Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

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 this Quarterly Report on Form 10-Q contains, 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, 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:

o general economic and business conditions and industry trends;

o the continued strength of the industries in which we are involved;

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

o the deregulation of the U.S. electric power market;

o the highly competitive nature of our businesses;

o our future financial performance, including availability, terms and deployment of capital;

o the continued availability of qualified personnel;

o changes in, or our failure or inability to comply with, government regulations and adverse outcomes from legal and regulatory proceedings, including the results of ongoing governmental investigations and related civil lawsuits involving alleged anticompetitive practices in our marine construction business;

o estimates for pending and future nonemployee asbestos claims against B&W and potential adverse developments that may occur in the Chapter 11 reorganization proceedings involving B&W and certain of its subsidiaries;

o the potential impact on available insurance due to the recent increases in bankruptcy filings by asbestos-troubled companies;

o changes in existing environmental regulatory matters;

o rapid technological changes;

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

o social, political and economic situations in foreign countries where we do business specifically in the Middle East based upon the September 11, 2001 terrorist attacks;

o effects of asserted and unasserted claims;

o our ability to obtain surety bonds and letters of credit;

o the continued ability of our insurers to reimburse us for payments made to asbestos claimants; and

o our ability to maintain builder's risk, liability and property insurance in amounts we consider adequate at rates that we consider economical due to the impact of the September 11, 2001 terrorist attacks on the insurance industry.

We believe the items we have outlined above are important factors that could cause our actual results to differ materially from 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, 2000. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown 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. We advise our security holders that they should (1) be aware that important 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.

GENERAL

The amount of revenues we generate from our Marine Construction Services segment largely depends on the level of oil and gas development activity in the world's major hydrocarbon producing regions. Our revenues from this segment reflect the variability associated with the timing of significant development projects. Although the timing of the award of many marine construction projects remains uncertain, we believe this segment's backlog should continue to increase for the remainder of 2001.

The revenues of our Government Operations segment are largely a function of capital spending by the U.S. Government. As a result of reductions in the defense budget over the past several years, we do not expect this

segment to experience any significant growth in the next three years. We expect this segment's backlog to remain relatively constant since it is the sole supplier to the U.S. Navy of nuclear fuel assemblies and major nuclear reactor components for the Naval Reactors Program. We currently expect the 2001 operating activity of this segment will be about the same as in 2000.

The revenues of our Industrial Operations segment are affected by variations in the business cycles in its customers' industries and the overall economy. Legislative and regulatory issues such as environmental regulations and fluctuations in U.S. Government funding patterns also affect this segment. With the sale of MECL completed, we expect the 2001 operating activity of this segment to be below the level of 2000.

We expect a sequential decrease in earnings next quarter, due to seasonal weakness in JRM's marine business.

Effective February 22, 2000 and until B&W and its filing subsidiaries emerge from the Chapter 11 reorganization proceedings and the subsequent accounting is determined, we no longer consolidate B&W's and its subsidiaries' results of operations in our condensed consolidated financial statements and our investment in B&W is presented on the cost method. Through February 21, 2000, B&W's and its subsidiaries' results are included in our segment results under Power Generation Systems - B&W (see Note 5 to the condensed consolidated financial statements). B&W and its consolidated subsidiaries' pre-bankruptcy filing revenues of $155,774,000 and operating income of $9,410,000 are included in our consolidated financial results for the nine months ended September 30, 2000.

In general, each of our business segments is composed of capital-intensive businesses that rely on large contracts for a substantial amount of their revenues.

RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2001 VS. THREE MONTHS ENDED SEPTEMBER 30, 2000

Marine Construction Services

Revenues increased $100,854,000 to $262,776,000, primarily due to higher volumes in North American activities, including the deepwater markets of the Gulf of Mexico, and fabrication operations in the Eastern Hemisphere.

Segment operating income (loss) increased $26,723,000 from a loss of $9,142,000 to income of $17,581,000, primarily due to higher volumes and margins in North American activities and fabrication operations in the Eastern Hemisphere. Higher general and administrative expenses partially offset these increases.

Income from investees increased $1,619,000 to $4,762,000, primarily due to favorable contract closeout adjustments from our U.K. joint venture that was terminated in June 2001. Lower operating results in our SPARS joint venture partially offset this increase.

Government Operations

Revenues increased $22,526,000 to $118,475,000, primarily due to higher volumes from nuclear fuel assemblies and reactor components for the U.S. Government.

Segment operating income decreased $4,361,000 to $3,814,000, primarily due to lower margins from nuclear fuel assemblies and reactor components for the U.S. Government and lower volumes and margins from management and operating contracts for U.S. Government-owned facilities.

Income from investees increased $1,627,000 to $6,110,000, primarily due to higher operating results from the start-up of our Pantex and Y-12 joint ventures. Lower operating results from a joint venture in Colorado partially offset these increases.

Industrial Operations

Revenues increased $77,046,000 to $198,007,000, primarily due to higher volumes from engineering, construction and plant maintenance activities in Canadian operations.

Segment operating income decreased $680,000 to $4,009,000, primarily due to lower margins from plant maintenance activities in Canadian operations and higher selling, general and administrative expenses. Higher volumes from engineering and construction activities in Canadian operations partially offset these decreases.

Power Generation Systems

Revenues decreased $2,770,000 to $12,059,000, primarily due to lower volumes from the fabrication of utility and industrial boilers. Higher volumes from after-market service activities partially offset these decreases.

Segment operating loss decreased $1,045,000 to $1,010,000, primarily due to lower selling, general and administrative expenses.

Income (loss) from investees increased $2,377,000 from a loss of $2,014,000 to income of $363,000, primarily due to charges to exit and impair certain foreign joint ventures in the prior year.

Corporate

Corporate expenses increased $6,302,000 from income of $4,294,000 to expense of $2,008,000, primarily due to lower income from our over-funded pension plans, legal and professional fees relating to the

declaratory action with respect to the assets transferred out of B&W, higher insurance expenses and costs associated with the termination of our information technology arrangement with AT&T Solutions. Lower employee-related costs, including severance, lower net general and administrative expenses and legal fees related to claims in the prior year partially offset these increases.

Other Income Statement Items

Interest income decreased $1,502,000 to $5,056,000, primarily due to a decrease in investments.

Other-net included a loss of $4,000,000 related to the curtailment of a foreign pension plan and gains of approximately $3,300,000 on the sale of securities.

The provision for income taxes for the three months ended September 30, 2001 and 2000 reflected nondeductible amortization of goodwill of $4,502,000. The goodwill was created by the premium we paid on the acquisition of the minority interest in JRM in June 1999. The provision for income taxes for the three months ended September 30, 2001 included a tax benefit of $1,500,000, primarily related to favorable tax settlements in foreign jurisdictions and a provision for proposed IRS tax deficiencies. In addition, the income before provision for income taxes for the three months ended September 30, 2000 included losses and charges of $2,340,000 to exit certain foreign joint ventures which had no associated tax benefits. We operate in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate.

RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2001 VS. NINE MONTHS ENDED SEPTEMBER 30, 2000

Marine Construction Services

Revenues decreased $12,094,000 to $602,605,000, primarily due to lower volume in offshore activities in the Far East relating to the West Natuna project. Higher volumes in North American activities, including the deepwater markets of the Gulf of Mexico, and in the Eastern Hemisphere fabrication operations partially offset this decrease.

Segment operating income (loss) increased $32,456,000 from a loss of $16,930,000 to income of $15,526,000, primarily due to higher volumes and margins in North American activities and in the Eastern Hemisphere fabrication operations. Lower volumes on the West Natuna project and higher general and administrative expenses partially offset these increases.

Income from investees increased $5,912,000 to $6,048,000, primarily due to favorable contract closeout adjustments from our U.K. joint venture that was terminated in June 2001. In addition, the prior year included higher losses associated with our U.K. joint venture.

Government Operations

Revenues increased $33,637,000 to $356,349,000, primarily due to higher volumes from nuclear fuel assemblies and reactor components for the U.S. Government and commercial work. Lower volumes from management and operating contracts for U.S. Government-owned facilities and other government operations partially offset these increases.

Segment operating income decreased $7,230,000 to $22,813,000, primarily due to lower volume and margins from management and operating contracts for U.S. Government-owned facilities and higher general and administrative expenses. Higher volume and margins from commercial work partially offset these decreases.

Income from investees increased $9,106,000 to $16,868,000, primarily due to higher operating results from a joint venture in Idaho and the start-up of our Pantex and Y-12 joint ventures. Lower operating results from a joint venture in Colorado partially offset these increases.

Industrial Operations

Revenues increased $162,040,000 to $527,714,000, primarily due to higher volumes from engineering, construction and plant maintenance activities in Canadian operations and from air-cooled heat exchangers.

Power Generation Systems

Revenues increased $18,511,000 to $33,486,000, primarily due to the acquisition of Babcock & Wilcox Volund ApS, an international power generation operation in the prior year.

Income (loss) from investees increased $24,524,000 from a loss of $23,443,000 to income of $1,081,000, primarily due to charges to exit and impair certain foreign joint ventures in the prior year.

Corporate

Corporate expenses increased $15,296,000 from income of $5,106,000 to expense of $10,190,000, primarily due to lower income from our over-funded pension plans, legal and professional fees relating to the declaratory action with respect to the assets transferred out of B&W, higher insurance expenses, severance costs, and costs associated with the termination of our information technology arrangement with AT&T Solutions. A favorable insurance recovery and legal fees related to claims in the prior year partially offset these increases.

Other Income Statement Items

Interest income decreased $4,909,000 to $15,687,000, primarily due to a decrease in investments.

Other-net decreased $6,363,000 from income of $5,534,000 to a loss of $829,000, primarily due to foreign currency transaction losses in the current period as compared to gains in the prior period. In addition, a loss of $4,000,000 was recorded in the current period related to the curtailment of a foreign pension plan.

The provision for income taxes for the nine months ended September 30, 2001 and 2000 reflected non-deductible amortization of goodwill of $13,506,000. The goodwill was created by the premium we paid on the acquisition of the minority interest in JRM in June 1999. The provision for income taxes for the nine months ended September 30, 2000 also included a provision of $3,800,000 for B&W for the pre-filing period and a tax benefit of $1,400,000 from the use of certain tax attributes in a foreign joint venture. Also included are tax benefits primarily related to favorable tax settlements in foreign jurisdictions totaling approximately $5,215,000 and $5,500,000 for the nine months ended September 30, 2001 and 2000, respectively, and a provision for proposed IRS tax deficiencies in the nine months ended September 30, 2001. In addition, income before the provision for income taxes for the nine months ended September 30, 2000 included losses and charges of $23,940,000 to exit certain foreign joint ventures which had no associated tax benefits. We operate in many different tax jurisdictions. Within these jurisdictions, tax provisions vary because of nominal rates, allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate.

                                            9/30/01      12/31/00
                                          -----------   -----------
                                                  (Unaudited)
                                                (In thousands)
Marine Construction Services              $ 1,530,167   $   541,647
Government Operations                         903,959     1,078,803
Industrial Operations                         363,519       396,429
Power Generation Systems                       56,859        48,631
                                          -----------   -----------
   TOTAL BACKLOG                          $ 2,854,504   $ 2,065,510
                                          ===========   ===========

Backlog for the Marine Construction Services segment increased primarily because of recent awards relating to new offshore construction projects in the Gulf of Mexico and the Eastern Hemisphere.

Backlog for our Industrial Operations segment included MECL backlog of approximately $329,000,000 at September 30, 2001.

At September 30, 2001, Government Operations' backlog with the U. S. Government was $821,654,000 (of which $33,608,000 had not been funded). However, we expect this segment's backlog to remain relatively constant since it is the sole source provider of nuclear fuel assemblies and nuclear reactor components for the U. S. Government.

Liquidity and Capital Resources

During the nine months ended September 30, 2001, our cash and cash equivalents increased $6,023,000 to $90,643,000 and our total debt decreased $68,010,000 to $351,493,000, primarily due to a decrease in short-term borrowings of $66,286,000. During this period, our operating activities generated cash of $64,589,000 and we received cash of $963,491,000 from sales and maturities of investments and $3,002,000 from the sale of assets. We used cash of $929,393,000 for the purchase of investments and $27,644,000 for additions to property, plant and equipment.

At September 30, 2001 and December 31, 2000, we had available various uncommitted short-term lines of credit from banks totaling $14,873,000 and $12,819,000, respectively. Borrowings outstanding against these lines at September 30, 2001 were $216,000. There were no borrowings against these lines at December 31, 2000.

On February 21, 2000, B&W and certain of its subsidiaries entered into the DIP Credit Facility to satisfy their working capital and letter of credit needs during the pendency of their bankruptcy case. As a condition to borrowing or obtaining letters of credit under the DIP Credit Facility, B&W must comply with certain financial covenants. There were no borrowings under this facility at September 30, 2001 or December 31, 2000. Letters of credit outstanding under this facility at September 30, 2001 totaled approximately $111,000,000. See Note 8 to the condensed consolidated financial statements for further information on the DIP Credit Facility.

On February 21, 2000, we also entered into other financing arrangements providing financing to the balance of our operations. This financing, as amended on April 24, 2000, consists of a $200,000,000 credit facility for MII, BWXT and Hudson Products Corporation (the "MII Credit Facility") and a $200,000,000 credit facility for JRM and its subsidiaries (the "JRM Credit Facility"). Each facility is with a group of lenders, for which Citibank, N.A. is acting as the administrative agent.

The MII Credit Facility consists of two tranches, each of which has a three-year term. One is a revolving credit facility that provides for up to $100,000,000 to the borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 of letters of credit and may be used to reimburse issuers for drawings under certain outstanding

letters of credit totaling $25,412,000 issued for the benefit of B&W and its subsidiaries. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the MII Credit Facility may not exceed $200,000,000. This facility is secured by a collateral account funded with various U.S. government securities with a marked-to-market value equal to 105% of the aggregate amount available for drawing under letters of credit and revolving credit borrowings then outstanding. Borrowings against this facility at September 30, 2001 and December 31, 2000 were $29,600,000 and $10,000,000, respectively. Letters of credit against this facility outstanding at September 30, 2001 totaled approximately $61,000,000. Borrowings against this facility were $8,600,000 at November 1, 2001.

The JRM Credit Facility also consists of two tranches. One is a revolving credit facility that provides for up to $100,000,000 for advances to borrowers. Borrowings under this facility may be used for working capital and general corporate purposes. The second tranche provides for up to $200,000,000 of letters of credit. The aggregate amount of loans and amounts available for drawing under letters of credit outstanding under the JRM Credit Facility may not exceed $200,000,000. The facility is subject to certain financial and non-financial covenants. Borrowings against this facility at December 31, 2000 were $50,000,000. There were no borrowings against this facility at September 30, 2001. Letters of credit outstanding against this facility at September 30, 2001 totaled approximately $62,000,000. There were no borrowings under this facility at November 1, 2001.

At September 30, 2001, we had total cash, cash equivalents and investments of $421,443,000. Our investment portfolio consists primarily of government obligations and other investments in debt securities. The fair value of our investments at September 30, 2001 was $330,800,000. As of September 30, 2001, we had pledged approximately $45,912,000 fair value of these investments to secure a letter of credit in connection with certain reinsurance agreements. In addition, approximately $210,413,000 fair value of these investments were pledged to secure the MII Credit Facility.

In connection with B&W's bankruptcy filing, MII entered into a support agreement pursuant to which it agreed to provide MI with standby financial support on its interest payments on its (i) $225,000,000 in aggregate principal amount of 9.375% Notes due 2002, (ii) $9,500,000 in aggregate principal amount of Series A Medium Term Notes due 2003, (iii) $64,000,000 in aggregate principal amount of Series B Medium Term Notes due 2005, 2008 and 2023, and (iv) $17,000,000 in principal amount under a Pollution Control Note due 2009. MI is required to pay MII $5,000 per month under the support agreement which expires on March 15, 2002.

MI's 9.375% notes with an aggregate principal amount of $225,000,000 are scheduled to mature on March 15, 2002. MI currently has insufficient cash and other liquid resources on hand to fund the repayment of its

9.375% notes. However, we have generated a significant amount of cash flow in the June and September 2001 quarters which gives us some confidence that our fourth quarter cash flow from operations will also be positive. We completed the sale of McDermott Engineers & Constructors (Canada) Ltd. on October 29, 2001 which generated additional cash that we may use to pay down debt (see Note 9 to the condensed consolidated financial statements). We are also exploring other alternatives, including further asset sales, early bond redemptions and potential refinancing or extension of these notes. MI's ability to satisfy, extend or refinance these notes will be significantly influenced by the results of the litigation involving our corporate reorganization completed in the fiscal year ended March 31, 1999. If the action in this litigation is decided against us by the Bankruptcy Court, it could have a material adverse effect on MI's ability to satisfy, extend or refinance these notes.

MI owns substantial subsidiaries outside the B&W Chapter 11 filing, including BWXT, which comprises our Government Operations segment, and Hudson Products Corporation, which operates our heat exchanger business. BWXT and Hudson Products Corporation are defendants in the action brought in the Chapter 11 proceeding concerning our corporate reorganization completed in the fiscal year ended March 31, 1999, and our alternatives regarding these subsidiaries may be limited until, and depending upon, a resolution in our favor of the action seeking to void the transfers of B&W of the capital stock of BWXT and Hudson Products Corporation to BWICO (the parent of B&W) in connection with the reorganization. In addition, MI has a financial asset pursuant to a stock purchase and sale agreement with MII (the "Intercompany Agreement"). For the 2001 year, MI would be entitled to $249,637,000 on the exercise of all of its rights under that agreement, which would generate a tax liability of $87,338,000. MI does not currently intend to exercise its right to sell under the Intercompany Agreement (although it may in the future elect to do so). Since MI is not expected to generate sufficient operating cash flow to repay the 9.375% notes at maturity, and if its extension or refinancing alternatives do not materialize, MI will have to consider exercising its rights under the Intercompany Agreement, selling all or a part of one or more of its operating subsidiaries, requesting a capital contribution or loan from MII or some combination of these and other alternatives. As a result, MI's inability to successfully refinance or repay these notes could have a material adverse impact on MII's liquidity, financial position and results of operations. MI's level of indebtedness and its lack of liquidity pose substantial risks to the holders of its debt securities and to its ability to continue as a going concern.

MI and JRM and their respective subsidiaries are restricted, as a result of covenants in debt instruments, in their ability to transfer funds to MII and its other subsidiaries through cash dividends or through unsecured loans or investments. At September 30, 2001, substantially all the net assets of MI were subject to those restrictions. At September 30, 2001, JRM and its subsidiaries could make unsecured loans to or investments in MII and its other subsidiaries of approximately $71,000,000.

Our two surety companies notified us in the first quarter of 2001 that they are no longer willing to issue bonds on our behalf. We obtain surety bonds in the ordinary course of business of several of our operations to secure contract bids and to meet the bonding requirements of various construction and other contracts with customers. We are currently canvassing the surety market to obtain additional bonding capacity. Since we received the notice from our surety companies, we have been satisfying most of our bonding requirements by letters of credit and enhanced contract terms and conditions. However, if we fail to obtain replacement bonding capacity, our ability to secure customer contracts and pursue additional projects in the future may be materially adversely affected.

As a result of the impact of the September 11, 2001, terrorist attacks on the insurance industry, our insurers have indicated that we will incur higher costs, higher deductibles and more restrictive terms and conditions as we renew our historical insurance coverages in the future. We expect to continue to maintain coverage that we consider adequate at rates that we consider economical. However, some previously insured risks may no longer be insurable or insurance to cover them will be available only at rates that we consider uneconomical. We do not expect this situation to impact our liquidity negatively for the foreseeable future.

We expect to meet capital expenditure, working capital and debt maturity requirements for the remainder of 2001 from cash and cash equivalents and short-term borrowings.

MI and its subsidiaries are unable to incur additional long-term debt obligations under one of MI's public debt indentures, other than in connection with certain extension, renewal or refunding transactions (including an extension or refinancing of MI's 9.375% notes).

As a result of its bankruptcy filing, B&W and its filing subsidiaries are precluded from paying dividends to stockholders and making payments on any pre-bankruptcy filing accounts or notes payable that are due and owing to any other entity within the McDermott group of companies (the "Pre-Petition Inter-company Payables") and other creditors during the pendency of the bankruptcy case, without the Bankruptcy Court's approval.

In September 2001, Moody's Investor Service lowered MI's credit rating form BA3 to B2. JRM's credit rating remained unchanged at BA3. Our rating by Standard & Poors remain unchanged at B. This downgrade by Moody's Investor Service has impacted our cost of capital and could impact our access to capital.

The Babcock & Wilcox Company

B&W and its subsidiaries conduct substantially all the operations of our Power Generation Systems segment. The amount of revenues we generate from our Power Generation Systems segment primarily depends on

capital spending by customers in the electric power generation industry. In that industry, persistent economic growth in the United States has brought the supply of electricity into approximate balance with energy demand, except during periods of peak demand. In recent years, electric power producers have generally been meeting these peaks with new combustion turbines rather than new base-load capacity. In January 2001, the state of California began experiencing shortages of electricity during periods of peak demand. This has caused many power companies to re-examine their needs for new power plants and for improvements at existing power plants. Depending on the outcome of these studies, power companies may order new plants and may improve their existing plants. New U.S. emissions requirements have also prompted some customers to place orders for environmental equipment. Domestic demand for electrical power generation industry services and replacement nuclear steam generators continues at strong levels. The international markets remain unsettled. We currently expect the 2001 operating activity of this segment to be about the same as in 2000. In addition, the September 11, 2001 terrorist attacks have increased the risk associated with certain contracts in the Middle East.

B&W's financial results are included in our consolidated results through February 21, 2000, the day prior to B&W's Chapter 11 filing. However, generally accepted accounting principles specifically require that any entity (1) whose financial statements were previously consolidated with those of its parent (as B&W's were with ours) and (2) that files for protection under the U.S. Bankruptcy Code, whether solvent or insolvent, must be prospectively deconsolidated from the parent and presented on the cost method. The cost method requires us to present the net assets of B&W at February 22, 2000 as an investment and not recognize any income or loss from B&W in our results of operations during the reorganization period. This investment of $186,966,000 as of September 30, 2001 is subject to periodic reviews for recoverability. When B&W emerges from the jurisdiction of the Bankruptcy Court, the subsequent accounting will be determined based upon the applicable facts and circumstances at that time, including the terms of any plan of reorganization. See Note 8 to the condensed consolidated financial statements for B&W's financial information at September 30, 2001.

In the three months ended September 30, 2001:

B&W's revenues increased $54,190,000 to $304,575,000, primarily due to higher volumes from the fabrication, repair and retrofit of existing facilities, nuclear services, fabrication and erection of fossil fuel steam and environmental control systems, replacement nuclear steam generators and replacement parts;

B&W's operating income increased $1,218,000 to $2,559,000, primarily due to higher volumes and margins from the fabrication and erection of fossil fuel steam and environmental control systems and boiler cleaning equipment and higher volumes from nuclear services. Lower margins from the fabrication, repair and retrofit of existing facilities, replacement parts, and higher general and

administrative expenses and reorganization expenses associated with the Chapter 11 filing partially offset these increases;

In the nine months ended September 30, 2001:

B&W's revenues increased $205,152,000 to $1,026,350,000, primarily due to higher volumes from the fabrication and erection of fossil fuel steam and environmental control systems, fabrication, repair and retrofit of existing facilities, nuclear services, replacement nuclear steam generators, boiler cleaning equipment and replacement parts;

B&W's operating income increased $32,517,000 to $42,848,000, primarily due to higher volumes and margins from the fabrication and erection of fossil fuel steam and environmental control systems which, in the prior year, included additional charges to substantially completed original equipment contracts still under warranty or in dispute resolution. In addition, B&W experienced higher volumes and margins from the fabrication, repair and retrofit of existing facilities and nuclear services. Higher general and administrative expenses and reorganization expenses associated with the Chapter 11 filing and lower operating results from a joint venture in Pennsylvania partially offset these increases;

Interest expense increased $2,649,000 to $5,146,000, primarily due to an increase in expenses related to the DIP facility and the settlement of an ongoing state income tax dispute;

Other-net expense increased $5,796,000 from income of $327,000 to expense of $5,469,000, primarily due to a loss on the sale of investment securities. In addition, B&W experienced higher income in the prior period from estimated future non-employee products liability asbestos claim recoveries.

B&W's backlog at September 30, 2001 and December 31, 2000 was $1,413,162,000 and $1,030,628,000, respectively.

In connection with the bankruptcy filing, B&W and its filing subsidiaries entered into the DIP Credit Facility with a group of lenders, with Citibank, N.A. as administrative agent, for a three-year term. The facility requires compliance with certain financial and non-financial covenants. See Note 8 to the condensed consolidated financial statements for further information on the DIP Credit Facility.

We have assessed B&W's liquidity position as a result of the bankruptcy filing and believe that B&W can continue to fund its and its subsidiaries' operating activities and meet its debt and capital requirements for the foreseeable future. However, B&W's ability to continue as a going concern depends on its ability to settle its ultimate asbestos liability from its net assets, future profits and cash flow and available insurance proceeds, whether through the confirmation of a plan of reorganization or otherwise. As a result of the bankruptcy

filing and related events, there is no assurance that the carrying amounts of assets will be realized or that liabilities will be liquidated or settled for the amounts recorded. In addition, a rejection of B&W's plan of reorganization could change the liability amounts reported in the B&W financial statements and cause a material decrease in the carrying amount of our investment in B&W. See Note 8 to the condensed consolidated financial statements for more information.

See Note 1 to the condensed consolidated financial statements for information on new accounting standards.