agreement shall terminate as provided in Section XI below and Executive shall have no further rights under this Agreement.

(e)

For purposes of this Agreement, the date of termination of Executive’s employment shall be: (i) if Executive’s employment is terminated by the Company for Cause, the date on which the Company delivers to Executive the resolution referred to in the last sentence of Section XII, paragraph (c), or, with respect to a termination under Section XII, paragraph (c)(iii), the date on which the Company notifies Executive of such termination, (ii) if Executive’s employment is terminated by the Company because of Executive’s Disability or for a reason other than Cause or Executive’s death or Disability, the date on which the Company notifies Executive of such termination, (iii) if executive’s employment is terminated by Executive for Good Reason, the date on which Executive notifies the Company of such termination (after having given the Company notice and a thirty-day cure period), or (iv) if Executive’s employment is terminated by reason of death, the date of death of executive.

(f)

The Company may terminate this Agreement at any time prior to a Change In Control upon giving Executive written notice of such termination at least thirty days prior to the date of termination if either of the following circumstances take place: (i) Executive’s position with the Company is changed so that he ceases to be an officer of the Company, or (ii) Executive ceases to be a fulltime employee; provided that if a Change In Control is announced or occurs during such thirty-day period, the termination shall not be effective.

(g)	This Agreement may be executed in two counterparts, each of which shall be deemed an original and together shall constitute one and the same agreement, with one counterpart being delivered to each party hereto.

(h)

In the event the Executive’s employment is terminated following the Effective Date of a Change In Control and before the one-year anniversary of the Effective Date of a Change In Control (i) by the Company for Cause or an a result of Executive’s death or disability, or (ii) by Executive without Good Reason, Executive shall not be entitled to the payments described in Section 1 hereof.

This Agreement shall terminate on the earliest to occur of (i) termination by the Company in accordance with Section X, paragraph (f) above, (ii) the date one year after the Effective Date of a Change or Control, or (iii) the date on which Executive’s employment with the Company is terminated (subject to the last sentence of Section XII, paragraph (g)); provided, however, that if Executive’s employment with the Company is terminated under any of the circumstances described in Section I hereof, Executive’s rights hereunder shall continue following the termination of his/her employment with the Company until all benefits to which Executive is entitled hereunder has been paid and the Company’s rights hereunder shall continue until all obligations owed to it hereunder have been satisfied.

For purposes of this Agreement, the following terms shall have the meanings given them in this Section XII.

(a)	“Accrued Benefits” shall mean:

(i)

Any portion of Executive’s Annual Base Salary earned through the date of termination of Executive’s employment and not yet paid;

(ii)	Reimbursement for any and all amounts advanced in connection with Executive’s employment for reasonable and necessary expenses incurred by Executive through the date of termination of Executive’s employment in accordance with the Company’s policies and procedures on reimbursement of expenses;

(iii)

Any earned vacation pay not theretofore used or paid in accordance with the Company’s policy for payment of earned and unused vacation time; and

(iv)

All other payments and benefits to which Executive may be entitled under the terms of any applicable compensation arrangement or benefit plan or program of the Company that do not specify the time of distribution; provided that Accrued Benefits shall not include any entitlement to severance under any severance policy of the Company generally applicable to the salaried employees of the Company.

(b)	“Annual Base Salary” shall mean Executive’s annual rate of pay excluding all other elements of compensation such as, without limitation, bonuses, perquisites, expatriate or hardship premiums, restricted stock awards, stock options and retirement and welfare benefits.

(c)	“Cause” shall mean:

(i)

the willful and continued failure of Executive to perform substantially his/her duties with the Company (occasioned by reason other than physical or mental illness or disability of Executive) after a written demand for substantial performance is delivered to Executive by the Compensation Committee of the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Compensation Committee of the Board or the Chief Executive Officer believes that Executive has not substantially performed his/her duties, after which Executive shall have thirty days to defend or remedy such failure to substantially perform his/her duties:

(ii)	the willful engaging by Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company; or

(iii)

the conviction of Executive with no further possibility of appeal or, or plea of nolo contendere by Executive to, any felony.

The cessation of employment of Executive under subparagraph (i) and (ii) above shall not be deemed to be for “Cause” unless and until there shall have been delivered a Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters (3/4) of the entire membership of the Compensation Committee of the Board at a meeting of such Committee called and held for such purpose (after reasonable notice is provided to Executive and Executive is given an opportunity, together with counsel, to be heard before the Compensation Committee of the Board), finding that, in the good faith opinion of the Compensation Committee of the Board, Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail.

(d)	“Change In Control” shall be deemed to occur if:

(i)

When any “person” or “group” of persons (as such terms are used in §13 and 14 of the Securities Exchange Act of 1934, as amended from time to time (the “Exchange Act”)), other than the Company or any employee benefit plan sponsored by the Company, becomes the “beneficial owner” (as such term is used in §13 of the Exchange Act) of 30 percent or more of the total number of the Company’s common shares at the time outstanding; or

(ii)

The shareholders of the Company approve: a) a merger or consolidation of the Company, with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto, continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or b) the shareholders of the Company approve a plan of complete liquidation of the Company, or c) an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets or;

(iii)

During any period of two (2) consecutive years (not including any period prior to the execution of this Plan), individuals who at the beginning of such period constitute the Board of the Company, and any new Director of the Company (other than a Director designated by a Person who has entered into an agreement with the Company to effect a transaction described in Clauses (a) or (c) of this Section 2.5) whose election by the Company’s Board or nomination for election by the stockholders of the Company, was approved by a vote of at least two-thirds (2/3) of the Directors of the Company’s Board, then still in office who either were Directors thereof at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority thereof; or

(iv)	Such other circumstances as may be deemed by the Board in its sole discretion to constitute a change in control of the Company.

However, in no event shall a “Change in Control” be deemed to have occurred with respect to the Executive if the Executive is part of the purchasing group which consummates the Change-in-Control transaction. An Executive shall be deemed “part of a purchasing group” for purposes of the preceding sentence if the Executive is an equity participant in the purchasing company or group (except for: (i) passive ownership of less than three percent (3%) of the stock of the purchasing company; or (ii) ownership of equity participation in the purchasing company or group which is otherwise not significant, as determined prior to the Change in Control by a majority of the non-employee continuing Directors). A Change In Control shall not result from any transaction precipitated by the Company’s insolvency, appointment of a conservator or determination by a regulatory agency that the Company is insolvent.

(e)	“Disability” shall mean circumstances that qualify Executive for long-term disability benefits under the Company’s Long-Term Disability Plan as in effect immediately prior to the Change In Control.

(f)

“Effective Date” with respect to a Change In Control for purposes of this Agreement shall be the earliest to occur of (i) the date on which the Company receives a copy of a Schedule 13D disclosing beneficial ownership of shares in accordance with Section XII, paragraph (d)(i) above; (ii) the effective date of the consummation of a merger, consolidation, share exchange or similar form of corporate transaction or liquidation or reorganization in accordance with Section XII, paragraph (d)(ii); or (iii) the date of the annual or special meeting of shareholders at which the last director necessary to meet the requirements of Section XII, paragraph (d)(iii) is elected. Upon the occurrence of the Effective Date of a Change In Control, the Board of Directors or its designee shall, within thirty days thereof, provide written notice to Executive of the Effective Date of the Change In Control. Notwithstanding anything to the contrary in this Agreement, if a Change In Control occurs and if Executive’s employment with the Company is terminated within the ninety days prior to the Effective Date of the Change In Control as determined in accordance with the first sentence of this paragraph (f), and if it is reasonably demonstrated by Executive that such termination of employment was at the request of a third party who has taken steps reasonably calculated to effect a Change In Control, or otherwise arose in connection with or in anticipation of a Change In Control, then for all purposes of this Agreement, the “Effective Date” of the Change In Control shall mean the date immediately prior to the date of such termination of employment.

(g)	“Good Reason” shall mean:

(i)

the assignment to Executive of duties that are materially inconsistent with Executive’s position, authority, duties or responsibilities immediately prior to the Change In Control, or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities;

(ii)

requiring Executive, without his consent, to be based at any office or location other than the office or location a which Executive was employed immediately prior to the Change In Control; provided, however, that any such relocation requests shall not be grounds for resignation with Good Reason if such relocation is within a twenty-mile radius of the location at which Executive was based prior to the Effective Date of a Change In Control;

(iii)

a reduction in Executive’s Annual Base Salary in effect immediately prior to the Change In Control or a reduction in the target multiplier used to calculate the annual bonus awarded to Executive below the target multiplier used to calculate the bonus paid to Executive under the EICP immediately prior to the Change In Control, provided, however that in either case a reduction in the Annual Base Salary or the target bonus multiplier shall not be considered “Good Reason” with respect to any year for which such reduction is part of a reduction uniformly applicable to all similarly situated employees;

(iv)	a change in Executive’s eligibility to participate in incentive compensation plans as in effect immediately prior to the Change In Control; or

(v)	any material breach of this Agreement by the Company, excluding for this purpose an isolated, insubstantial or inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive.

Upon the occurrence of any of the events described above, Executive shall give the Company written notice that such event constitutes Good Reason and the Company shall thereafter have thirty days in which to cure. If the Company has not cured in that time, the event shall constitute Good Reason.

(h)	“Subsidiaries” shall mean every, limited liability company, partnership or other entity of which 50% or more of the total combined voting power of all classes of voting securities or other equity interests is owned, directly or indirectly, by McDermott International, Inc.

Any controversy or claim arising out of or relating to this Agreement (or the breach thereof) shall be settled by final and binding arbitration in Houston, Texas by one arbitrator selected in accordance with the Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (the “Association”) then in effect. Subject to the following provisions, the arbitration shall be conducted in accordance with the Rules then in effect. Any award entered by the arbitrator shall be final and binding, and judgment may be entered thereon by any party hereto in any court of law having competent jurisdiction. This arbitration provision shall be specifically enforceable. The Company and the Executive shall each pay half of the administrative fees of the Association and the compensation of the arbitrator and shall each be responsible for its or his/her own attorney’s fees and expenses relating to the conduct of the arbitration.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

McDERMOTT INTERNATIONAL, INC.

By: _____________________________________

Printed Name: ______________________________

Title: ____________________________________

Date: ___________________________________

Executive: _________________________________

Date: ____________________________________

I.	Obligations of the Company Upon Termination of Executive After Change In Control.

(a)	Pay to the Executive within thirty days after the date of termination of Executive’s employment (or such earlier time as may be required by law) the Accrued Benefits;

(b)

(c)

(d)

Pay to Executive in a lump sum in cash as soon as administratively practicable after the date of termination of Executive’s employment 200% of the sum of (1) Executive’s annual base salary as in effect immediately prior to the date of termination of Executive’s employment, and (2) Executive’s target bonus under EICP as in effect immediately prior to the date of termination.

(e)

(f)

II.	Participation In Other Company Programs.

III.	Confidential and Proprietary Information.

If to Executive: ___________________

Email: ___________________

Facsimile: ___________________

McDermott International, Inc.

Senior Vice President, Human Resources

777 N. Eldridge Parkway

Email: pjj@mcdermott.com

Facsimile: 281-870-5095

or to such other address as any party may have furnished to the other in writing in accordance with this Agreement.

VI.	Successors and Assigns.

(a)	This Agreement is personal to Executive and, without the prior written consent of the Company, shall not be assignable by Executive otherwise than by will or the laws of descent and distribution.

(b)	This Agreement shall be binding upon and shall inure to the benefit of the Company and its successors and assigns.

(c)

VII.	Employment by Subsidiaries.

VIII.

Severability.

IX.	Entire Agreement; Amendment.

(a)	The captions and headings of this Agreement are not part of the provisions hereof and shall have no force or effect.

(b)	The Company shall be entitled to withhold from any amounts payable under this Agreement such Federal, state, local, foreign or excise taxes as shall be required or permitted to be withheld pursuant to any applicable law or regulation.

(c)

(d)

(e)

(f)

(g)	This Agreement may be executed in two counterparts, each of which shall be deemed an original and together shall constitute one and the same agreement, with one counterpart being delivered to each party hereto.

(h)

For purposes of this Agreement, the following terms shall have the meanings given them in this Section XII.

(a)	“Accrued Benefits” shall mean:

(i)

Any portion of Executive’s Annual Base Salary earned through the date of termination of Executive’s employment and not yet paid;

(ii)	Reimbursement for any and all amounts advanced in connection with Executive’s employment for reasonable and necessary expenses incurred by Executive through the date of termination of Executive’s employment in accordance with the Company’s policies and procedures on reimbursement of expenses;

(iii)

Any earned vacation pay not theretofore used or paid in accordance with the Company’s policy for payment of earned and unused vacation time; and

(iv)

(b)	“Annual Base Salary” shall mean Executive’s annual rate of pay excluding all other elements of compensation such as, without limitation, bonuses, perquisites, expatriate or hardship premiums, restricted stock awards, stock options and retirement and welfare benefits.

(c)	“Cause” shall mean:

(i)

(ii)	the willful engaging by Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company; or

(iii)

the conviction of Executive with no further possibility of appeal or, or plea of nolo contendere by Executive to, any felony.

(d)	“Change In Control” shall be deemed to occur if:

(i)

(ii)

(iii)

(iv)	Such other circumstances as may be deemed by the Board in its sole discretion to constitute a change in control of the Company.

(e)	“Disability” shall mean circumstances that qualify Executive for long-term disability benefits under the Company’s Long-Term Disability Plan as in effect immediately prior to the Change In Control.

(f)

(g)	“Good Reason” shall mean:

(i)

(ii)

(iii)

(iv)	a change in Executive’s eligibility to participate in incentive compensation plans as in effect immediately prior to the Change In Control; or

(v)	any material breach of this Agreement by the Company, excluding for this purpose an isolated, insubstantial or inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive.