UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.  )

Filed by the Registrant ý
Filed by a Party other than the Registrant o
Check the appropriate box:
ý Preliminary Proxy Statement
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material Under 14a-12

McDERMOTT INTERNATIONAL, INC.

McDermott International, Inc.

Bruce W. Wilkinson
Chairman of the Board and
Chief Executive Officer

November    , 2005

Dear Stockholder:

     We invite you to attend a special meeting of stockholders of McDermott International, Inc., which we have called to ask our stockholders to consider and vote on a resolution relating to the proposed settlement of the Chapter 11 proceedings involving The Babcock & Wilcox Company, a significant subsidiary of McDermott. We have scheduled this meeting to take place on         , December      , 2005, at 757 N. Eldridge Parkway, Houston, Texas 77079, on the 14th floor, commencing at 10:00 a.m. local time. The accompanying proxy statement provides information about the proposed settlement. You should consider this information, including the discussion of the risks associated with the proposed settlement which appears beginning on page 16, before voting on the proposed resolution. Our Board of Directors has unanimously approved the proposed settlement and unanimously recommends that you vote FOR the adoption of the proposed resolution.

     If EquiServe Trust Company, N.A., our transfer agent and registrar, holds your shares of record, we have enclosed a proxy card for your use. You may vote these shares by completing and returning the proxy card or, alternatively, calling a toll-free telephone number or using the Internet as described on the proxy card. If a broker or other nominee holds your shares in “street name,” it has enclosed a voting instruction form, which you should use to vote those shares. The voting instruction form indicates whether you have the option to vote those shares by telephone or by using the Internet.

     Your vote is important. Whether or not you plan to attend the meeting, please take a few minutes now to vote your shares.

     Thank you for your interest in our company.

Sincerely yours,

BRUCE W. WILKINSON

McDermott International, Inc.

Notice of Special Meeting of Stockholders

     A special meeting of the stockholders of McDermott International, Inc., a Panamanian corporation, will be held at 757 N. Eldridge Parkway, Houston, Texas 77079, on the 14th floor, on         , December      , 2005, at 10:00 a.m. local time, for the following purpose:

     To consider and vote on the adoption of a resolution to:

•

authorize and approve the settlement contemplated by the proposed settlement agreement relating to the Chapter 11 bankruptcy proceedings involving The Babcock & Wilcox Company, a significant subsidiary of McDermott, in substantially the form attached to the accompanying proxy statement, with such modifications or changes as the Board of Directors of McDermott may approve; and

•

authorize and approve McDermott’s execution and delivery of, and performance under, the proposed settlement agreement, in substantially the form attached to the accompanying proxy statement, with such modifications or changes as the Board of Directors of McDermott may approve.

     The accompanying proxy statement sets forth the proposed resolution under the caption “The Special Meeting—General.” Appendix A to the accompanying proxy statement includes a copy of the proposed settlement agreement.

     If you were a stockholder as of the close of business on November      , 2005, you are entitled to vote at the meeting and at any adjournment thereof.

     Please indicate your vote by following the instructions the enclosed proxy card or voting instruction form provides, whether or not you plan on attending the meeting.

By Order of the Board of Directors,

JOHN T. NESSER, III

Secretary

Dated: November      , 2005

TABLE OF CONTENTS

		PAGE
Summary			1
The Proposed Resolution			1
The Special Meeting			8
Recommendation of Our Board of Directors			9
Questions and Answers About the Proposed Settlement and the Special Meeting			10
Questions About the Proposal			10
Questions About Voting			14
Cautionary Statement Regarding Forward-Looking Statements			16
Risk Factors			16
The Special Meeting			19
General			19
Record Date and Who May Vote			20
How to Vote			20
How to Change Your Vote			21
Quorum			21
Vote Required and How Votes Are Counted			21
Confidential Voting			22
The Proposed Settlement			22
Background of the Proposed Settlement			22
Recommendation of the Board			35
Accounting Treatment of the Previously Negotiated Settlement			36
Accounting Treatment of the Proposed Settlement			37
Material U.S. Federal Income Tax Considerations Relating to the Proposed Settlement			38
Dissenters’ Rights			39
Description of the Proposed Settlement Agreement			39
Fairness in Asbestos Injury Resolution Act of 2005			44
Overview			44
Kickout and Sunset Provisions			46
Effect on Existing Asbestos Claims and Agreements			46
Comparison of Treatment of the Chapter 11 Debtors Under the Proposed FAIR Act as Reported to the Senate by the Senate Judiciary Committee, the Previously Negotiated Settlement Agreement and the Proposed Settlement Agreement			46
Information About McDermott and Its Subsidiaries			48
Information About B&W and Its Subsidiaries			50

		PAGE
Business			50
Selected Financial Information			53
Management’s Discussion and Analysis of Financial Condition and Results of Operations			53
Quantitative and Qualitative Disclosures About Market Risk			58
Selected Historical Consolidated Financial Data of McDermott			60
Unaudited Pro Forma Financial Information of McDermott			61
Security Ownership of Directors and Executive Officers			77
Security Ownership of Certain Beneficial Owners			79
Stockholders’ Proposals			80
Where You Can Find More Information			80
Financial Statements of The Babcock & Wilcox Company and Subsidiaries			F-1
Appendix A — Proposed Settlement Agreement			A-1

Cautionary Statement Regarding Forward-Looking Statements

     In accordance with the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, McDermott cautions that statements in this proxy statement which are forward-looking and provide other than historical information involve risks and uncertainties that may result in actual outcomes or results that differ from those indicated in the forward-looking statements. The forward-looking statements in this proxy statement include, among other things, statements about: conditions to the consummation and the effectiveness of the Proposed Joint Plan and Proposed Settlement Agreement; alternatives to the Proposed Joint Plan and Proposed Settlement Agreement; the estimated cost of the proposed settlement of the Chapter 11 proceedings; the estimated cost of contributions to a proposed national trust fund to resolve asbestos-related personal injury claims based on the provisions of legislation currently pending before the U.S. Senate; and the prospects for that legislation to be enacted and become law. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we can give no assurance that those expectations will prove to have been correct. Those statements are subject to various underlying assumptions, uncertainties and risks. If underlying assumptions prove incorrect, or if one or more of these risks materialize, actual outcomes or results may vary materially from those expected. For a more complete discussion of these and other risk factors, see “Risk Factors” below and the information in our annual report on Form 10-K for the year ended December 31, 2004 and our 2005 quarterly reports on Form 10-Q filed with the Securities and Exchange Commission, which are incorporated into this proxy statement by reference.

Risk Factors

     You should carefully consider the following risks related to the proposed settlement. For information about risks associated with McDermott’s business, see McDermott’s annual report on Form 10-K for the year ended December 31, 2004, which is incorporated into this proxy statement by reference. See “Where You Can Find More Information.”

If you vote to approve the proposed resolution and the Proposed Joint Plan becomes effective, the Chapter 11 Debtors may not qualify for participation under the terms of any subsequently enacted federal legislation addressing the resolution of asbestos claims.

     The Fairness in Asbestos Injury Resolution Act of 2005 (S. 852), introduced in the U.S. Senate on April 19, 2005 and reported favorably out of the Senate Judiciary Committee on June 16, 2005, would create a privately funded, federally administered trust fund to resolve pending and future asbestos-related personal injury claims. In light of continuing political opposition to the legislation, as well as other factors, we cannot currently predict whether the draft FAIR Act will be enacted and become law or, if it does become law, how it would impact the B&W Chapter 11 proceedings, the Chapter 11 Debtors or our company. We anticipate that, during the legislative process, the terms of the draft FAIR Act will change and that any such changes may be material to the impact of such legislation on B&W and the other Chapter 11 Debtors. Although the Condition Precedent provisions set forth in the Proposed Settlement Agreement would potentially provide us relief from having to make any payment pursuant to the Contingent Payment Right and payments under the B&W Note in excess of $25 million, it is unlikely that we would be able to avail ourselves of a more favorable outcome under any legislation that may be enacted and become law after the effective date of the Proposed Joint Plan. Furthermore, the Condition Precedent would be deemed satisfied if the FAIR Act or similar federal legislation does not become law on or before November 30, 2006. Even if the Condition Precedent is deemed not to be satisfied, and we are able to benefit from the relief of having to make these contingent payments, we cannot assure you that the economic terms of the proposed settlement will be at least as favorable to us as the economic terms of any asbestos claims-resolution legislation that may eventually become law. See “Fairness in Asbestos Injury Resolution Act of 2005” for more information regarding the proposed legislation.

If the Proposed Settlement Agreement and Proposed Joint Plan become effective and the Condition Precedent is satisfied, MI will be obligated to make, or to cause one of its subsidiaries to make, an additional $355 million cash payment to the Asbestos PI Trust on or before May 29, 2007 (subject to possible suspension of that payment obligation to a later date) and the entire $250 million principal amount of the B&W Note will become payable, which will create significant payment obligations and could adversely affect our liquidity.

     Under the terms of the Proposed Settlement Agreement, if the FAIR Act, or other similar legislation addressing resolution of asbestos claims, does not become law on or before November 30, 2006, or does become law but then becomes subject to a proceeding on or before January 31, 2007 which leads to a judicial decision that such legislation is unconstitutional as applied to Chapter 11 debtors similarly situated to B&W as of September 1, 2005, MI will be obligated to make, or to cause one of its subsidiaries to make, an additional $355 million cash payment to the Asbestos PI Trust pursuant to the Contingent Payment Right on or before May 29, 2007 (subject to the possible suspension of that payment obligation to a later date as described under “Description of the Proposed Settlement Agreement — Creation of the Asbestos PI Trust and Contribution of Assets”) and the entire $250 million principal amount of the B&W Note will become payable. Thus, our obligation to make substantial additional contributions to the Asbestos PI Trust would be conditioned upon events that are largely beyond our control.

     We anticipate that the $355 million contingent cash payment, if required, would be funded by available cash, McDermott share issuances, new borrowings or a combination of those sources. MI may not be able to obtain any additional financing that is required to fund the payment on commercially reasonable terms. In addition, any indebtedness incurred to fund this cash payment, along with the $250 million B&W Note, would represent significant additional indebtedness for us on a consolidated basis.

     While our management believes that, even with the addition of this new debt, our consolidated indebtedness on effectiveness of the proposed settlement would be reasonable in relation to our projected capitalization and working capital positions, the increased level of indebtedness and increased debt service obligations would increase our vulnerability to cyclical declines in our businesses. More specifically, our increased level of consolidated indebtedness and debt service requirements could affect our operations and expose us to greater risks during a cyclical decline in several ways, including:

	•		a greater percentage of our cash flow would be required to be used to service debt obligations;
	•		we may not be able to generate sufficient cash flow from operations to enable us to meet all of our debt service and other fixed-charge requirements;
	•		we may not be able to obtain additional financing for working capital, capital expenditures or general corporate and other purposes; and
	•		our flexibility in planning for, or reacting to changes in, our businesses and the industries in which we compete may be limited.

If the prospect of federal legislation effectively addressing the liability of the Chapter 11 Debtors for asbestos-personal injury claims does not materialize and the proposed settlement is not effected, either because the proposed resolution is not adopted at the Special Meeting, the Proposed Joint Plan does not become effective on or before the Effective Date Deadline or for any other reason, our inability to consummate the proposed settlement could have a material adverse effect on us.

     If the proposed resolution is not adopted, or if the Proposed Joint Plan does not become effective, on a final, nonappealable basis, on or before the Effective Date Deadline for any other reason, the Proposed Settlement Agreement contemplates that, unless the ACC, the FCR and we agree to extend that deadline, the settlement contemplated by the Proposed Settlement Agreement will be abandoned and those parties will resume their efforts to effect the settlement contemplated by the Previously Negotiated Settlement Agreement and the Previously Negotiated Joint Plan. However, there have been various objections, appeals and uncertainties that have impeded the progress of that previously negotiated settlement and there is substantial uncertainty as to whether that settlement would be consummated. If neither settlement is consummated, the Bankruptcy Court would be faced with the decision of how the Chapter 11 cases should proceed, and, under those circumstances, the Court would likely consider the following alternatives:

•

continuation of the Chapter 11 proceedings until another plan of reorganization is confirmed and becomes effective;

	•		appointment of a trustee to assume the administration of the Chapter 11 proceedings;
	•		conversion of the Chapter 11 proceedings to liquidation proceedings under Chapter 7 of the U.S. Bankruptcy Code; or
	•		dismissal of the Chapter 11 proceedings.

In the case of each of these alternatives, we would continue to be subject to substantial risks and uncertainties associated with the pending and future asbestos-related liabilities and other liabilities of B&W and the other Chapter 11 Debtors. Any one of these alternatives could ultimately result in the return to the courts of the approximately 300,000 asbestos-related personal injury and related-party claims, which are currently pending and proposed to be resolved through the proposed settlement. Each of these alternatives could also result in the resumption of litigation relating to the corporate reorganization we completed in 1998. As a result of these risks and uncertainties, we cannot predict the outcome if the proposed settlement fails; however, any such outcome could have a material and adverse impact on us and the market value of our common stock. See “The Proposed Settlement — Background of the Proposed Settlement.”

If the proposed settlement is consummated, and as a result we retain our ownership in B&W, our investment in the B&W Entities could be impaired as a result of future incidents arising from (1) operational risks associated with the businesses of the B&W Entities, (2) the significant pension liabilities of the B&W Entities, or (3) the contingent liabilities associated with their operations.

     The B&W Entities are subject to a number of risks inherent in their operations, including:

	•		the risk that operating accidents may occur, which could result in injury to or the loss of life or property;
	•		risks associated with environmental or toxic tort claims, including delayed manifestation claims for personal injury or loss of life;
	•		risks relating to potential pollution or other environmental mishaps;
	•		business interruption risks, including those relating to political action in foreign countries;
	•		risks associated with labor stoppages;
	•		risks associated from competing with competitors, some of whom may have greater financial or other resources;
	•		risks associated with governmental regulation and changes in regulations applicable to the businesses of the B&W Entities; and
	•		risks associated with international operations, including risks of war, terrorism and civil unrest, changing political conditions and changing laws and policies affecting trade and investment, the overlap of different tax structures and the risks associated with the assertion of foreign sovereignty over areas in which operations are conducted, including through expropriation, confiscation or nationalization of assets.

B&W and some of its subsidiaries have been, and in the future may be, named as defendants in lawsuits asserting large claims arising from events associated with risks such as these. Insurance against some of these risks is either unavailable or available only at rates that we consider uneconomical. A successful claim against one or more of the B&W Entities for which they are not fully insured could have a material adverse effect on our investment in the B&W Entities.

     The B&W Entities also have substantial pension liabilities (as described in note 8 to the financial statements of B&W and its subsidiaries included in this proxy statement).

     In addition, the B&W Entities are currently subject to claims for various contingent liabilities that would not be discharged pursuant to the Proposed Joint Plan, including present and future Apollo/Parks Township Claims, the claims by Iroquois Falls Power Corp. and various other claims discussed in notes 10 and 15 to the financial statements of B&W and its subsidiaries included in this proxy statement. In addition, it is possible that certain contingent liabilities, including any such liabilities to Citgo Petroleum Corporation and PDV Midwest Refinery L.L.C., ultimately may not be discharged pursuant to the Proposed Joint Plan. Citgo Petroleum and PDV Midwest Refinery have asserted that their claims (which are described in note 10 to the financial statements of B&W and its subsidiaries included in this proxy statement) will not be discharged by the Chapter 11 Proceedings. Furthermore, the B&W Entities could, in the future, become subject to significant asbestos-related personal injury claims in jurisdictions outside the United States, which would not be discharged pursuant to the Proposed Joint Plan or channeled to the Asbestos PI Trust pursuant to the channeling injunction contemplated by the Proposed Joint Plan. Although the Proposed Settlement Agreement contemplates that the Asbestos PI Trust would indemnify McDermott and its subsidiaries (including the B&W Entities) from various asbestos-related personal injury claims (other than workers’ compensation claims) attributable to the business and operations of the B&W Entities, including any such claims that may be brought in jurisdictions outside the United States, it is possible that the assets of the Asbestos PI Trust could be depleted over time so that such indemnification may not be adequate to protect us from future claims that may be brought in foreign jurisdictions and, as a result, would not be subject to the channeling injunction. Although the B&W Entities will indemnify McDermott and its other subsidiaries from all contingent liabilities of the B&W Entities pursuant to the Proposed Settlement Agreement (as would have been the case under the Previously Negotiated Settlement Agreement), any material loss suffered by any of the B&W Entities relating to any of those contingent liabilities (whether directly or as a result of their indemnification obligations to McDermott and its other subsidiaries) could have a material adverse impact on us, particularly by impairing our investment in, or reducing the profitability, cash flows or value of, the B&W Entities.

The Special Meeting

General

     We are mailing this proxy statement and accompanying proxy card to our stockholders beginning on November      , 2005. Our Board of Directors is soliciting your proxy to vote your shares at a Special Meeting to be held on December     , 2005. We have called the Special Meeting to ask our stockholders to consider and vote on the following resolution:

     RESOLVED, that the stockholders of McDermott International, Inc., a Panamanian corporation (“McDermott”), hereby:

     (1) authorize and approve the settlement contemplated by the Settlement Agreement to be entered into by and among McDermott, McDermott Incorporated, a Delaware corporation and a wholly owned subsidiary of McDermott (“MI”), Babcock & Wilcox Investment Company, a Delaware corporation and a wholly owned subsidiary of MI (“BWICO”), The Babcock & Wilcox Company, a Delaware corporation and a wholly owned subsidiary of BWICO (“B&W”), Diamond Power International, Inc., a Delaware corporation and a wholly owned subsidiary of B&W (“DPII”), Americon, Inc., a Delaware corporation and a wholly owned subsidiary of B&W (“Americon”), Babcock & Wilcox Construction Co., Inc., a Delaware corporation and a wholly owned subsidiary of Americon (together with B&W, DPII and Americon, the “Chapter 11 Debtors”), the Asbestos Claimants’ Committee in the Chapter 11 bankruptcy proceedings involving the Chapter 11 Debtors as debtors-in-possession, which are pending in the United States Bankruptcy Court for the Eastern District of Louisiana (the “Chapter 11 proceedings”), and the Legal Representative for Future Asbestos-Related Claimants in the Chapter 11 proceedings, in substantially the form attached as Appendix A to the proxy statement of McDermott dated as of November      , 2005, relating to the special meeting of stockholders of McDermott held on December      , 2005 (the “Proposed Settlement Agreement”), with such modifications or changes as the Board of Directors of McDermott may subsequently approve; and

     (2) approve the form, terms and provisions of, and authorize McDermott’s execution and delivery of, and (subject to the ability of the Board of Directors of McDermott to cause McDermott to terminate the Proposed Settlement Agreement pursuant to the provisions of Section 8.3 thereof) performance under, the Proposed Settlement Agreement, in substantially the form hereby approved, with such modifications or changes as the Board of Directors of McDermott may subsequently approve.

     We will bear all expenses incurred in connection with this proxy solicitation, which we expect to conduct primarily by mail. We have engaged The Proxy Advisory Group of Strategic Stock Surveillance, LLC to assist in the solicitation for a fee that will not exceed $25,000, plus out-of-pocket expenses. In addition to solicitation by mail and by The Proxy Advisory Group of Strategic Stock Surveillance, LLC, our officers and regular employees may solicit your proxy by telephone, by facsimile transmission or in person, for which they will not be separately compensated. If your shares are held through a broker or other nominee (i.e., in “street name”), we have requested that your broker or nominee forward this proxy statement to you and obtain your voting instructions, for which we will reimburse them for reasonable out-of-pocket expenses. If your shares are held through the Thrift Plan for Employees of McDermott Incorporated and Participating Subsidiary and Affiliated Companies, the trustee of that plan has sent you this proxy statement and a voting instruction form, which you can use to direct the trustee on how to vote your plan shares.

Record Date and Who May Vote

     Our Board of Directors selected November     , 2005 as the record date (the “Record Date”) for determining stockholders entitled to vote at the Special Meeting. This means that if you were a registered stockholder with our transfer agent and registrar, EquiServe Trust Company, N.A., on the Record Date, you may vote your shares on the matters to be considered by our stockholders at the Special Meeting. If your shares were held in street name on that date, the broker or other nominee that was the record holder of your shares has the authority to vote them at the Special Meeting. They have forwarded to you this proxy statement seeking your instructions on how you want your shares voted.

     On the Record Date,        shares of our common stock were outstanding. Each outstanding share of common stock entitles its holder to one vote on each matter to be acted on at the meeting.

How to Vote

     For shares held of record, you can vote your shares in person at the Special Meeting or vote now by giving us your proxy. You may give us your proxy by completing the enclosed proxy card and returning it in the enclosed U.S. postage prepaid envelope or by calling a toll-free telephone number or using the Internet as further described in the enclosed proxy card. The telephone and Internet voting procedures have been designed to verify your identity through a personal identification or control number and to confirm that your voting instructions have been properly recorded. If you vote using either of these electronic means, you will save us return mail expense. By giving us your proxy, you will be directing us on how to vote your shares at the meeting. Even if you plan on attending the meeting, we urge you to vote now by giving us your proxy. This will ensure that your vote is represented at the meeting. If you do attend the meeting, you can change your vote at that time.

     If your shares are held in street name, the broker or nominee that holds your shares will need to obtain your authorization in order to have the authority to vote those shares for or against the proposed resolution and has enclosed a voting instruction form with this proxy statement for that purpose. That broker or nominee will vote your shares as you direct on its voting instruction form, which is enclosed. Please complete the voting instruction form and return it in the enclosed U.S. postage prepaid envelope. If your shares are held in street name and you want to vote your shares in person at the Special Meeting, you must obtain a valid proxy from your broker or nominee. You should refer to the instructions provided in the enclosed voting instruction form for further information. Additionally, the availability of telephone or Internet voting will depend on the voting process used by the broker or nominee that holds your shares.

     You may receive more than one proxy statement and proxy card or voting instruction form if your shares are held through more than one account (e.g., through different brokers or nominees). Each proxy card or voting instruction form covers only those shares of common stock held in the applicable account. If you hold shares in more than one account, you will have to provide voting instructions as to all your accounts to vote all your shares.

How to Change Your Vote

     You may change your proxy voting instructions at any time prior to the stockholder vote at the Special Meeting. For shares held of record, you may change your vote by written notice to our Corporate Secretary, granting a new proxy or by voting in person at the Special Meeting. Unless you attend the meeting and vote your shares in person, you should change your vote using the same method (by telephone, Internet or mail) that you first used to vote your shares. That way, the inspectors of election for the meeting will be able to verify your latest vote.

     For shares held in street name, you should follow the instructions in the voting instruction form provided by your broker or nominee to change your vote. If you want to change your vote as to shares held in street name by voting in person at the Special Meeting, you must obtain a valid proxy from the broker or nominee that holds such shares for you.

Quorum

     The Special Meeting will be held only if a quorum exists. The presence at the meeting, in person or by proxy, of holders of a majority of our outstanding shares of common stock as of the Record Date will constitute a quorum. If you attend the meeting or vote your shares using the enclosed proxy card or voting instruction form (including any telephone or Internet voting procedures provided), your shares will be counted toward a quorum, even if you abstain from voting on the proposed resolution. Broker non-votes (i.e., shares held by brokers and other nominees as to which they have not received voting instructions from the beneficial owners and lack the discretionary authority to vote on the proposed resolution) also will count for quorum purposes.

Vote Required and How Votes Are Counted

     As provided in the Proposed Settlement Agreement, the adoption of the proposed resolution requires the affirmative vote of a majority of the shares of common stock present in person or represented by proxy at the Special Meeting and entitled to vote on the matter, provided that, in order for the vote to be effective, the number of shares of our common stock for which votes are cast in favor of the proposed resolution must represent at least 50% of the voting power of all of the shares of our common stock outstanding and entitled to vote on the matter. The “shares of our common stock outstanding and entitled to vote on the matter” are all the shares that were outstanding as of the record date, excluding treasury shares.

     You may vote “FOR” or “AGAINST” or abstain from voting on the proposal. If you submit a signed proxy card without specifying your vote, your shares will be voted “FOR” the approval of the Proposed Settlement Agreement.

     Because abstentions are counted for purposes of determining whether a quorum is present but are not affirmative votes for the proposal, they have the same effect as votes “AGAINST” the proposal.

     If you hold your shares in street name and you do not instruct your broker or nominee how to vote those shares, it may vote your shares as it decides as to matters for which it has discretionary authority under applicable New York Stock Exchange rules. Those rules will not permit brokers or other nominees to exercise their discretionary authority with respect to the vote on the proposed resolution. Accordingly, shares held by brokers or other nominees as to which they have not received voting instructions from the beneficial owners with regard to the vote on the proposed resolution will be treated as “broker non-votes.” While broker non-votes will be counted toward a quorum, they are not entitled to vote on, or considered present for purposes of, the vote on the proposed resolution. However, because of the requirement set forth in the Proposed Settlement Agreement that, in order for the vote to be effective, the number of shares of our common stock for which votes are cast in favor of the proposed

resolution must represent at least 50% of the voting power of all of the shares of our common stock outstanding and entitled to vote on the matter, broker non-votes may have the same effect as a vote “AGAINST” the proposal.

     We are not aware of any other matters that may be presented or acted on at the meeting. If you vote by signing and returning the enclosed proxy card or using the telephone or Internet voting procedures, the individuals named as proxies on the card may vote your shares, in their discretion, on any other matter requiring a stockholder vote that comes before the meeting.

Confidential Voting

     All voted proxies and ballots will be handled to protect your voting privacy as a stockholder. Your vote will not be disclosed except:

	•		to meet any legal requirements;
	•		to permit independent inspectors of election to tabulate and certify your vote; or
	•		to adequately respond to your written comments on your proxy card.

The Proposed Settlement

Background of the Proposed Settlement

     B&W and the other Chapter 11 Debtors filed for protection under Chapter 11 of the U.S. Bankruptcy Code on February 22, 2000, in response to increases in the amounts being demanded to settle asbestos-related personal injury claims that put an extraordinary strain on B&W’s historical claims resolution process, left B&W with no practicable means of resolving the claims through out-of-court settlement and threatened B&W’s financing viability and long-term prospects. The Chapter 11 Debtors took this action as a means to determine and comprehensively resolve all pending and future asbestos-related liability claims against them. After the bankruptcy filing, the ACC was formed to represent the rights of asbestos-related personal injury claimants, and the Bankruptcy Court appointed the FCR to represent the rights of persons who might subsequently assert future asbestos-related personal injury claims.

     Since 2002, we have been engaged in negotiations with the ACC, the FCR and other parties to the bankruptcy proceedings to reach a settlement and a consensual joint plan of reorganization for the Chapter 11 proceedings. Those negotiations led to the Previously Negotiated Joint Plan and the Previously Negotiated Settlement Agreement in 2003. For details regarding the terms of the Previously Negotiated Settlement Agreement, see “—Description of the Previously Negotiated Settlement Agreement” below.

     At a special meeting of McDermott’s stockholders on December 17, 2003, McDermott’s stockholders voted on and approved a resolution relating to the Previously Negotiated Settlement Agreement. The stockholders’ approval of the resolution was expressly conditioned on the subsequent approval of the previously negotiated settlement by McDermott’s Board of Directors. In addition, the Previously Negotiated Joint Plan provided that it could not become effective without the approval of the Previously Negotiated Settlement Agreement by the McDermott Board within 30 days prior to the effective date of the plan. The McDermott Board’s decision on whether to approve the Previously Negotiated Settlement Agreement was to be made after consideration of any developments that might occur prior to the effective date, including any changes in the status of any potential federal legislation concerning asbestos liabilities. The affirmative vote of a majority of the shares of McDermott’s common stock present in person or by proxy at the December 2003 special meeting was required to approve the resolution related to the Previously Negotiated Settlement Agreement. The voting, which resulted in approval of the resolution, was as follows: 46,648,582 votes for, 1,126,732 votes against, 411,808 abstentions and no broker non-votes.

     Although McDermott’s stockholders approved the Previously Negotiated Settlement Agreement, McDermott’s Board has not taken the requisite approval under consideration because progress towards an effective

date for the Previously Negotiated Joint Plan has been impeded by various procedural objections and appeals on the part of: (1) American Nuclear Insurers relating to insurance coverage for Apollo/Parks Township Claims and (2) insurers whose policies cover asbestos personal injury claims who have not settled with the Chapter 11 Debtors, McDermott, the ACC and the FCR. As a result, the Previously Negotiated Settlement Agreement has not been executed and delivered by the parties to the negotiations, and, beginning in January 2005, we, together with the ACC, the FCR, the Chapter 11 Debtors and their respective representatives, began discussions about alternative means to expedite the resolution of the Chapter 11 proceedings on a mutually acceptable basis. Those discussions led to the Proposed Settlement Agreement. For a description of the Proposed Settlement Agreement, see “Description of the Proposed Settlement Agreement,” below.

     A summary of the events leading up to B&W’s bankruptcy and the Proposed Settlement Agreement is set forth below, including the history of asbestos-related and other claims filed against B&W, a corporate reorganization we undertook that has been challenged by other parties to the bankruptcy proceedings, a description of the settlement negotiation process and other alternatives we considered.

Asbestos-Related Claims and Bankruptcy Proceedings

     As a result of asbestos-insulated commercial boilers and other products B&W and some of its subsidiaries sold, installed or serviced in prior decades, B&W is subject to a substantial volume of nonemployee liability claims asserting asbestos-related injuries. The vast majority of these claims relate to exposure to asbestos occurring prior to 1977, the year in which the U.S. Occupational Safety and Health Administration adopted new regulations that impose liability on employers for, among other things, job-site exposure to asbestos. All of these personal injury claims are similar in nature, the primary difference being the type of alleged injury or illness suffered by the plaintiff as a result of the exposure to asbestos fibers (e.g., mesothelioma, lung cancer, other types of cancer, asbestosis or pleural changes).

     B&W received its first asbestos claims in the late 1970s. Initially, our primary insurance carrier, a unit of Travelers Group, handled the claims. B&W exhausted the limits of most of our primary products liability insurance coverage in 1989. Prior to the Chapter 11 filing, B&W had been handling the claims under a claims-handling program funded primarily by reimbursements from our excess-coverage insurance carriers. The excess coverage available for B&W’s asbestos-related products liability claims extended through March 1986. This coverage has been provided by a total of approximately 135 insurance companies. We obtained varying amounts of excess-coverage insurance for each year within that period, and within each year there are typically several increments of coverage. For each of those increments, a syndicate of insurance companies has provided the coverage.

     Pursuant to agreements with the majority of our principal insurers concerning the method of allocation of claim payments to the years of coverage, B&W historically negotiated and settled asbestos-related personal injury claims against it and billed the appropriate amounts to the insurers. From the early 1980s forward, B&W devised a broad settlement program with key plaintiffs’ law firms, entering into informal arrangements with such firms throughout the country to settle, rather than litigate, asbestos claims. This program involved grouping claims that met basic criteria and paying negotiated settlement amounts. The average amount per settled claim, including related out-of-pocket attorneys’ fees and other related out-of-pocket expenses, over the three calendar years prior to the Chapter 11 filing was approximately $7,900.

     Beginning in the third quarter of calendar year 1999, B&W experienced a significant increase in the amount demanded by several plaintiffs’ attorneys to settle some types of asbestos-related personal injury claims. These increased demands significantly impaired B&W’s ability to continue to resolve its asbestos-related liability through out-of-court settlements. As a result, B&W filed for bankruptcy, believing that a Chapter 11 reorganization offered the only viable legal process through which it and its subsidiaries could seek a comprehensive resolution of their asbestos-related liability.

     On February 22, 2000, the Chapter 11 Debtors filed a voluntary petition in the Bankruptcy Court for the Eastern District of Louisiana to reorganize under Chapter 11 of the U.S. Bankruptcy Code. As a result of the filing, the Bankruptcy Court issued a temporary restraining order prohibiting asbestos-related liability lawsuits and other

actions for which there is shared insurance from being brought against non-filing affiliates of B&W, including McDermott, MI and J. Ray McDermott, S.A. The temporary restraining order was converted to a preliminary injunction, which has been subject to periodic hearings before the Bankruptcy Court for extension. Currently, the preliminary injunction runs through January 9, 2006.

     Pursuant to an order of the Bankruptcy Court, a March 29, 2001 bar date was set for the submission of allegedly unpaid pre-Chapter 11 settled asbestos claims and a July 30, 2001 bar date was set for all other asbestos-related personal injury claims, asbestos-related property damage claims and derivative asbestos claims against the Chapter 11 Debtors, as well as the Apollo/Parks Township Claims. As of the March 29, 2001 bar date, over 49,000 allegedly settled claims had been filed. The Chapter 11 Debtors have accepted approximately 8,910 as pre-Chapter 11 binding settled claims at this time, with an aggregate liability of approximately $69 million. The Bankruptcy Court has disallowed approximately 33,000 claims as settled claims, and the Chapter 11 Debtors are in the process of challenging virtually all the remaining claims. If the Bankruptcy Court determines these claims were not settled prior to the filing of the Chapter 11 petition, these claims may be refiled as unsettled personal injury claims. As of July 30, 2001, approximately 223,000 additional asbestos-related personal injury claims, 60,000 related-party claims, 183 property damage claims, 225 derivative asbestos claims and 571 claims relating to the Apollo/Parks Township facilities had been filed. Since the July 30, 2001 bar date, approximately 15,000 additional personal injury claims have been filed, including approximately 10,000 claims originally filed as allegedly settled claims that were disallowed by the Bankruptcy Court as settled claims and subsequently refiled as unsettled personal injury claims. Approximately 3,900 additional related party claims, 28 property damage claims, 218 derivative claims and three Apollo/Parks Township Claims have also been filed since the July 30, 2001 bar date. A bar date of January 15, 2003 was set for the filing of specified general unsecured claims. As of January 15, 2003, more than 2,700 general unsecured claims were filed, and the Chapter 11 Debtors commenced an analysis of these claims and filed objections to many of them. These include claims filed by various insurance companies seeking recovery from the Chapter 11 Debtors under various theories and priority tax claims, which appear to be estimates of liability by taxing authorities for ongoing audits of MI. The Chapter 11 Debtors believe that these claims are without merit and are contesting them. The Chapter 11 Debtors continue to analyze the claims filed by the January 15, 2003 bar date. The estimated total alleged liability, as asserted by the claimants in the Chapter 11 proceedings and in filed proofs of claim, of the asbestos-related claims, including the alleged settled claims, substantially exceeds the combined value of the Chapter 11 Debtors and the known available products liability and property damage insurance coverages. The Chapter 11 Debtors filed a proposed Litigation Protocol with the District Court on October 18, 2001, setting forth the intention of the Chapter 11 Debtors to challenge all unsupported claims and taking the position that a significant number of those claims may be disallowed by the Bankruptcy Court. The ACC and the FCR filed briefs opposing the Litigation Protocol and requesting an estimation of pending and future claims. No decision was rendered by the Bankruptcy Court or the District Court and these matters have been stayed pending the settlement negotiations between the parties.

     On May 15, 2000, the Chapter 11 Debtors filed their first motion for an extension of the exclusive period within which they had the exclusive right to file a plan of reorganization and solicit acceptance of that plan. The ACC filed an opposition to that request. By order dated June 9, 2000, the Bankruptcy Court approved the Chapter 11 Debtors’ motion and extended the exclusive period for 60 days. Thereafter, the Chapter 11 Debtors filed a second motion seeking a further extension. The ACC filed an opposition to that request as well. By order dated October 13, 2000, the Bankruptcy Court extended the exclusive period in which the Chapter 11 Debtors had to file a plan of reorganization until February 22, 2001, and the period in which they had to obtain acceptances of that plan in order to preserve the exclusive period until April 23, 2001. Due to the parties’ inability to reach a compromise of the issues raised in the Chapter 11 proceedings, the Chapter 11 Debtors filed a motion to appoint a mediator on January 25, 2001, in an effort to move the Chapter 11 proceedings toward a consensual plan of reorganization. As a result, the Bankruptcy Court appointed Professor Francis McGovern as a mediator to coordinate and otherwise assist with settlement discussions.

     On February 22, 2001, the Chapter 11 Debtors filed a plan of reorganization and disclosure statement (the “B&W Plan”). This plan of reorganization contemplated a resolution under either a settlement process or a strategy of litigating asbestos claims. Under the settlement process, there would have been a consensual agreement of 75% of the asbestos-related personal injury claimants. A trust would have been formed and assigned all of the Chapter 11 Debtors’ insurance rights with an aggregate products liability value of approximately $1.15 billion. In addition,

$50 million of cash and a $100 million subordinated 10-year note payable would have been transferred to the trust. The Chapter 11 Debtors and their nondebtor affiliates (including McDermott and its other subsidiaries) would have consented to the assignment of the insurance and would have released and voided any right they had to the insurance, with the nondebtor defendants receiving a full release and protection under the U.S. Bankruptcy Code against all present and future asbestos-related liability claims relating to the B&W Entities. The trust’s rights to the insurance would have been protected and could have been dedicated solely to the resolution of the asbestos-related claims. Significantly, the protection that would have been provided to the Chapter 11 Debtors and their nondebtor affiliates (including McDermott and its other subsidiaries) would not have included a channeling injunction under Section 524(g) of the U.S. Bankruptcy Code. Accordingly, while the B&W Plan contemplated that B&W and all of its affiliates would have been released and discharged from all present and future liability for asbestos-related claims arising out of exposure to products of the B&W Entities, the absence of a permanent channeling injunction might have left us with some risk of future asbestos-related claims attributable to the B&W Entities, particularly in the event the trust exhausted its assets, through the payment of claims or otherwise.

     Under the litigation strategy, if B&W was not able to reach a consensual agreement with the plaintiffs, a cram-down option under the U.S. Bankruptcy Code would have been available. The claims would still have been channeled to a trust with $50 million of cash and a $100 million subordinated 10-year note payable, but the Chapter 11 Debtors and their affiliates would not have transferred their insurance rights. The Chapter 11 Debtors would have managed the insurance rights, and claims would have been handled through the litigation process by the trust. Funding of the trust would have been from the insurance, the cash, the note payable and equity of the Chapter 11 Debtors, if necessary.

     Shortly after the filing of the B&W Plan, it became apparent that the ACC, the FCR and other representatives for asbestos-related claimants found that plan to be unacceptable. By their filing of the B&W Plan, the Chapter 11 Debtors preserved their exclusive period through April 23, 2001, the deadline as of which the Chapter 11 Debtors had to have obtained acceptance of the initial proposed plan. The Chapter 11 Debtors filed subsequent requests to extend that deadline. That deadline was extended until May 8, 2002, at which time, in response to further objections from the ACC and the FCR, the Bankruptcy Court allowed the exclusivity period to expire and permitted other parties in interest to file competing plans. The ACC and the FCR filed a competing joint plan of reorganization (the “ACC/FCR Plan”) and a related disclosure statement on July 3, 2002.

     The ACC/FCR Plan contemplated that, on its effective date, all of the shares of B&W owned by BWICO would be canceled and new shares would be issued to: (1) a trust established for the benefit of claimants with asbestos-related personal injury claims against the Chapter 11 Debtors; and (2) certain general unsecured creditors of the Chapter 11 Debtors. The ACC/FCR Plan further contemplated that McDermott and its affiliates (other than the B&W Entities) would be enjoined from any continuing access to the insurance rights that provided coverage for the Chapter 11 Debtors’ liability on account of asbestos-related personal injury claims. Those insurance rights would be assigned to the trust. The ACC/FCR Plan, however, did not contemplate that, absent a settlement, McDermott and its affiliates (other than the B&W Entities) would receive the protection of an injunction against present or future claims based on the Chapter 11 Debtors’ asbestos-related liabilities. Instead, it contemplated that claims against McDermott and its subsidiaries (other than the B&W Entities), including McDermott’s captive insurance subsidiaries, would survive. Furthermore, it did not contemplate a settlement of the pending appeal by the ACC and the FCR of a favorable ruling by the Bankruptcy Court validating the corporate reorganization we completed in 1998, which involved B&W’s cancellation of a $313 million intercompany note receivable and transfers of substantial assets from B&W to BWICO, including all the capital stock of several operating subsidiaries. See “—Corporate Reorganization.”

     The ACC/FCR Plan generally contemplated that:

	•		asbestos-related personal injury claimants asserting claims arising from cases of severe asbestosis and malignancies would have access to 55% of the asbestos trust’s resources;
	•		asbestos-related personal injury claimants asserting claims based on cases involving nonmalignant asbestosis and pleural disease would have access to 45% of the asbestos trust’s resources; and

•

all asbestos-related personal injury claimants would be entitled to a “quick pay” option of $250.

The trustees of the trust would have had the discretion to assert defenses to asbestos-related personal injury claims.

     Under the ACC/FCR Plan, the asbestos trust and general unsecured creditors with allowed claims would have shared pro rata in a pool of assets consisting of the new stock of B&W issued on the effective date of the ACC/FCR Plan, excess cash of the Chapter 11 Debtors and the monetary value of specified tax benefits created upon effectuation of the ACC/FCR Plan. In addition, certain general unsecured creditors of the Chapter 11 Debtors would have been entitled to recover the full amount of insurance proceeds arising from the allowance of their claims.

     The ACC/FCR Plan also contemplated that a separate trust would have been created to pay the Apollo/Parks Township Claims. This trust would have been funded by access to separate insurance and a contribution from the Chapter 11 Debtors that would be reimbursed out of insurance proceeds. McDermott and its affiliates (other than the B&W Entities) would not have been protected by an injunction from the assertion of Apollo/Parks Township Claims against them, but would have been enjoined from access to the insurance rights relating to those claims.

     As more fully described under “—Developing the Previously Negotiated Settlement” below, subsequent settlement discussions between the parties resulted in an agreement in principle on key terms by August 7, 2002, which served as a basis for continuing negotiations. Based on that agreement in principle and subsequent negotiations, on December 19, 2002, the Chapter 11 Debtors, the ACC, the FCR and MI, acting together as plan proponents, filed drafts of the Previously Negotiated Joint Plan, a related joint disclosure statement and the Previously Negotiated Settlement Agreement. On March 28, 2003 and again on May 5, 2003, the parties filed amended drafts of the Previously Negotiated Joint Plan, the disclosure statement and the Previously Negotiated Settlement Agreement. On June 25, 2003, the parties filed a third amended Previously Negotiated Joint Plan and disclosure statement and another revised version of the Previously Negotiated Settlement Agreement. On July 7, 2003, the Bankruptcy Court ruled that the third amended disclosure statement was adequate for purposes of soliciting votes on whether to accept or reject the Previously Negotiated Joint Plan and, on July 21, 2003, the solicitation commenced. Under a voting procedures order entered on July 10, 2003 by the Bankruptcy Court, August 29, 2003 was established as the voting deadline for the claimants entitled to vote on the proposed plan of reorganization, and objections to confirmation were also due by that date. As discussed below under “—Developing the Previously Negotiated Settlement,” the Bankruptcy Court subsequently modified its voting procedures order, effectively extending the period of time for the asbestos-related personal injury claimants to complete their voting on the Previously Negotiated Joint Plan until November 25, 2003, in order to permit that vote to be completed concurrently with the holding of the 2003 Special Meeting. The Bankruptcy Court commenced hearings on the confirmation of the Previously Negotiated Joint Plan on September 22, 2003.

     On November 9, 2004, the Bankruptcy Court entered its Amended Findings of Fact and Conclusions of Law Regarding Core Matters and Proposed Finding of Fact, Conclusions of Law and Recommendations to the District Court With Respect to Non-Core Matters (the “Amended Findings and Conclusions”). In its Amended Findings and Conclusions, the Bankruptcy Court recommended to the District Court that the Previously Negotiated Joint Plan be confirmed. Also on November 9, 2004, the Bankruptcy Court entered an order making findings of fact and conclusions of law on core matters and making recommendations to the District Court on non-core matters (“November 9, 2004 Order”). Various insurers and certain claimants parties filed objections or appeals to the Amended Findings and Conclusions and the November 9, 2004 Order. The plan proponents filed a cross-appeal with respect to a bankruptcy law issue that relates to ANI’s policies. Briefing and other filings regarding the objections and appeals were completed on May 31, 2005, and the District Court heard oral argument on July 21, 2005. The District Court has not yet ruled on the various appeals and objections, and the timing of any ruling by the District Court is uncertain. Since the July 21, 2005 oral argument, the plan proponents have entered into settlement arrangements with a number of the objectors/appellants. While other settlement negotiations are continuing, several unresolved objections to and appeals from the Amended Findings and Conclusions and the November 9, 2004 Order remain pending.

Apollo/Parks Township Claims

     In 1971, B&W purchased the stock of Nuclear Materials and Equipment Corporation (“NUMEC”) from ARCO. NUMEC owned and operated two nuclear fuel processing facilities located in Apollo, Pennsylvania and in Parks Township, Pennsylvania. Under the stock purchase agreement, ARCO agreed to indemnify B&W for specified claims arising out of these facilities.

     B&W merged NUMEC into itself in 1974 and continued to operate the Parks Township facility until 1980 and the Apollo facility until 1983. Subsequently, both the Apollo facility and the Parks Township facility were decommissioned.

     On June 7, 1994, Donald F. Hall, Mary Ann Hall and others filed suit against B&W and ARCO in the United States District Court for the Western District of Pennsylvania. The suit involves approximately 500 separate claims for compensatory and punitive damages relating to the operation of the Apollo and Parks Township nuclear fuel processing facilities (the “Hall Litigation”). The plaintiffs in the Hall Litigation allege, among other things, that they suffered personal injury, property damage and other damages as a result of radioactive emissions from these facilities. In September 1998, a jury found B&W and ARCO liable to eight plaintiffs in the first cases brought to trial, awarding $36.7 million in compensatory damages. In the course of that trial, B&W settled all pending punitive damages claims in the Hall Litigation for $8.0 million. In June 1999, the Court set aside the $36.7 million judgment and ordered a new trial on all issues. In November 1999, the Court allowed an interlocutory appeal by the plaintiffs of some of the issues, including the granting of the new trial and the Court’s rulings on specified evidentiary matters, which, following B&W’s bankruptcy filing, the Third Circuit Court of Appeals declined to accept for review.

     The plaintiffs’ remaining claims against B&W in the Hall Litigation have been automatically stayed as a result of B&W’s bankruptcy filing. Under the Proposed Settlement Agreement and the Proposed Joint Plan, the Apollo/Parks Township Claims will not be channeled to a trust, as contemplated by the Previously Negotiated Settlement Agreement and the Previously Negotiated Joint Plan. Rather, the Apollo/Parks Township Claims will remain the responsibility of the Chapter 11 Debtors and will not be impaired under the terms of the Proposed Joint Plan. While the Proposed Settlement has been structured in a manner to permit all disputes relating to the Apollo/Parks Townships Claims and the associated insurance coverage to be resolved after the Proposed Joint Plan has been confirmed and becomes effective, we are continuing our efforts to negotiate a mutually satisfactory resolution of the disputes involving the current claimants in the Hall Litigation on an expedited basis. We believe that all claims under the Hall Litigation will be resolved within the limits of coverage of our insurance policies. However, there may be an issue as to whether our insurance coverage is adequate and we may be materially adversely impacted if our liabilities exceed our coverage.

Corporate Reorganization

     In 1998, we completed a corporate reorganization which included, among other things, B&W’s cancellation of a $313 million intercompany note receivable and B&W’s transfer to BWICO of all the capital stock of Babcock & Wilcox Tracy Power, Inc., Hudson Products Corporation (“Hudson Products”), McDermott Technology, Inc. (“MTI”) and BWXT (collectively, the “1998 Transfers”).

     On April 30, 2001, B&W filed a declaratory judgment action in its Chapter 11 proceeding in the Bankruptcy Court against MI, BWICO, BWXT, Hudson Products and MTI, seeking a judgment, among other things, that (1) B&W was not insolvent at the time of, or rendered insolvent as a result of, the corporate reorganization that we completed in the fiscal year ended March 31, 1999, and (2) the transfers related to the reorganization were not voidable. The Bankruptcy Court permitted the ACC and the FCR in the Chapter 11 proceeding to intervene and proceed as plaintiff-intervenors and realigned B&W as a defendant in this action. The ACC and the FCR asserted in this action, among other things, that B&W was insolvent at the time of the transfers and that the transfers should be voided. Following a trial on the issue of solvency, in February 2002 the Bankruptcy Court found the ACC and FCR failed to sustain their burden of proving B&W was insolvent at the time of the corporate reorganization. MI, BWICO, BWXT, Hudson Products and MTI then filed a motion for summary judgment asking that judgment be entered on a variety of additional pending counts presented by the ACC and the FCR. The Bankruptcy Court

granted this motion and entered an order dismissing all claims asserted in complaints filed by the ACC and the FCR regarding the 1998 Transfers. The ACC and the FCR have appealed this order to the District Court, but their appeal would be dismissed if the proposed settlement is finalized.

     The Proposed Settlement Agreement and the Proposed Joint Plan provide for settlement of the claims brought by the ACC and the FCR relating to the 1998 Transfers. Please read “Description of the Proposed Settlement Agreement” for more information.

Insurance Settlements

     During the course of the Chapter 11 proceedings and continuing to the present, we, the ACC and FCR have been in settlement negotiations with insurers of B&W and McDermott that have issued the insurance policies whose rights will be assigned to the Asbestos PI Trust. The settlement negotiations generally seek to (1) resolve various claims made by those insurers in litigation initiated after the Chapter 11 Debtors commenced their Chapter 11 cases and (2) liquidate insurance policy rights into cash payments that would be paid to or for the benefit of the Asbestos PI Trust if and when a joint plan of reorganization becomes effective. To date, we, the ACC and the FCR have:

	•		entered into conditional settlements with a substantial number of our insurers, which collectively provide for the payment of approximately $330 million in insurance proceeds to the Asbestos PI Trust if and when the plan effective date occurs, in exchange for a release of certain coverage liabilities of these insurers;
	•		entered into a conditional settlement agreement with underwriters at Lloyd’s, London, Equitas Limited, Equitas Reinsurance Limited, Equitas Holdings Limited, Equitas Management Services Limited and Equitas Policyholders Trustee Limited (“Lloyd’s/Equitas”), under which Lloyd’s/Equitas has paid $415 million into an escrow account, which amount would be transferred to the Asbestos PI Trust if and when the plan of reorganization becomes effective, in exchange for a release of coverage liability of those entities; and
	•		entered into unconditional settlement agreements with two insolvent insurance company groups, which are currently subject to insolvency proceedings in the United Kingdom. Under these settlements, in exchange for a release of certain policies, the liquidators agreed to pay a total sum in excess of $18.4 million, which amounts will be retained regardless of whether the plan of reorganization becomes effective.

     Under the terms of these agreements, the settling insurers would withdraw any objections to the plan of reorganization and, if and when the plan becomes effective, these insurers would receive the benefit of the plan’s Section 524(g) injunction with respect to B&W asbestos claims. Certain of the settlement payments represent discounts of up to approximately 30% from the remaining products liability limits available under the policies. The conditional settlements will become effective, however, only upon the effective date of the plan of reorganization, and, in the event the plan does not become effective, the conditional settlements will become null and void and the remaining products liability limits will be available to satisfy claims as provided under the policies. The conditional and unconditional settlements have been approved, or are in the process of being approved, by the Bankruptcy Court. We, the ACC and FCR are also engaged in settlement negotiations with other insurers of B&W. If any agreements are reached, they would be subject to the approval of the Bankruptcy Court. For additional information concerning the litigation with these insurers and the developments leading up to the insurance settlement agreements, see the discussions in note 10 to the consolidated financial statements of B&W and its subsidiaries included in this proxy statement.

Developing the Previously Negotiated Settlement

     At various points in time between the commencement of the Chapter 11 proceedings and July 1, 2002, our representatives engaged in discussions with representatives of the ACC and the FCR regarding the possibility of a

negotiated settlement of the contested issues among the parties in the proceedings. Those discussions did not result in any agreement on material issues.

     On July 1, 2002, Francis S. Kalman, the Chief Financial Officer of McDermott, and John T. Nesser, III, the General Counsel of McDermott, met with representatives of the ACC and the mediator to further discuss the possibility of a settlement. During that meeting, the participants agreed on eight basic “points of agreement,” which were memorialized in a preliminary term sheet. Those points of agreement served as the general basis for further negotiations that culminated in the Previously Negotiated Settlement Agreement.

     On July 3, 2002, the Board of Directors of McDermott held a meeting by telephone to discuss the potential settlement. At that meeting, Messrs. Kalman and Nesser described the July 1 points of agreement, and the general consensus of the McDermott Board was that the points of agreement could serve as a basis for further discussions among the parties.

     On July 8, 2002, Mr. Nesser sent a letter to the ACC’s national counsel requesting a meeting on July 12, 2002 to further discuss the potential settlement.

     On July 12, 2002, Bruce W. Wilkinson, Chairman of the Board and Chief Executive Officer of McDermott, Mr. Nesser and David L. Keller, President and Chief Operating Officer of B&W, along with their legal and financial advisors, participated in settlement negotiations with representatives of the ACC and the FCR and their advisors, at a meeting in New York City. The mediator was also present at that meeting. The parties discussed the process and timetable for developing a detailed agreement on the terms of the proposed settlement, as well as near-term issues in the Chapter 11 proceedings that the parties needed to address. In this connection, the parties generally agreed to a deferral of all litigation among them, including the appeal by the ACC and the FCR of the Bankruptcy Court’s rulings relating to the 1998 Transfers, while the parties proceeded with the settlement negotiations.

     On July 15 and 16, 2002, Messrs. Wilkinson, Kalman and Nesser advised each of the members of McDermott’s Board of Directors of developments regarding the potential settlement, including the substance of the July 12 meeting.

     On July 18, 2002, attorneys for the various parties to the proposed settlement participated in a status conference with the Bankruptcy Court. The subject of the conference was the parties’ request to defer various court proceedings pending further negotiations toward a potential settlement. As a result, the Bankruptcy Court entered an order to defer those proceedings.

     From July 22 to August 7, 2002, the parties to the settlement and their legal and financial advisors communicated by telephone, e-mail, correspondence and in-person meetings. In these communications, the parties discussed and negotiated various issues related to the potential settlement, including settlement terms as reflected in various drafts of a detailed memorandum of understanding. Although those representatives were unable to reach agreement on a memorandum of understanding, as of August 7, 2002, they generally concurred that the remaining issues were not reasonably likely to stand in the way of an agreement in principle among the parties.

     The Board of Directors of McDermott discussed the potential settlement at a meeting on August 7, 2002. At that meeting, Mr. Nesser reviewed the most recent draft of the memorandum of understanding and described the remaining issues that were unresolved. Later that day, with the concurrence of representatives of the ACC and the FCR, McDermott issued a press release announcing the items of agreement in principle regarding the potential settlement and cautioning that there were many open issues remaining to be resolved, resolution of which was necessary to reach a settlement.

     From August 8, 2002 to early September 2002, representatives of McDermott, B&W, the ACC and the FCR continued to negotiate to resolve open issues reflected in the memorandum of understanding. In early September 2002, representatives of B&W and McDermott began preparing initial drafts of the Previously Negotiated Joint Plan and Previously Negotiated Settlement Agreement.

     While early drafts of the Previously Negotiated Joint Plan and Previously Negotiated Settlement Agreement were prepared and discussed among representatives of the parties, the parties also considered an alternative settlement structure during the period from early September 2002 through mid-October 2002. This alternative structure, which McDermott’s management proposed, would have involved the combination of B&W and BWXT into a new company and the co-ownership of that new company by McDermott and the Asbestos PI Trust. The Asbestos PI Trust’s share in the ownership of this new company would have been economically equivalent to the value of the entire equity ownership of the B&W Entities. After some consideration of this alternative, the ACC and the FCR rejected it without detailed explanation to us.

     After several telephonic negotiating sessions among representatives of the parties, Messrs. Kalman and Nesser, together with counsel for the Chapter 11 Debtors and McDermott, met with representatives of the ACC and the FCR in Washington, D.C. on November 8, 2002. At that meeting, the parties attempted to reach an agreement on all significant open issues relating to the draft Previously Negotiated Joint Plan and Previously Negotiated Settlement Agreement, both of which needed to be put into substantially complete form in order to meet a filing deadline for the Previously Negotiated Joint Plan imposed by the Bankruptcy Court. While the parties did not reach agreement on all the open issues, they were able to reach agreement on many of these issues and agreed on a continued information exchange to permit resolution of the remaining issues.

     The plan proponents filed the first version of the Previously Negotiated Joint Plan on November 19, 2002. Although the basic terms of the proposed settlement did not materially change after that filing, numerous ancillary matters and details remained to be negotiated and finalized. Representatives of the plan proponents continued to negotiate by telephone and by e-mail until June 9, 2003, to resolve the remaining issues relating to the Previously Negotiated Settlement Agreement, and prepared and negotiated revisions to various ancillary agreements and other documents, including a transition services agreement, a tax separation agreement, an intellectual property agreement and insurance rights assignment agreements. On March 28, 2003, the plan proponents filed a first amended version of the Previously Negotiated Joint Plan reflecting progress in those negotiations through that date, as well as the addition of provisions to reflect progress in the settlement discussions relating to the Apollo/Parks Township Claims and to define more particularly the insurance rights to be assigned to the Asbestos PI Trust. On May 5, 2003, the plan proponents filed a second amended version of the Previously Negotiated Joint Plan to incorporate various technical amendments to which the plan proponents agreed, including amendments involving the settlement relating to Apollo/Parks Township Claims and the insurance rights to be assigned to the Asbestos PI Trust and the trusts to be created for the benefit of holders of Apollo/Parks Township Claims and claims for asbestos-related property damages.

     On June 9, 2003, Messrs. Nesser and Keller, together with other representatives of McDermott and the Chapter 11 Debtors, met with the mediator and representatives of the ACC and the FCR in Washington, D.C. to identify and work to resolve all open issues relating to the Previously Negotiated Joint Plan, the Previously Negotiated Settlement Agreement and various ancillary documents. Following that meeting and a series of telephonic follow-up meetings extending until June 25, 2003, the plan proponents agreed on the form of the Previously Negotiated Joint Plan and Previously Negotiated Settlement Agreement. The plan proponents filed the third amended version of the Previously Negotiated Joint Plan and related documents, including the Previously Negotiated Settlement Agreement, with the Bankruptcy Court on June 25, 2003. The third amended version of the Previously Negotiated Joint Plan reflected changes from the second amended version to, among other things, finalize the provisions for the settlement relating to the Apollo/Parks Township Claims.

     Subsequent to June 25, 2003 and through August 28, 2003, representatives of the plan proponents continued work to resolve various issues and finalize various ancillary documents. Substantially complete forms of those documents were filed with the Bankruptcy Court on August 28, 2003.

     During this period, the plan proponents resolved an issue among themselves concerning the timing of voting by the asbestos-related personal injury claimants on whether to accept or reject the Previously Negotiated Joint Plan. As initially established by the Bankruptcy Court, the deadline for all claimants to vote on the Previously Negotiated Joint Plan was August 29, 2003. The ACC and the FCR urged the Bankruptcy Court to consider their position that the asbestos-related personal injury claimants should not have to become bound by their vote on the Previously Negotiated Joint Plan before McDermott’s stockholders voted on the previously negotiated settlement. In response,

the Bankruptcy Court modified its previous voting procedures order, effectively extending the period of time for the asbestos-related personal injury claimants to complete their voting on the Previously Negotiated Joint Plan until November 25, 2003. In connection with that extension, we stated our intention to convene a special meeting of our stockholders as promptly as practicable.

     At a meeting of the Board of Directors of McDermott held on September 12, 2003, Mr. Nesser, together with outside counsel for McDermott, reviewed with the McDermott Board the history of the negotiations leading up to the previously negotiated settlement, the terms and provisions of the Previously Negotiated Settlement Agreement and the related transition services and tax separation agreements and a preliminary draft of the proxy statement related to the December 2003 special meeting. After a full discussion of issues, the McDermott Board unanimously approved the submission of the proposed resolution to the stockholders of McDermott and recommended that those stockholders vote to adopt the proposed resolution.

Description of the Previously Negotiated Settlement Agreement

     The Previously Negotiated Settlement Agreement included the following key terms:

	•		McDermott would have effectively assigned all its equity in B&W to the Asbestos PI Trust.
	•		McDermott and all its subsidiaries would have assigned, transferred or otherwise made available their rights to all applicable insurance proceeds to the Asbestos PI Trust, consisting of rights to excess insurance coverage with an aggregate face amount of available limits of coverage of approximately $1.15 billion.
	•		McDermott would have issued 4.75 million shares of restricted common stock and caused those shares to be transferred to the Asbestos PI Trust. The resale of the shares would have been subject to certain limitations, in order to provide for an orderly means of selling the shares to the public. Certain sales by the Asbestos PI Trust would also have been subject to a McDermott right of first refusal. If any of the shares issued to the Asbestos PI Trust were still held by the trust after three years, and to the extent those shares could not have been sold in the market at a price greater than or equal to $19.00 per share (based on quoted market prices), taking into account the restrictions on sale and any waivers of those restrictions that may be granted by McDermott from time to time, McDermott would have effectively guaranteed that those shares would have a value of $19.00 per share on the third anniversary of the date of their issuance. In the event this guarantee materialized, McDermott would have been able to satisfy the guaranty obligation by making a cash payment or through the issuance of additional shares of its common stock. If McDermott elected to issue shares to satisfy this guaranty obligation, it would not have been required to issue more than 12.5 million shares.
	•		MI would have issued promissory notes to the Asbestos PI Trust in an aggregate principal amount of $92 million. The notes would have been unsecured obligations and would have provided for payments of principal of $8.4 million per year for 11 years, with interest payable on the outstanding balance at the rate of 7.5% per year. The payment obligations under those notes would have been guaranteed by McDermott.
	•		McDermott and all of its subsidiaries, including its captive insurers, and all of their respective directors and officers, would have received the full benefit of the protections afforded by Section 524(g) of the Bankruptcy Code with respect to personal injury claims attributable to B&W’s use of asbestos and would have been released and protected from all pending and future asbestos-related claims stemming from B&W’s operations, as well as other claims (whether contract claims, tort claims or other claims) of any kind relating to B&W, including, but not limited to, claims relating to the 1998 corporate reorganization that has been the subject of litigation in the Chapter 11 proceedings.

     The Previously Negotiated Settlement Agreement provided that, effective as of the effective date of the Previously Negotiated Joint Plan, each of the Chapter 11 Debtors would have generally released McDermott, its

affiliates (other than the B&W Entities, but including McDermott’s captive insurers), and their respective directors and officers, from all pending and future claims arising out of or attributable to the post-incorporation business or operations of any of the Chapter 11 Debtors or their past or present subsidiaries (other than claims arising out of or attributable to the post-incorporation business or operations of any of the subsidiaries that were transferred by B&W to BWICO as part of the 1998 Transfers), including full release and protection under the U.S. Bankruptcy Code against pending and future asbestos and other products liability claims, Apollo/Parks Township Claims, claims related to the 1998 Transfers and other intercompany dealings prior to the effective date, various claims that could be asserted through the Chapter 11 Debtors and that could arise out of, result from or be attributable to insurance or the placement of insurance under which any of the Chapter 11 Debtors or any of their respective past or present subsidiaries is or was insured, and other specified claims.

     From and after the effective date of the Previously Negotiated Joint Plan, McDermott, its affiliates, and their respective directors and officers, would have been generally indemnified by:

	•		the Asbestos PI Trust, with respect to released claims and damages described in the preceding paragraph that were to be channeled to the Asbestos PI Trust in accordance with a channeling injunction, claims related to assigned insurance rights and other specified claims; and
	•		a trust created to process and pay Apollo/Parks Township Claims (the “Apollo/Parks Township Trust”), with respect to released claims and damages described in the preceding paragraph that were to be channeled to the Apollo/Parks Township Trust in accordance with a channeling injunction, claims related to assigned insurance rights and other specified claims.

     The B&W Entities also would have generally indemnified McDermott, its affiliates, and their respective directors and officers, with respect to the released claims and damages and other specified claims. In addition, McDermott and its other subsidiaries would have been relieved of payment obligations on approximately $37 million of intercompany indebtedness owed to the B&W Entities, as well as various other existing and contingent intercompany obligations to the B&W Entities.

     In addition to the release and indemnification protections set forth in the Previously Negotiated Settlement Agreement, the Previously Negotiated Joint Plan contemplated an injunction, to be entered or affirmed by the United States District Court for the Eastern District of Louisiana under Section 524(g) of the U.S. Bankruptcy Code, permanently enjoining any person or entity from taking any action against McDermott and the Chapter 11 Debtors and their respective subsidiaries, directors and officers, as well as other specified persons and entities, for the purpose of, directly or indirectly, collecting, recovering or receiving payment of, on or with respect to any asbestos-related personal injury claims against one or more of the Chapter 11 Debtors or their respective subsidiaries, all of which were to be channeled to the Asbestos PI Trust for resolution.

     The Previously Negotiated Joint Plan also provided for similar injunctions under Section 105(a) of the U.S. Bankruptcy Code, covering asbestos-related property damage claims against one or more of the Chapter 11 Debtors or their respective subsidiaries and Apollo/Parks Township Claims. These injunctions might not have had the same force as a channeling injunction under Section 524(g) of the U.S. Bankruptcy Code, particularly in the event one of the applicable trusts were to exhaust its assets, through payment of claims or otherwise.

Confirmation Hearings on the Previously Negotiated Joint Plan and Subsequent Developments Leading to the Proposed Settlement Agreement and the Proposed Joint Plan

     The terms of the Previously Negotiated Settlement Agreement were reflected in the Previously Negotiated Joint Plan, which the plan proponents filed with the Bankruptcy Court on June 25, 2003 and subsequently amended at various dates through September 30, 2004.

     The Bankruptcy Court commenced hearings on the confirmation of the Previously Negotiated Joint Plan on September 22, 2003. On November 9, 2004, the Bankruptcy Court entered the Amended Findings and Conclusions. In its Amended Findings and Conclusions, the Bankruptcy Court recommended to the District Court that the

Previously Negotiated Joint Plan be confirmed. Also on November 9, 2004, the Bankruptcy Court entered the November 9, 2004 Order. Various insurers and certain parties have filed objections to or appeals from the Amended Findings and Conclusions and the November 9, 2004 Order. The plan proponents have filed a cross-appeal with respect to a bankruptcy law issue that relates to ANI’s policies. Briefing and other filings regarding the appeals and objections were completed on May 31, 2005, and the District Court heard oral argument on July 21, 2005. The District Court has not yet ruled on the various appeals and objections and the timing of any ruling by the District Court is uncertain. Since the July 21, 2005 oral argument, the plan proponents have entered into settlement arrangements with a number of the objectors/appellants. While other settlement negotiations are continuing, several unresolved objections to and appeals from the Amended Findings and Conclusions and the November 9, 2004 Order remain pending.

     At a special meeting of our stockholders on December 17, 2003, our stockholders voted on and approved a resolution relating to the previously negotiated settlement. The stockholders’ approval of the resolution was expressly conditioned on the subsequent approval of the Previously Negotiated Settlement Agreement by McDermott’s Board of Directors. In addition, the Previously Negotiated Joint Plan provided that it could not become effective without the approval of the Previously Negotiated Settlement Agreement by McDermott’s Board within 30 days prior to the effective date of the plan.

     McDermott’s Board has not yet taken the requisite approval under consideration because progress towards an effective date for the Previously Negotiated Joint Plan has been impeded by various procedural objections and appeals on the part of: (1) American Nuclear Insurers relating to insurance coverage for Apollo/Parks Township Claims and (2) insurers whose policies cover asbestos personal injury claims who have not settled with the Chapter 11 Debtors, MI, the ACC and the FCR. As a result, the Previously Negotiated Settlement Agreement has not been executed and delivered by the parties to the negotiations, and, beginning in January 2005, we, together with the ACC, the FCR, the Chapter 11 Debtors and their respective representatives, began discussions about alternative means to expedite the resolution of the Chapter 11 proceedings on a mutually acceptable basis.

     The discussions regarding alternative settlement arrangements led to several exchanges of term sheet proposals and meetings among representatives of the plan proponents to discuss those proposals. As a result of those efforts, on August 25, 2005, the plan proponents agreed on a mutually acceptable term sheet for the proposed settlement, which McDermott announced on August 29, 2005.

     Based on the August 25, 2005 term sheet, the plan proponents prepared drafts of definitive settlement documentation, including drafts of the Proposed Settlement Agreement, the Proposed Joint Plan and the B&W Note. Negotiations on those draft documents continued until September 29, 2005, when they were filed with the Bankruptcy Court. The Bankruptcy Court is expected to commence the confirmation process based on those documents in late October or early November 2005.

     At a meeting of the Board of Directors of McDermott held on August 29, 2005 and a telephonic meeting of the McDermott Board held on October 17, 2005, Mr. Nesser reviewed with the McDermott Board the history of the negotiations leading up to the current proposed settlement and the terms and provisions of the Previously Negotiated Settlement Agreement and the Proposed Settlement Agreement. After a full discussion of issues at those meetings, including the alternatives discussed under “—Alternatives to the Proposed Settlement Agreement” below, the McDermott Board unanimously approved the proposed settlement and the terms and provisions of the Proposed Settlement Agreement and unanimously approved the submission of the proposed resolution to the stockholders of McDermott and recommended that those stockholders vote to adopt the proposed resolution at the October 17, 2005 telephonic meeting.

Alternatives to the Proposed Settlement Agreement

     If the proposed resolution is not adopted at the Special Meeting, or if the Proposed Joint Plan does not become effective, on a final, nonappealable basis, on or before the Effective Date Deadline for any other reason, the Proposed Settlement Agreement contemplates that, unless the ACC, the FCR and we agree to extend that deadline, the settlement contemplated by the Proposed Settlement Agreement will be abandoned and those parties will resume

their efforts to effect the settlement contemplated by the Previously Negotiated Settlement Agreement and the Previously Negotiated Joint Plan. However, there have been various objections, appeals and uncertainties that have impeded the progress of that previously negotiated settlement, and there is substantial uncertainty as to whether that settlement would be consummated. If neither settlement is consummated, the Bankruptcy Court will be faced with the decision of how the Chapter 11 cases should proceed, and, under those circumstances, the Bankruptcy Court would likely consider the following alternatives:

	•		continuation of the Chapter 11 proceedings until another plan of reorganization is confirmed and becomes effective;
	•		appointment of a trustee to assume the administration of the Chapter 11 proceedings outside of the control of management of the Chapter 11 Debtors, potentially followed by a conversion or dismissal of the Chapter 11 proceedings as described below;
	•		conversion of the Chapter 11 proceedings to liquidation proceedings under Chapter 7 of the U.S. Bankruptcy Code; or
	•		dismissal of the Chapter 11 proceedings.

     Our Board of Directors considered each of these alternatives in determining to recommend the proposed resolution for adoption by our stockholders. In the case of each of these alternatives, we would continue to be subject to various risks and uncertainties associated with the pending and future asbestos-related liabilities of B&W and the other Chapter 11 Debtors (in the absence of federal legislation that comprehensively resolves those liabilities). These risks and uncertainties include potential future rulings by the Bankruptcy Court, the District Court or other courts that could be adverse to us and the risks and uncertainties associated with appeals from the rulings issued by the Bankruptcy Court relating to the 1998 Transfers. Any one of these alternatives could ultimately result in the return to the courts of the approximately 300,000 asbestos-related personal injury and related-party claims, which are currently pending and proposed to be resolved through the proposed settlement. Each of these alternatives could also result in the resumption of litigation relating to the 1998 Transfers. The following discussion provides more detail regarding each of these alternatives.

     Continuation of Chapter 11 Proceedings. If the Chapter 11 Debtors remain in Chapter 11, they could continue to operate their businesses and manage their properties as debtors-in-possession until a plan of reorganization is confirmed and becomes effective. Under this alternative, the Chapter 11 proceedings could revert to the situation in which there are two competing plans of reorganization — the B&W Plan and the ACC/FCR Plan. It is possible that the Bankruptcy Court could confirm the ACC/FCR Plan over our and any other objections. As discussed under “—Asbestos-Related Claims and Bankruptcy Proceedings” above, the ACC/FCR Plan would be considerably less favorable to us than the Proposed Joint Plan in several respects, including the loss of our equity interests in the B&W Entities, the preservation of claims regarding the 1998 Transfers and the absence of channeling injunctions to protect us and our affiliates from asbestos-related claims attributable to the business and operations of the B&W Entities and Apollo/Parks Township Claims.

     Appointment of a Trustee. The Bankruptcy Court could order the appointment of a trustee on the request of either a party in interest or the United States Trustee. The trustee would assume both the authority and responsibility of administering the Chapter 11 Debtors’ estates, and certain legal powers associated with that administration. The Chapter 11 Debtors would lose the authority otherwise granted to debtors in possession to manage their affairs on a day-to-day basis. Once the Bankruptcy Court ordered the appointment of a trustee, the United States Trustee would select the trustee. In making that selection, the United States Trustee would consult not only with us but also with the ACC and the FCR. Alternatively, any party in interest (including the ACC and the FCR) could request the election of a trustee by the creditors of the Chapter 11 Debtors. Whether selected by the United States Trustee or elected by the creditors, the trustee could pursue a plan of reorganization or liquidation of the Chapter 11 Debtors that would be substantially less favorable to us than the Proposed Joint Plan.

     Liquidation Under Chapter 7. The Bankruptcy Court could convert the Chapter 11 proceedings from reorganization proceedings to a Chapter 7 liquidation at the request of a party in interest or the United States Trustee, if the Bankruptcy Court determines that conversion is in the best interest of the creditors and the estate. If the B&W Entities were liquidated under Chapter 7, a trustee would be elected or appointed to liquidate all of their assets. The proceeds of liquidation would be distributed to the respective holders of claims against the B&W Entities (including the asbestos personal injury claimants and the asbestos property damages claimants) in accordance with the priorities established by the U.S. Bankruptcy Code. Any assets of the Chapter 11 Debtors remaining after paying their obligations would be distributed to BWICO, the sole stockholder of B&W.

     Dismissal of the Chapter 11 Proceedings. The Bankruptcy Court could dismiss the Chapter 11 proceedings altogether at the request of a party in interest or the United States Trustee if the Court determines that dismissal is in the best interest of the creditors and the estate. Upon dismissal, we and our affiliates, including the Chapter 11 Debtors, would lose the benefits of the automatic stay afforded by the U.S. Bankruptcy Code, which, since the commencement of the reorganization proceedings, has shielded the Chapter 11 Debtors, us and our other affiliates from litigation arising from the use of asbestos by the B&W Entities.

Remaining Issues to Be Resolved

     Even assuming all requisite approvals of the Proposed Joint Plan and the proposed settlement are obtained, there are a number of issues and matters to be resolved prior to completion of the B&W Chapter 11 proceedings. Remaining issues and matters to be resolved include, among other things, the following:

	•		the Bankruptcy Court’s decisions relating to various substantive and procedural aspects of the Chapter 11 proceedings;
	•		objections or appeals by some of our insurers and others of the Bankruptcy Court’s Amended Findings and Conclusions and November 9, 2004 Order; and
	•		potential appeals as to the confirmation of the Proposed Joint Plan.

     In addition, there are numerous conditions to the confirmation of the Proposed Joint Plan and the effectiveness of the Proposed Joint Plan following confirmation. See “Description of the Proposed Settlement Agreement—Conditions.”

Timetable for Confirmation of the Proposed Joint Plan

     The Proposed Joint Plan is subject to ongoing confirmation proceedings, in the following sequence. First, the Bankruptcy Court will oversee the plan confirmation process, which is expected to begin in late October or early November 2005 and will continue into at least December 2005. Following the confirmation hearings, the Bankruptcy Court will prepare written proposed findings that would be submitted to the District Court. Thereafter, the District Court may oversee additional hearings and briefing and may issue a plan confirmation order. If the District Court confirms the Proposed Joint Plan, one or more parties may appeal the District Court’s confirmation order to the U.S. Court of Appeals for the Fifth Circuit in appellate proceedings that could extend beyond the Effective Date Deadline.

Recommendation of the Board

     Our Board of Directors unanimously recommends that you vote FOR the adoption of the proposed resolution.

     In determining to make its recommendation, the Board considered the benefits we would obtain from the proposed settlement, including the following:

	•		the B&W Entities would remain as indirect subsidiaries of McDermott, and we would include the results of their operations in our consolidated results of operations, and (subject to ordinary restrictions on accessing cash flows of subsidiaries) we would regain access to the cash flows of the B&W Entities and be in a position to benefit from the strengths of the B&W Entities through the business strategies we intend to employ with respect to the B&W Entities, as described under “Information About B&W and Its Subsidiaries—Business”;
	•		the Asbestos PI Trust would indemnify McDermott and its subsidiaries against asbestos-related personal injury claims (other than workers’ compensation claims) attributable to the business and operations of the B&W Entities;
	•		McDermott and its subsidiaries, including the B&W Entities, would receive the protection of a channeling injunction under Section 524(g) of the U.S. Bankruptcy Code, which would channel all pending and future asbestos-related personal injury claims (other than workers’ compensation claims) subject to the jurisdiction of courts in the United States and attributable to the business and operations of the B&W Entities to the Asbestos PI Trust;
	•		McDermott’s captive insurance subsidiaries, which provided insurance coverage to the B&W Entities for specified risks, and/or reinsured against specified risks, would generally be entitled to the same indemnification and channeling injunction protections as described above;
	•		the ACC and the FCR would terminate their appeal of a favorable ruling by the Bankruptcy Court validating the 1998 Transfers; and
	•		the likely acceleration of B&W’s emergence from bankruptcy, because the proposed settlement does not involve some of the complexities that were reflected in the previously negotiated settlement and removes the bases for objection by various parties.

     Additionally, the Board considered the uncertainty as to whether the FAIR Act will ever become law and the Condition Precedent included in the Proposed Settlement Agreement, which would potentially limit the consideration to be contributed to the Asbestos PI Trust if the FAIR Act or similar U.S. federal legislation is enacted and becomes law on or before November 30, 2006. The Board also considered the exclusion of workers’ compensation claims from the indemnification and channeling injunction provisions of the proposed settlement, together with management’s estimate that the ongoing exposure of the B&W Entities and our captive insurance companies to those claims would not give rise to material losses in the foreseeable future. The Board also considered the factors discussed under “Risk Factors” (including the fact that the non-asbestos-related liabilities and contingent liabilities of the B&W Entities will not be discharged or otherwise impacted by the Proposed Joint Plan), as well as the Board’s and McDermott’s management’s understanding of those risks through the continuing oversight of the operations of the B&W Entities throughout the course of the B&W Chapter 11 proceedings. The Board also considered the alternatives discussed above under “—Background of the Proposed Settlement—Alternatives to the Proposed Settlement Agreement.” In addition, the Board considered the need to bring the Chapter 11 proceedings to a close, given the fact that the Chapter 11 proceedings have required significant amounts of attention from our senior management and have resulted in substantial uncertainties for our customers, suppliers and financing sources, as well as in the market for our common stock and other securities.

Accounting Treatment of the Previously Negotiated Settlement

     Due to the bankruptcy filing, beginning on February 22, 2000, we stopped consolidating the results of operations of the B&W Entities in our consolidated financial statements and we have been presenting our investment in B&W on the cost method. The Chapter 11 filing, along with subsequent filings and negotiations, led to increased uncertainty with respect to the amounts, means and timing of the ultimate settlement of asbestos claims and the recovery of our investment in B&W. Due to this increased uncertainty, we wrote off our net investment in B&W in the quarter ended June 30, 2002. The total impairment charge of $224.7 million included our investment in B&W of

$187.0 million and other related assets totaling $37.7 million, primarily consisting of accounts receivable from B&W, for which we provided an allowance of $18.2 million.

     On December 19, 2002, in connection with the filing of drafts of the Previously Negotiated Joint Plan and the Previously Negotiated Settlement Agreement in the Chapter 11 proceedings, we determined that a liability related to the previously negotiated settlement was probable and that the amount of that liability was reasonably estimable. Accordingly, as of December 31, 2002, we established an estimate for the cost of the previously negotiated settlement of $110 million, including tax expense of $23.6 million. Since that date, we have continued to reevaluate the cost of the previously negotiated settlement as of the end of each quarter. As of June 30, 2005, we updated our estimated cost of the previously negotiated settlement to reflect current conditions, and for the six months ended June 30, 2005, we recorded an aggregate increase in the provision of $6.8 million, including associated tax expense of $1.0 million. The provision for the estimated cost of the previously negotiated settlement is comprised of the following (in thousands):

		June 30,
		2005
		(Unaudited)
Promissory notes to be issued		$	91,426
Shares of McDermott common stock to be issued			99,750
Share price guaranty obligation			—
Other			3,435
Estimated impact of tax separation and sharing agreement			(37,847	)
Forgiveness of certain intercompany balances			(38,774	)
Total		$	117,990
Plus: tax expense			28,710
Net provision for estimated cost of settlement		$	146,700

     The fair value of the promissory notes to be issued under the Previously Negotiated Settlement Agreement was based on the present value of future cash flows discounted at borrowing rates currently assumed to be available for debt with similar terms and maturities. The shares of McDermott common stock to be issued under the Previously Negotiated Settlement Agreement were valued at our closing stock price on June 30, 2005 of $21.00. The fair value of the share price guaranty obligation was zero at June 30, 2005 as McDermott’s stock price closed above $19.00 per share. The estimated impact of the contemplated tax separation and sharing agreement was based on a present value of projected future tax reimbursements to be received pursuant to such arrangement between MI and B&W. If the previously negotiated settlement were to be finalized, the final value of the overall settlement would differ from the estimates currently recorded depending on a variety of factors, including changes in market conditions and the market value of our common shares when issued.

Accounting Treatment of the Proposed Settlement

     Under the terms of the proposed settlement, McDermott (through BWICO) will retain 100% ownership of B&W and will reacquire control of B&W. McDermott will account for the proposed settlement applying the guidelines of Statement of Financial Accounting Standards No. 141, Business Combinations (“SFAS 141”), and will account for the proposed settlement similar to a step purchase.

For further information see “Unaudited Pro Forma Financial Information of McDermott.”

Material U.S. Federal Income Tax Considerations Relating to the Proposed Settlement

     For general information only, we have provided a description of the material U.S. federal income tax consequences to MI and its subsidiaries of the proposed settlement below. This description does not purport to be a complete analysis or listing of all potential tax consequences.

     The following description of material U.S. federal income tax consequences is based on the Internal Revenue Code, the Treasury Regulations promulgated and proposed thereunder, judicial decisions and published administrative rulings and pronouncements of the IRS, all as in effect on the date of this proxy statement. Legislative, judicial or administrative changes or interpretations enacted or promulgated in the future could alter or modify the analysis and conclusions set forth below. Any such changes or interpretations may be retroactive, and could significantly affect the U.S. federal income tax consequences discussed below.

     No ruling has been requested or obtained from the IRS with respect to any of the tax aspects of the proposed settlement. Accordingly, we can provide no assurance that the IRS will not challenge the tax consequences described below or that any such challenge, if made, would not be successful.

     The following discussion does not address any foreign, state or local tax consequences of the proposed settlement, nor does it purport to address the U.S. federal income tax consequences of the proposed settlement to the Asbestos PI Trust or holders of claims subject to the B&W Chapter 11 proceedings.

     The proposed settlement should generate significant U.S. federal income tax deductions associated with the contributions to be made by MI and its subsidiaries to the Asbestos PI Trust. The Asbestos PI Trust is expected to qualify as a “qualified settlement fund” under Section 468B of the Internal Revenue Code, as was contemplated by the prior settlement. In order to qualify as a qualified settlement fund, the Asbestos PI Trust must be:

	•		established pursuant to an order of, or approved by, the United States, any state, territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and be subject to the continuing jurisdiction of that governmental authority;
	•		established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability arising out of, among other things, a tort, breach of contract, or violation of law; and
	•		a trust under applicable state law, or its assets must otherwise be physically segregated from other assets of the transferor (and related persons).

     Assuming that qualification, with respect to the initial $350 million to be contributed to the Asbestos PI Trust on or after the effective date of the Proposed Joint Plan, the associated U.S. federal income tax deductions will be taken as and when such payment to the Asbestos PI Trust is made. Similarly, with respect to the $355 million to be paid pursuant to the Contingent Payment Right and payments of principal on the B&W Note, the associated U.S. federal income tax deductions will be taken as and when such payments to the Asbestos PI Trust are made.

     Neither MI nor any of its subsidiaries will be entitled to a deduction to the extent that the Asbestos PI Trust is funded through insurance proceeds or the proposed transfer of rights under insurance policies.

     Any deductions for payments made to the Asbestos PI Trust first would reduce or eliminate the U.S. federal taxable income of MI’s consolidated group for the taxable year in which the payments are made. To the extent these deductions created a taxable loss for such year, the loss would constitute a net operating loss. In general, net operating losses may be carried back and deducted two years and carried forward 20 years. To the extent a net

operating loss is a “specified liability loss,” however, it may be carried back and deducted ten years. The taxpayer may elect to waive the entire carryback period with respect to a net operating loss or may elect to waive only the additional eight years of carryback afforded net operating losses attributable to specified liability losses.

     A net operating loss constitutes a specified liability loss to the extent it is attributable to products liability or to expenses incurred in the investigation or settlement of, or opposition to, claims against the taxpayer on account of products liability. Any net operating loss resulting from payments to the Asbestos PI Trust should constitute a specified liability loss and accordingly would qualify for the ten-year carryback period.

     The U.S. federal income tax consequences of the proposed settlement differ in several respects from those that would have resulted from the previously negotiated settlement. The Previously Negotiated Settlement Agreement contemplated that MI would enter into a tax separation and sharing agreement with B&W and its U.S. domestic subsidiaries, which would reflect various arrangements that would be implemented to: (1) separate B&W and its U.S. domestic subsidiaries from MI’s consolidated group for U.S. federal income tax purposes; and (2) allocate the tax benefits realized from the consummation of the previously negotiated settlement. In connection with the tax benefits to be realized, it was contemplated that the Asbestos PI Trust and the trust to be formed for the benefit of holders of Apollo/Parks Township Claims would qualify as “qualified settlement funds” for U.S. federal income tax purposes. Assuming that qualification, B&W would have been entitled to a current U.S. federal income tax deduction for all transfers of cash, stock and other property (other than the promissory notes proposed to be issued by MI) to the trusts to the same extent it would have been entitled to a deduction if those amounts were paid directly to holders of personal injury claims. We also expected that MI would have been entitled to deductions for the principal amount of the MI promissory notes contributed to the Asbestos PI Trust as and when such payments were made on those notes. As with the proposed settlement, neither B&W nor MI would have been entitled to a deduction to the extent that the trusts were funded through insurance proceeds or the transfer of rights under insurance policies.

     The tax separation and sharing agreement proposed in connection with the previously negotiated settlement would have provided for an agreed method of computing and allocating the tax benefits that would have resulted from the transfers of property to the Asbestos PI Trust. Under that agreement:

	•		MI would have had the economic benefit of any tax deductions arising from the transfer of the McDermott common stock, payments on the MI promissory notes and payments made under the share price guarantee; and
	•		B&W would have had the economic benefit of any tax deductions arising from the contribution of its common stock and cash payments made to the Asbestos PI Trust, other than payments on the MI promissory notes or the share price guarantee.

The tax separation and sharing agreement also would have provided that MI and B&W would be entitled to their respective economic benefits on a proportionate basis, as the deductions resulting from the property transferred to the Asbestos PI Trust were used to offset income of either the MI consolidated group or B&W.

Dissenters’ Rights

     McDermott is a Panamanian corporation. Neither Panamanian law nor McDermott’s articles of incorporation or by-laws provides for dissenters or similar rights for dissenting stockholders in connection with the vote on the proposed resolution or the consummation of the proposed settlement. Accordingly, our stockholders will have no right to dissent and obtain payment for their shares.

Description of the Proposed Settlement Agreement

     The following discussion describes the material provisions of the Proposed Settlement Agreement but does not describe all of its terms. The full text of the Proposed Settlement Agreement is attached to this proxy statement

as Appendix A and is incorporated into this proxy statement by reference. We urge you to read the Proposed Settlement Agreement in its entirety.

     Parties to the Proposed Settlement Agreement. The parties to the Proposed Settlement Agreement would include:

	•		McDermott;
	•		MI;
	•		BWICO;
	•		the Chapter 11 Debtors;
	•		the ACC; and
	•		the FCR.

Creation of the Asbestos PI Trust and Contribution of Assets

     The Proposed Settlement Agreement provides for the contribution of specified assets to the Asbestos PI Trust, which will be established to process and pay asbestos-related personal injury claims, manage the assets of the trust for use in paying asbestos-related personal injury claims and manage the disposition of insurance rights assigned to the trust by McDermott and various subsidiaries of McDermott. Specifically, the Proposed Settlement Agreement provides that, in consideration of an asbestos-related personal injury claim channeling injunction established pursuant to the Proposed Joint Plan and the releases and indemnification provided under the Proposed Joint Plan and the Proposed Settlement Agreement:

	•		McDermott will, and will cause various of its subsidiaries to, enter into an agreement assigning to the Asbestos PI Trust their rights to numerous insurance policies that have an aggregate face amount of available products liability limits of coverage for, among other things, asbestos-related personal injury claims of approximately $1.15 billion; and
	•		McDermott will cause the following other assets to be contributed to the Asbestos PI Trust:

	•		$350 million in cash, to be paid by MI or one of its subsidiaries on the effective date of the Proposed Joint Plan;
	•		an additional contingent cash payment of $355 million, which would be payable by MI or one of its subsidiaries within 180 days of November 30, 2006, but only if the Condition Precedent is satisfied, which amount would be payable with interest accruing on that amount at 7% per year from December 1, 2006 to the date of payment; and
	•		the B&W Note, which will be in the aggregate principal amount of $250 million and will bear interest at the rate of 7% annually on the outstanding principal balance from and after December 1, 2006, with a five-year term and annual principal payments of $50 million each, commencing on December 1, 2007; provided that, if the Condition Precedent is not satisfied, only $25 million principal amount of the B&W Note would be payable (with the entire $25 million amount due on December 1, 2007). B&W’s payment obligations under the B&W Note would be fully and unconditionally guaranteed by BWICO and McDermott. The guarantee obligations of BWICO and McDermott would be secured by a pledge of all of B&W’s capital stock outstanding as of the effective date of the Proposed Joint Plan.

McDermott and most of its subsidiaries would also contribute to the Asbestos PI Trust substantially the same insurance

rights as were to be contributed to the Asbestos PI Trust under the Previously Negotiated Settlement Agreement.

     Through the Condition Precedent provisions, the Proposed Settlement Agreement includes a mechanism that would potentially limit the consideration to be contributed to the Asbestos PI Trust if the FAIR Act or similar U.S. federal legislation is enacted and becomes law. Specifically, the Proposed Settlement Agreement provides that the right to receive the $355 million payment pursuant to the Contingent Payment Right would vest and amounts under the B&W Note in excess of $25 million would be payable only upon satisfaction of the Condition Precedent, which is that neither the FAIR Act nor any other U.S. federal legislation designed to resolve asbestos-related personal injury claims through the implementation of a national trust shall have been enacted and become law on or before November 30, 2006. The Proposed Settlement Agreement further provides that:

	•		if such legislation is enacted and becomes law on or before November 30, 2006 and is not subject to a Challenge Proceeding (which is a legal proceeding that challenges the constitutionality of such legislation) as of January 31, 2007, the Condition Precedent would be deemed not to have been satisfied, and no amounts would be payable under the Contingent Payment Right and no amounts in excess of $25 million would be payable under the B&W Note; and
	•		if such legislation is enacted and becomes law on or before November 30, 2006, but is subject to a Challenge Proceeding as of January 31, 2007, the Condition Precedent would be deemed not to have been satisfied and any rights with respect to the Contingent Payment Right and payments under the B&W Note in excess of $25 million would be suspended until either:

	(1)		there has been a final, nonappealable judicial decision with respect to the Challenge Proceeding to the effect that such legislation is unconstitutional as generally applied to debtors in Chapter 11 proceedings whose plans of reorganization have not yet been confirmed and become substantially consummated (i.e., debtors that are similarly situated to B&W as of September 1, 2005), so that such debtors would not be subject to such legislation, in which event the Condition Precedent would be deemed to have been satisfied, and the Contingent Payment Right would vest and the Note would become fully payable pursuant to its terms (in each case subject to the protection against double payment provisions described below); or
	(2)		there has been a final nonappealable judicial decision with respect to the Challenge Proceeding which resolves the Challenge Proceeding in a manner other than as contemplated by the immediately preceding clause, in which event the Condition Precedent would be deemed not to have been satisfied and no amounts would be payable under the Contingent Payment Right and no amounts in excess of $25 million would be payable under the B&W Note.

     The Proposed Settlement Agreement also includes provisions to provide some protection against double payment so that, if the FAIR Act or similar U.S. federal legislation is enacted and becomes law after November 30, 2006, or the Condition Precedent is otherwise satisfied (in accordance with the provisions described in clause (1) above), any payment McDermott or any of its subsidiaries may be required to make pursuant to the legislation on account of asbestos-related personal injury claims against any of the B&W Entities would reduce, by a like amount:

	•		first, the amount, if any, then remaining payable pursuant to the Contingent Payment Right; and
	•		next, any then remaining amounts payable pursuant to the B&W Note.

     Under the Proposed Settlement Agreement and the Proposed Joint Plan, the Apollo/Parks Township Claims will not be channeled to a trust, as contemplated by the Previously Negotiated Settlement Agreement and the Previously Negotiated Joint Plan. Rather, the Apollo/Parks Township Claims would remain the responsibility of the Chapter 11 Debtors and will not be impaired under the terms of the Proposed Joint Plan. While the Proposed Settlement has been structured in a manner to permit all disputes relating to the Apollo/Parks Townships Claims and the associated insurance coverage to be resolved after the Proposed Joint Plan has been confirmed and becomes effective, we are continuing our efforts to negotiate a mutually satisfactory resolution of the disputes involving the

current claimants in the Hall Litigation on an expedited basis. We believe that all claims under the Hall Litigation will be resolved within the limits of coverage of our insurance policies. However, there may be an issue as to whether our insurance coverage is adequate and we may be materially adversely impacted if our liabilities exceed our coverage.

     The Proposed Settlement Agreement contemplates that the Proposed Joint Plan must become effective, on a final, nonappealable basis, no later than the Effective Date Deadline. The Proposed Settlement Agreement further contemplates that, if the effective date of the Proposed Joint Plan has not occurred by that date, and is not extended by the ACC, the FCR and us, acting together, then the settlement contemplated by the Proposed Settlement Agreement will be abandoned and the parties will resume their efforts to effect the settlement contemplated by the Previously Negotiated Settlement Agreement and the Previously Negotiated Joint Plan.

Channeling Injunction and Indemnification for the Asbestos-Related Personal Injury Claims

     In addition to the release and indemnification protections set forth in the Proposed Settlement Agreement, the Proposed Joint Plan provides for an injunction, to be entered or affirmed by the United States District Court for the Eastern District of Louisiana under Section 524(g) of the U.S. Bankruptcy Code, permanently enjoining any person or entity from taking any action against McDermott and the Chapter 11 Debtors and their respective subsidiaries, directors and officers, as well as other specified persons and entities, for the purpose of, directly or indirectly, collecting, recovering or receiving payment of, on or with respect to any asbestos-related personal injury claims against one or more of the Chapter 11 Debtors or their respective subsidiaries, all of which are to be channeled to the Asbestos PI Trust for resolution as set forth in the procedures governing distributions from that trust.

     The Proposed Settlement Agreement and the Proposed Joint Plan also provide that the Asbestos PI Trust will indemnify McDermott and its subsidiaries and their respective directors and officers from and against any asbestos-related personal injury claims that are to be channeled to the Asbestos PI Trust as described above.

Conditions

     General conditions to the obligations of all parties. The Proposed Settlement Agreement provides for the following conditions to the obligations of all parties to the agreement:

	•		no temporary restraining order, preliminary or permanent injunction or other order issued by a court of competent jurisdiction or other legal restraint or prohibition preventing or otherwise interfering with the consummation of the settlement as contemplated by the Proposed Settlement Agreement shall be in effect;
	•		the channeling injunction contemplated by the Proposed Joint Plan, which will channel asbestos-related personal injury claims (other than workers’ compensation claims) attributable to the business or operations of the B&W Entities to the Asbestos PI Trust, shall be in full force and effect; and
	•		no governmental authority shall have enacted or otherwise implemented any law, statute, order, rule, regulation, judgment, decree, award or other requirement that prohibits or restricts in any material respect the consummation of the settlement contemplated by the Proposed Settlement Agreement.

     In order to meet the condition that the channeling injunction must be in full force and effect, the Proposed Joint Plan must be confirmed by the Bankruptcy Court or the District Court and must become effective. The Proposed Joint Plan establishes various conditions to its confirmation and effectiveness.

     The conditions to confirmation include, among others, the following:

•

various findings of fact and conclusions of law that must be set forth in the confirmation order, including, with respect to insurance matters, that:

	•		the various assignments of insurance rights contemplated by the Proposed Joint Plan do not violate any obligation of the Chapter 11 Debtors or any of the other assigning entities under any consent-to-assignment, consent-to-settlement, cooperation, management-of-claims or no-action provision under any of the applicable insurance policies or related agreements;
	•		the various assignments of insurance rights contemplated by the Proposed Joint Plan do not materially increase any applicable insurer’s risk of providing coverage for specified claims, as compared to the risk that was otherwise being borne by the insurer prior to the effective date of the Proposed Joint Plan; and
	•		the duties and obligations of various insurers are not diminished, reduced or eliminated by (1) the discharge, release and extinguishment of various obligations of McDermott and the Chapter 11 Debtors and their respective officers, directors, subsidiaries and other affiliates from and in respect of various asbestos-related claims, (2) the assumption of responsibility for those claims by the Asbestos PI Trust or (3) the assignment of the insurance rights to be assigned pursuant to the Proposed Joint Plan;

	•		various findings to the effect that the Proposed Joint Plan complies with the requirements of Section 524(g) of the U.S. Bankruptcy Code;
	•		the entry of an order of the Bankruptcy Court or the District Court estimating the aggregate value of all asbestos-related property damage claims (as distinguished from asbestos-related personal injury claims) against the Chapter 11 Debtors and determining that such value is not greater than $700,000; and
	•		the approval of the Proposed Settlement Agreement, and the settlement contemplated by the Proposed Settlement Agreement, by the affirmative vote of a majority of the shares of McDermott common stock present in person or represented by proxy at the Special Meeting and entitled to vote on the matter, provided that, in order for the vote to be effective, the number of shares of McDermott common stock for which votes are cast in favor of the proposal must represent at least 50% of the voting power of all of the shares of McDermott common stock outstanding and entitled to vote on the matter.

     The Proposed Joint Plan also establishes various conditions that must be satisfied after the confirmation of the Proposed Joint Plan before it will become effective. These conditions include, among others, the following:

•

Specified court orders, including a confirmation order and an order or orders entering specified injunctions, including the channeling injunction contemplated by the Proposed Joint Plan, which will channel asbestos-related personal injury claims (other than workers’ compensation claims) attributable to the business or operations of the B&W Entities to the Asbestos PI Trust, must have been entered or affirmed by the District Court, and those orders must have become final and nonappealable and those injunctions must be in full force and effect. The failure to resolve disputes with remaining objectors, including the objecting insurers, could materially hinder satisfaction of this condition.

	•		The applicable parties to the documents ancillary to the Proposed Joint Plan, to implement the proposed settlement and the other provisions of the Proposed Joint Plan, must have executed and delivered those documents.
	•		The Chapter 11 Debtors must have obtained new financing arrangements, or an extension of their existing financing arrangements, to support their operations on their exit from the Chapter 11 proceedings.
	•		The ACC and the FCR must have dismissed with prejudice their appeal from the decision in the adversary proceeding relating to the 1998 Transfers.
	•		The Proposed Settlement Agreement must not have been terminated pursuant to its terms, which provide that the agreement may be terminated (1) by mutual consent of the parties, (2) by the ACC, the FCR or us if McDermott stockholder approval of the Proposed Settlement Agreement has not been obtained on or before January 31, 2006, (3) by McDermott, if its Board of Directors determines that a material adverse change has occurred in either the financial condition, assets or operations of the B&W Entities or national or international general business or economic conditions that obligates the Board to terminate the Proposed Settlement Agreement to avoid a breach of its fiduciary duties; or (4) by the ACC, the FCR or us if the Proposed Joint Plan has not become effective, on a final, nonappealable basis, on or before the Effective Date Deadline.

     While it is possible that conditions to confirmation or effectiveness in the Proposed Joint Plan may be waived, any such waiver would require unanimous agreement among the plan proponents. We do not anticipate re-soliciting our stockholders for approval of any such waiver unless we propose to waive a condition to confirmation or effectiveness and such waiver would be materially adverse to our stockholders, in which case we would re-solicit the vote of our stockholders.

Fairness in Asbestos Injury Resolution Act of 2005

     On April 19, 2005, Senator Arlen Specter introduced in the United States Senate a bill for the enactment of federal legislation entitled “The Fairness in Asbestos Injury Resolution Act of 2005” (Senate Bill 852, the “FAIR Act”). The bill was referred to the Senate Judiciary Committee, which held hearings and considered and amended the bill. The Committee voted to approve the FAIR Act on May 26, 2005, and the bill was reported to the Senate and placed on the legislative calendar on June 16, 2005. There is similar legislation pending in the U.S. House of Representatives (House of Representatives Bill 1360), which was introduced in the House of Representatives in 2005 and is based on a prior version of the FAIR Act introduced in the Senate in 2004.

     It is uncertain whether the FAIR Act or similar legislation will ever be presented for a vote or passed by the U.S. Senate or House of Representatives, or whether it will become law. We cannot predict the final terms or costs associated with any bill that might become law and impact the B&W Chapter 11 bankruptcy proceedings, the Chapter 11 Debtors and McDermott. The terms of the pending legislation could change, and any changes could be material to the impact of such legislation on the B&W Chapter 11 proceedings, the Chapter 11 Debtors and McDermott.

     To enable you to make an informed decision on the proposed resolution, we include below a summary description of the FAIR Act as currently drafted. This description focuses on the legislation pending before the U.S. Senate, as that legislation has progressed further than the legislation pending in the U.S. House of Representatives. This description does not address all material provisions of the proposed FAIR Act. We encourage you to read the entire FAIR Act as currently drafted.

Overview

     The FAIR Act would create a privately funded, federally administered trust fund to resolve pending and future asbestos-related personal injury claims. An Office of Asbestos Disease Compensation within the Department

of Labor would be formed to process asbestos claims and make awards to qualified claimants. Claimants would qualify for payment from the trust fund if the claimant meets the FAIR Act’s standardized medical criteria. The level of payment for a qualified claimant would depend on various factors, including the severity of the asbestos-related disease.

     The trust fund would be funded by existing asbestos trusts and mandatory payments from companies with asbestos-related liabilities and their insurers. The FAIR Act (1) anticipates that the trust fund would collect roughly $4 billion from existing asbestos trusts and (2) caps the aggregate payment obligations of participating companies at $90 billion and insurers at $46 billion. Individual contributions would be assessed differently for each group. The methods of assessing contributions among the participants in each group are discussed below. If individual participating companies or insurers make their payments in accordance with the FAIR Act, then they would be shielded from asbestos-related personal injury claims. See “—Effect on Existing Asbestos Claims and Agreements.”

Asbestos Defendant Contributions

     Asbestos defendants would be divided into tiers based on prior asbestos liability-related expenditures, including settlement, judgment, defense and indemnity costs. Defendants would be further divided into subtiers based on revenues for the fiscal year 2002. Additionally, a separate tier would be created for companies that have prior asbestos expenditures greater than $1 million and have a Chapter 11 case pending on the date of enactment of the FAIR Act or during the year preceding that date. A bankruptcy tier defendant whose bankruptcy was not caused by asbestos claims would be able to continue through the normal bankruptcy process and avoid participation in the trust fund.

     Each subtier of defendants would be assessed an annual payment to the fund. Payments would be required either for a 30-year period or until the amount received from the defendant participants equals $90 billion. Defendants with greater prior asbestos-related liability-related expenditures and revenues would generally be assessed larger annual payments. For defendants other than defendants in the bankruptcy tier, annual payments would be for fixed dollar amounts. Bankruptcy tier defendants that are still subject to Chapter 11 proceedings as to which a plan of reorganization has not yet become effective would be required to make annual payments to the fund in an amount equal to approximately 1.67 percent of 2002 revenues, capped at $80 million per year.

     The fund administrator would have the limited ability to adjust a defendant participant’s payment based on financial hardship or exceptional cases of demonstrated inequity. The fund administrator would also be directed to reduce the annual aggregate payment obligation of defendant participants at the end of the tenth, fifteenth, twentieth and twenty-fifth years of the fund. However, the administrator would be required to suspend, cancel or reduce any scheduled payment reduction upon finding that the current and projected future assets of the fund are insufficient to satisfy the fund’s anticipated obligations. Further, the administrator would be able to assess surcharges or, after the tenth year of the fund, declare funding holidays, to adjust for funding shortfalls or overpayments to the fund. In summary, although the FAIR Act establishes preliminary payment obligations for individual defendant participants, those obligations may be adjusted under various provisions of the FAIR Act.

Insurer Contributions

     An Asbestos Insurers Commission would be created to determine the amount to be assessed each insurer to satisfy the $46 billion aggregate insurer contribution. The Commission would be required to apply the following factors in assessing insurer contributions:

	•		historic premium lines for asbestos-related liability coverage;
	•		recent loss experiences for asbestos-related liabilities;
	•		amounts reserved for asbestos-related liabilities;
	•		the likely costs to each insurer of its future liabilities under applicable insurance policies; and

•

other factors the Commission deems relevant and appropriate.

     Captive insurers of defendant participants would generally not be assessed funding obligations except to the extent they have asbestos-related liabilities for claims from persons unaffiliated with their ultimate corporate parent.

Kickout and Sunset Provisions

     The FAIR Act would provide for a temporary stay on pending asbestos claims upon enactment. If the fund is not operational and paying claims within nine months of the FAIR Act’s enactment, those stayed claims involving claimants with “exigent health claims,” such as those with mesothelioma or those whose life expectancy is less than one year due to an asbestos-related illness, would be allowed to proceed in court. In addition, all pending claims would be returned to the court system if the fund is not fully operational and handling claims within 24 months following enactment of the FAIR Act.

     The fund would terminate 180 days after the administrator determines that the fund does not have sufficient assets to resolve additional claims and still satisfy all outstanding obligations. Upon termination, all claimants with unsatisfied claims could pursue their claims in the court system. Defendant and insurer participants would be required to continue making annual payments following the fund’s termination to satisfy the fund’s existing obligations.

Effect on Existing Asbestos Claims and Agreements

     Upon determination by the administrator that the fund is fully operational and processing claims, the FAIR Act would bar any pending or future asbestos claims in state or federal court except as provided for by the FAIR Act. Moreover, agreements by any person with respect to the treatment of asbestos claims that require future performance would be superseded and of no force and effect, other than pre-enactment settlement agreements meeting criteria set out in the FAIR Act. Any plan of reorganization which has not yet become effective or agreement by any bankruptcy tier defendant relating to an asbestos claim would be similarly superseded.

Comparison of Treatment of the Chapter 11 Debtors Under the Proposed FAIR Act as Reported to the Senate by the Senate Judiciary Committee, the Previously Negotiated Settlement Agreement and the Proposed Settlement Agreement

     The following chart illustrates some of the differences between the Proposed Settlement Agreement (assuming both satisfaction and failure of the Condition Precedent), the Previously Negotiated Settlement Agreement and the draft FAIR Act:

Proposed

Proposed

Settlement

Settlement

Existing

Agreement, no

Agreement,

Consideration Paid, Benefits

Settlement

FAIR Act only, with no

FAIR Act by

with FAIR Act

Received & Liabilities Retained

Agreement

Settlement

11/30/06

by 11/30/06

B&W business/stock

Surrendered

Retained

Retained

Retained

B&W cash, assets & liabilities1

Surrendered

Retained

Retained

Retained

Insurance rights

Surrendered

Partially Surrendered

Surrendered

Surrendered

Estimated FAIR Act payments

$

0

$750 million/ $335 million (NPV) 2

$

0

$

0

Initial cash payment

$

0

$

0

$350 million

$350 million

Note/contingent note issued

$92 million

$

0

$250 million

$25 million

Stock issued/contingent payment

>$90 million

$

0

$355 million

$

0

Estimated gross tax benefits from consideration paid (at 35%)

$64 million

$263 million/ $109 million (NPV) 2

$334 million

$131 million

Future B&W asbestos liability

None

Contingent on viability of national trust

None

None

Expected Date of Consummation

Uncertain

Uncertain

By 2/22/06

By 2/22/06; FAIR Act Uncertain

The FAIR Act and the Proposed Settlement

     If the proposed FAIR Act were eventually passed containing the same provisions as the FAIR Act approved by the Senate Judiciary Committee, we estimate that the present value of the Chapter 11 Debtors’ total payments to the proposed national trust over a period of 30 years would be approximately $335 million, assuming the sunset provision described above does not become applicable. Through use of the Contingent Payment Right, we believe we have structured the proposed settlement so that, if the FAIR Act is enacted by November 30, 2006 and the Condition Precedent is not satisfied, the aggregate consideration we would deliver pursuant to the Proposed Settlement Agreement would be similar to the net present value of the amount we would pay pursuant to the FAIR Act with no settlement.

     If the FAIR Act is enacted and becomes law after November 30, 2006, so that the Condition Precedent is satisfied, the combined value of the consideration we would be required to deliver pursuant to the Proposed Settlement would be substantially greater than the present value of the payments we would make pursuant to the FAIR Act in its current form. In addition, the proposed settlement would eliminate substantially all of our excess insurance coverage for the period from April 1, 1979 to April 1, 1986, which we would only partially surrender under the proposed FAIR Act.

The FAIR Act and the Previously Negotiated Settlement

     We believe the present value of the payments we would make pursuant to the proposed FAIR Act would be substantially less than the combined value of the consideration we would be delivering under the previously negotiated settlement. In addition, as with the previously negotiated settlement, the proposed settlement would eliminate substantially all of our excess insurance coverage, which we would only partially surrender under the proposed FAIR Act. However, the level of funding required by the FAIR Act could increase. We can provide no assurance that the FAIR Act or any similar legislation will be enacted and, if legislation is enacted, what the terms of such legislation will be.

Uncertainties Associated With the FAIR Act

     Enactment of the FAIR Act, or other similar legislation addressing asbestos-related personal injury claims, could have a material impact on the B&W Chapter 11 proceedings, the Chapter 11 Debtors and McDermott. The legislative process is uncertain and there is some risk that the proposed legislation could be enacted after it is amended or modified to provide for an exclusion that would apply to the Proposed Joint Plan, as a result of the adoption of the proposed resolution or the confirmation of the Proposed Joint Plan, or for some other reason. Although the Condition Precedent provisions set forth in the Proposed Settlement Agreement would potentially provide us relief from having to make any payment pursuant to the Contingent Payment Right and payments under the B&W Note in excess of $25 million, it is unlikely that we would be able to avail ourselves of a more favorable outcome under any legislation that may subsequently be enacted and become law. Furthermore, the Condition Precedent would be deemed satisfied if the FAIR Act or similar federal legislation does not become law on or before November 30, 2006. Even if the Condition Precedent is deemed not to be satisfied, and we are able to benefit from the relief of having to make these contingent payments, we cannot assure you that the economic terms of the proposed settlement will be at least as favorable to us as the economic terms of any asbestos claims-resolution legislation that may eventually become law.

Information About McDermott and Its Subsidiaries

     McDermott is a leading worldwide energy services company. McDermott’s subsidiaries provide engineering, fabrication, installation, procurement, research, manufacturing, environmental systems, project management and facility management services to a variety of customers in the energy industry, including the U.S. Department of Energy. McDermott currently operates in three business segments: Marine Construction Services, Government Operations and Power Generation Systems.

     Marine Construction Services includes the results of operations of J. Ray McDermott, S.A. and its subsidiaries, which supply services to offshore oil and gas field developments worldwide. This segment’s principal activities include:

	•		the front-end and detailed engineering, fabrication and 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 throughout the world, including the U.S. Gulf of Mexico, Mexico, Africa, South America, the Middle East, India, the Caspian Sea and Asia Pacific.

     Government Operations includes the results of operations of BWX Technologies, Inc. and its subsidiaries. This segment includes the provision of:

	•		nuclear components to the U.S. Navy;
	•		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 results of operations of McDermott’s Power Generation Group, which is conducted primarily through the B&W Entities. This segment provides a variety of services, equipment and systems to generate steam and electric power at energy facilities worldwide. See “Information about B&W and its Subsidiaries” below.

     For more information about McDermott and its subsidiaries, see McDermott’s annual report on Form 10-K for the year ended December 31, 2004, and its subsequently filed quarterly reports on Form 10-Q and current reports on Form 8-K, which are incorporated into this proxy statement by reference. See “Where You Can Find More Information.”

Information About B&W and Its Subsidiaries

Business

     The B&W Entities are leading suppliers of fossil fuel-fired steam generating systems, replacement commercial nuclear steam generators, environmental equipment and components, and related services to customers around the world. They design, engineer, manufacture, construct, and service 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.

     More specifically, the B&W Entities:

	•		provide engineered-to-order services, products and systems for energy conversion worldwide and related auxiliary equipment, such as burners, pulverizer mills, soot blowers and ash handlers;
	•		manufacture heavy-pressure equipment for energy conversion, such as boilers fueled by coal, oil, bitumen, natural gas, solid municipal waste, biomass and other fuels;
	•		fabricate steam generators for nuclear power plants;
	•		design and supply environmental control systems, including both wet and dry scrubbers for flue gas desulfurization, modules for selective catalytic reduction of nitrous oxides and electrostatic precipitators and similar devices;
	•		construct power plant equipment, and provide related heavy mechanical erection services;
	•		support operating plants with a wide variety of services, including the installation of new systems and replacement parts, engineered upgrades, construction, maintenance and field technical services such as condition assessments;
	•		provide inventory services to help customers respond quickly to plant interruptions and construction crews to assist in maintaining and repairing operating equipment; and
	•		provide power through cogeneration, refuse-fueled power plants, and other independent power-producing facilities and participate in this market as a contractor for engineer-procure-construct services, as an equipment supplier, as an operations and maintenance contractor and as an owner.

     We believe that B&W’s industry is entering a high-demand cycle over the next five to seven years as a result of:

	•		recent changes in environmental regulation, which have increased the demand for B&W’s environmental control systems used in coal-fired power plants, including scrubbers for flue-gas desulfurization and modules for selective catalytic reduction of nitrous oxides;
	•		high natural gas prices, which have resulted in clean coal becoming less expensive relative to natural gas and accelerated the trend towards the use of advanced clean-coal technology for new power plants and retrofits of existing power plants;
	•		strong demand for replacement parts and services for power plants installed by B&W, which we expect will continue to exist for the near future; and
	•		the Energy Policy Act of 2005, which provides valuable incentives designed to encourage the use of clean coal.

     We believe that the proposed settlement, if consummated, will allow us to benefit from the following strengths of B&W:

	•		B&W has one of the best-known names and longest operating histories (over 135 years) in the power generation industry;
	•		B&W has leading market positions in most of its market sectors, including fossil fuel-fired steam generating systems, replacement commercial nuclear steam generators, and environmental equipment and components;
	•		B&W has an established reputation as a leader in its industry, which is enhanced by its technologically advanced equipment and technological know-how;
	•		B&W’s management team has substantial relevant industry experience, much of which derives from experience with B&W; and
	•		B&W should have a strong balance sheet, even after giving effect to the proposed settlement.

     We expect that our strategies for B&W, if the proposed settlement is consummated, would include the following:

	•		capitalizing on the strong demand for B&W’s services resulting from the industry factors described above;
	•		investing in B&W’s technology and assets to maintain B&W’s reputation as a leader in its industry and to help B&W pursue new clean-coal and other opportunities;
	•		selling integrated solutions to meet the demands of customers seeking single-source solutions to their requirements in order to differentiate B&W from its competitors and maximize B&W’s operating margins; and
	•		selectively pursuing acquisitions and growth opportunities that augment B&W’s capabilities as a leading provider of services to many of its customers.

     The principal customers of the B&W Entities are government-owned and investor-owned utilities and independent power producers, businesses in various process industries, such as pulp and paper mills, petrochemical plants, oil refineries and steel mills, and other steam-using businesses and governmental units. Customers normally purchase services, equipment or systems from B&W after an extensive evaluation process based on competitive bids. B&W generally submits proposals based on the estimated cost of each job.

     B&W’s principal manufacturing plants are located in:

	•		West Point, Mississippi;
	•		Lancaster, Ohio;
	•		Cambridge, Ontario, Canada;
	•		Melville, Saskatechewan, Canada; and
	•		Esbjerg, Denmark.

B&W owns each of these plants.

     The B&W Entities use raw materials such as carbon and alloy steels in various forms, including plates, forgings, structurals, bars, sheets, strips, heavy wall pipes and tubes. They also purchase many components and accessories for assembly. The B&W Entities generally purchase these raw materials and components as needed for individual contracts. Although shortages of some raw materials have existed from time to time, no serious shortage exists at the present time. The B&W Entities do not depend on a single source of supply for any significant raw materials.

     The B&W Entities primarily compete with:

	•		a number of domestic and foreign-based companies specializing in steam-generating systems, equipment and services, including Alstom S.A., Mitsui Babcock Energy Limited, Babcock Power, Foster Wheeler Corporation, Aker Kvaerner ASA, Mitsubishi Heavy Industries, Hitachi, Clyde Bergemann, Inc., the AREVA Group and United Conveyor Corporation;
	•		a number of additional companies in the markets for environmental control equipment and related specialized industrial equipment and in the independent power-producing business; and
	•		other suppliers of replacement parts, repair and alteration services, and other services required to backfit and maintain existing steam systems.

     At June 30, 2005, December 31, 2004 and December 31, 2003, B&W’s consolidated backlog amounted to $1.5 billion, $1.5 billion and $1.1 billion, respectively. If, in B&W’s management’s judgment, it becomes doubtful whether a contract will proceed, B&W adjusts its backlog accordingly. If a contract is deferred or cancelled, B&W or one of its subsidiaries is usually entitled to a financial settlement related to the individual circumstances of the contract.

     B&W attempts to cover increased costs of anticipated changes in labor, material and service costs of long-term contracts through an estimate of those changes, which are reflected in the original price. Most of those long-term contracts contain provisions for progress payments.

     B&W’s overall activity depends mainly on the capital expenditures of electric power generating companies, paper companies and other steam-using industries. Several factors influence these expenditures:

	•		prices for electricity and paper, along with the cost of production and distribution;
	•		demand for electricity, paper and other end products of steam-generating facilities;
	•		availability of other sources of electricity, paper or other end products;
	•		requirements for environmental improvements;
	•		level of capacity utilization at operating power plants, paper mills and other steam-using facilities;
	•		requirements for maintenance and upkeep at operating power plants and paper mills to combat the accumulated effects of wear and tear;
	•		ability of electric generating companies and other steam users to raise capital; and
	•		relative prices of fuels used in boilers, compared to prices for fuels used in gas turbines and other alternative forms of generation.

     B&W’s products and services are capital intensive. As such, customer demand is heavily affected by the variations in customer’s business cycles and by the overall economies of the countries in which they operate.

Selected Financial Information

     We have derived the following selected financial information from (1) the audited financial statements of B&W and subsidiaries included in this proxy statement as of and for the years ended December 31, 2004, 2003, 2002, 2001 and 2000, and (2) the unaudited financial statements of B&W and subsidiaries as of and for the six-month periods ended June 30, 2005 and 2004 included in this proxy statement, which have been prepared on the same basis as the audited statements and, in the opinion of B&W’s management, reflect all adjustments necessary for a fair presentation of the financial position and results of operations of B&W and its consolidated subsidiaries as of those dates and for those periods.

		For the Six Months								For the Years Ended
		Ended June 30,								December 31,
		2005				2004				2004				2003				2002				2001				2000
		(In thousands)
Revenues		$	713,648			$	734,424			$	1,368,918			$	1,408,128			$	1,497,401			$	1,431,908			$	1,162,458
Income (Loss) from Continuing Operations		$	40,776			$	68,317			$	100,956			$	(7,604	)		$	(232,435	)		$	35,377			$	(3,572	)
Net Income (Loss)		$	19,040			$	69,459			$	99,117			$	1,274			$	(213,723	)		$	17,499			$	(4,308	)
Total Assets		$	2,474,054			$	2,310,413			$	2,402,288			$	2,297,453			$	2,257,072			$	2,069,139			$	2,013,662
Current Maturities of Long-Term Debt		$	3,867			$	4,076			$	4,169			$	430			$	288			$	50			$	51
Long-Term Debt		$	4,239			$	4,713			$	4,937			$	4,970			$	4,727			$	4,617			$	4,667

     Pre-tax results for the six months ended June 30, 2005, and the years ended December 31, 2004, 2003 and 2002 include losses totaling $9.7 million, $3.6 million, $73.8 million and $286.5 million, respectively, for estimated costs relating to future nonemployee asbestos-related claims.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

     B&W’s financial statements have been prepared in conformity with the American Institute of Certified Public Accountants’ Statement of Position 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” issued November 19, 1990 (“SOP 90-7”). SOP 90-7 requires a segregation of liabilities subject to compromise by a Bankruptcy Court as of the commencement of the bankruptcy proceedings and identification of all transactions and events that are directly associated with the reorganization. As used in the following discussion, “B&W” refers to The Babcock & Wilcox Company and its consolidated subsidiaries, unless the context otherwise requires.

Critical Accounting Policies and Estimates

     We believe the following are the most critical accounting policies that B&W applies in the preparation of its financial statements. These policies require B&W’s most difficult, subjective and complex judgments, often as a result of the need to make estimates of matters that are inherently uncertain.

     Contracts and Revenue Recognition. B&W generally recognizes contract revenues and related costs on a percentage-of-completion method for individual contracts or combinations of contracts. Under this method, B&W generally recognizes estimated contract income and resulting revenue based on costs incurred to date as a percentage of total estimated costs. Changes in the expected cost of materials and labor, productivity, scheduling and other

factors affect total estimated costs and resulting contract income. Additionally, external factors such as weather, customer requirements and other factors outside of B&W’s control, may also affect the progress and estimated cost of a project’s completion and therefore the timing of income and revenue recognition. B&W routinely reviews estimates related to its contracts, and revisions to profitability are reflected in earnings immediately. If a current estimate of total contract cost indicates a loss on a contract, the projected loss is recognized in full when determined. In prior years, B&W has had significant adjustments to earnings as a result of revisions to contract estimates. Adjustments to overall contract costs due to unforeseen events may continue to be significant in future periods.

     B&W generally recognizes claims for extra work or changes in scope of work in contract revenues, to the extent of costs incurred, when its management believes collection is probable. Any amounts not collected are reflected as an adjustment to earnings. B&W regularly assesses customer credit risk inherent in contract costs. It recognizes contract claim income when formally agreed with the customer.

     Property, Plant and Equipment. B&W carries its property, plant and equipment at depreciated cost, reduced by provisions to recognize economic impairment when B&W determines impairment has occurred. Factors that impact B&W’s determination of impairment include forecasted utilization of equipment and estimates of cash flow from projects to be performed in future periods. B&W’s estimates of cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions or changes in operating performance. It is reasonably possible that changes in such factors may negatively affect B&W’s business and result in future asset impairments.

     B&W depreciates its property, plant and equipment using the straight-line method, over estimated economic useful lives of eight to 40 years for buildings and three to 28 years for machinery and equipment.

     B&W expenses the costs of maintenance, repairs and renewals, which do not materially prolong the useful life of an asset, as it incurs them.

     Pension Plans and Postretirement Benefits. B&W estimates income or expense related to pension and postretirement benefit plans based on actuarial assumptions, including assumptions regarding discount rates and expected returns on plan assets. B&W determines the discount rate based on a review of published financial data and discussions with an actuary regarding rates of return on high-quality fixed-income investments currently available and expected to be available during the period to maturity of its pension obligations. Based on historical data and discussions with the actuary, B&W determines its expected return on plan assets based on the expected long-term rate of return on plan assets and the market-related value of the plan assets. Changes in these assumptions can result in significant changes in the estimated pension income or expense. B&W revises its assumptions on an annual basis based on changes in current interest rates, return on plan assets and the underlying demographics of its workforce. These assumptions are reasonably likely to change in future periods and may have a material impact on future earnings.

     Effective January 31, 2005, MI spun-off to B&W the assets and liabilities associated with B&W’s portion of MI’s pension plan to a new pension plan sponsored by B&W. Approximately 46% of the participants in the MI pension plan at January 30, 2005 transferred to the new B&W sponsored plan. As of June 30, 2005 B&W recorded its best estimate of this transaction based on data received from our actuary. B&W recorded an increase in its pension liability totaling approximately $117.1 million, with corresponding decreases in other comprehensive income totaling approximately $100.5 million and in capital in excess of par value totaling approximately $16.6 million. We expect this transfer to be completed in the third quarter of 2005.

     Loss Contingencies. B&W estimates liabilities for loss contingencies when it is probable that a liability has been incurred and the amount of loss is reasonably estimable. Disclosure is required when there is a reasonable possibility that the ultimate loss will exceed the recorded provision. B&W has accrued its estimates of probable losses when appropriate. However, losses are typically resolved over long periods of time and are often difficult to estimate due to the possibility of multiple actions by third parties. Therefore, it is possible future earnings could be affected by changes in estimates related to these matters. B&W’s most significant loss contingency is its estimate of its asbestos-related liability. Currently, B&W’s best estimate of its liability for asbestos claims is based on the

proposal to settle the liability contemplated by the Joint Plan. Any changes to the proposed settlement could change the estimate of B&W’s liability for asbestos claims and could be material to B&W’s financial condition and results of operations.

     Goodwill. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires that B&W no longer amortize goodwill, but instead perform periodic testing for impairment. It requires a two-step impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss. The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss, if any. Both steps of goodwill impairment testing involve significant estimates. A discounted cash flow model is used to determine the fair value of each reporting unit. Inherent in the model are assumptions regarding forecasted revenue, operating expenses and future cash flows, which could differ materially from actual future results.

     Deferred Taxes. Deferred taxes reflect the net effects of temporary differences between the financial and tax bases of assets and liabilities. B&W records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. B&W will continue to assess the adequacy of the valuation allowance on a quarterly basis. Any changes to its estimated valuation allowance could be material to B&W’s consolidated financial condition and results of operations.

     Warranty. B&W accrues estimated expense to satisfy contractual warranty requirements when it recognizes the associated revenue on the related contracts. In addition, B&W makes specific provisions where it expects the costs of warranty to significantly exceed the accrued estimates. Such provisions could result in a material effect on B&W’s results of operations, financial position and cash flows.

Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

     Revenues decreased approximately $20.8 million from $734.4 million in the six months ended June 30, 2004 to $713.6 million for the six months ended June 30, 2005. This decrease was primarily attributable to lower volumes from the fabrication, repair and retrofit of existing facilities. The decrease was partially offset by higher volumes from B&W’s nuclear service, boiler cleaning equipment and replacement parts activities.

     B&W’s operating income decreased by $33.8 million to $33.9 million in the six months ended June 30, 2005 compared to the six months ended June 30, 2004. This decrease was attributable primarily to pension plan expense incurred in the six months ended June 30, 2005 related to the spin-off of MI’s pension plan to a B&W sponsored plan effective January 31, 2005. In addition, B&W also experienced lower volume and margins from the fabrication, repair, and retrofit of existing facilities. Also, lower margins in replacement parts and replacement of nuclear steam generators and higher general and administrative expenses, contributed to the decrease in operating income. Partially offsetting this decrease in operating income were higher margins and volume from B&W’s nuclear service and boiler cleaning equipment activities.

     Interest income increased $2.9 million from $2.5 million in the six months ended June 30, 2004 to $5.4 million for the six months ended June 30, 2005, primarily due to increases in average cash and cash equivalents and prevailing interest rates.

     B&W’s other-net increased from expense of approximately $0.4 million in the six months ended June 30, 2004 to income of approximately $3.0 million in the six months ended June 30, 2005. This increase was primarily attributable to foreign currency exchange gains offset by higher minority interest expense.

     B&W’s provision for (benefit from) income taxes increased by $22.8 million from a benefit totaling $1.1 million in the six months ended June 30, 2004 to an expense totaling $21.7 million in the six months ended June 30, 2005. The six months ended June 30, 2004 included a benefit taken for an adjustment to B&W’s federal deferred tax asset valuation allowance totaling approximately $26.2 million, which was recorded as a credit to B&W’s provision for income taxes. B&W and its subsidiaries operate in different tax jurisdictions with different statutory

rates. These variances in rates, along with the mix of income in these jurisdictions, are responsible for the shifts in B&W’s effective tax rates.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

     B&W’s revenues decreased approximately $39.2 million from $1.408 billion for the year ended December 31, 2003 to $1.369 billion for the year ended December 31, 2004. This decrease was primarily attributable to lower volumes from the fabrication, repair and retrofit of existing facilities and B&W’s utility steam system fabrication activities. The decrease in revenues was partially offset by higher volumes from nuclear service, replacement parts, and boiler cleaning activities.

     B&W’s operating income increased by $115.0 million to $116.8 million for the year ended December 31, 2004 compared to $1.8 million in 2003. This increase was attributable primarily to a decrease in B&W’s provision for asbestos-related liability from $73.8 million in the year ended December 31, 2003 to $3.6 million in the year ended December 31, 2004. In addition, B&W experienced higher margins from its utility steam system fabrication activities, higher volumes from its nuclear service activities, and increased volume and margin in its non-boiler construction and boiler cleaning equipment businesses. Partially offsetting these increases were lower volumes from the fabrication, repair, and retrofit of existing facilities, lower margins in B&W’s replacement parts activities, and higher selling, general and administrative expenses.

     Interest income decreased approximately $1.0 million from $6.0 million in 2003 to approximately $5.0 million in 2004, primarily due to decreases in average cash and cash equivalents.

     Other-net expense increased $6.0 million from expense of $12.1 million in 2003 to expense of $18.1 million in 2004. This increase was primarily attributable to an increase in foreign currency exchange losses.

     B&W’s provision for (benefit from) income taxes increased by $10.6 million from a benefit totaling $8.8 million in the year ended December 31, 2003 to an expense totaling $1.8 million in the year ended December 31, 2004. In the year ended December 31, 2004, B&W recorded a benefit taken for an adjustment to its federal deferred tax asset valuation allowance totaling approximately $34.1 million, which was recorded as a credit to B&W’s provision for income taxes. In addition, in the year ended December 31, 2003, B&W recorded an additional provision totaling $7.7 million as an increase to its deferred tax asset valuation allowance.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

     B&W’s revenues decreased in 2003 from 2002 by approximately $89 million from $1.497 billion in 2002 to $1.408 billion in 2003. This decrease was primarily attributable to lower volumes from the fabrication, repair and retrofit of existing facilities in addition to replacement of nuclear steam generators and lower nuclear services activities. Partially offsetting these decreases were high volumes from B&W’s utility steam fabrication activities, replacement parts and boiler cleaning equipment.

     Operating income for B&W increased by approximately $206.5 million in 2003 from 2002. In 2002, B&W recorded an adjustment to its provision for asbestos liability totaling $286.5 million, compared with an adjustment in 2003 totaling $73.8 million. In addition, B&W experienced higher margins from its utility steam system fabrication activities and higher volumes from its boiler cleaning equipment activities. These increases were partially offset by lower volumes and margins from the nuclear service and non-boiler construction activities of B&W. Also B&W experienced higher selling general and administrative expenses in 2003 related to the Chapter 11 filing.

     Interest income increased $1.4 million from $4.6 million in 2002 to $6.0 million in 2003, primarily due to an increase in average cash and cash equivalents and prevailing interest rates.

     Interest expense decreased by $1.9 million in 2003 compared to 2002. This decrease was primarily attributable to lower amortization of deferred debt issue costs on B&W’s DIP Credit Facility.

     Other-net expense decreased $15 million from expense of $27.1 million in 2002 to expense of $12.1 million in 2003. The year ended December 31, 2002 included a charge totaling approximately $22 million to reserve for certain notes receivable due from affiliates of McDermott, which, as a result of the Chapter 11 proceedings, were not expected to be collected, while this amount for the year ended December 31, 2003 totaled approximately $5.1 million.

     B&W’s benefit from income taxes decreased by $9.8 million from a benefit totaling $18.7 million in the year ended December 31, 2002 to a benefit totaling $8.9 million in the year ended December 31, 2003. In 2003, B&W recorded an additional provision totaling $7.7 million as an increase to its federal deferred tax asset valuation allowance.

Liquidity and Capital Resources

     In connection with the Chapter 11 filing, the Chapter 11 Debtors entered into an original $300 million debtor-in-possession revolving credit facility (the “DIP Credit Facility”), which, as amended, now provides for credit extensions of up to $250 million and expires in February 2007. All amounts owed under the facility have a super-priority administrative expense status in the Chapter 11 proceedings. The Chapter 11 Debtors’ obligations under the DIP Credit Facility are (1) guaranteed by substantially all of B&W’s other domestic subsidiaries and B&W Canada Ltd. and (2) secured by security interests in B&W Canada Ltd.’s assets. Additionally, B&W and substantially all of its domestic subsidiaries granted security interests in their assets to the lenders under the DIP Credit Facility, which would become effective upon the defeasance or repayment of MI’s outstanding public debt. The DIP Credit Facility generally provides for borrowings by the Chapter 11 Debtors for working capital and other general corporate purposes and the issuance of letters of credit, except that the total of all borrowings and nonperformance letters of credit issued under the facility cannot exceed $100 million in the aggregate. There were no borrowings outstanding under the DIP Credit Facility at June 30, 2005 or December 31, 2004. The DIP Credit Facility imposes certain financial and non-financial covenants on B&W and its subsidiaries. The interest rate is, at B&W’s option, J. P. Morgan’s prime lending rate plus 1.25% or LIBOR plus 2.5%, and letters of credit are charged at 1%.

     A permitted use of the DIP Credit Facility is the issuance of new letters of credit to backstop or replace pre-existing letters of credit issued in connection with B&W’s and its subsidiaries’ business operations, but for which McDermott, MI or BWICO was a maker or guarantor. As of February 22, 2000, the aggregate amount of all such pre-existing letters of credit totaled approximately $172 million (the “Pre-existing LCs”). McDermott, MI and BWICO have agreed to indemnify and reimburse the Chapter 11 Debtors for any customer draw on any letter of credit issued under the DIP Credit Facility to backstop or replace any Pre-existing LC for which they already have exposure and for the associated letter of credit fees paid under the facility. As of June 30, 2005, approximately $172.1 million in letters of credit had been issued under the DIP Credit Facility, of which approximately $15.9 million was to replace or backstop Pre-existing LCs. All other pre-existing LCs have expired.

     In the course of the conduct of B&W’s and its subsidiaries’ business, McDermott and MI have agreed to indemnify two surety companies for B&W’s and its subsidiaries’ obligations under surety bonds issued in connection with their customer contracts. At June 30, 2005, the total value of B&W’s and its subsidiaries’ customer contracts yet to be completed covered by such indemnity arrangements was approximately $30.9 million, of which approximately $0.4 million related to bonds issued after February 21, 2000.

     B&W had cash and cash equivalents totaling $346.6 million at June 30, 2005 compared to $351.5 million at December 31, 2004. At June 30, 2005 and December 31, 2004, B&W’s balance in cash and cash equivalents included approximately $11.5 million and $9.6 million, respectively, in adjustments for bank overdrafts, with a corresponding increase in accounts payable for these overdrafts. Working capital increased to $222.9 million at June 30, 2005 from $220.9 million at December 31, 2004.

     Effective January 31, 2005, McDermott spun off the assets and liabilities associated with our portion of the MI Plan to the “Retirement Plan for Employees of The Babcock and Wilcox Company and Participating Subsidiary and Affiliated Companies” (the “New Plan”) sponsored by us. Beginning January 31, 2005, our financial statements will include pension assets, liabilities and pension costs associated with the New Plan. Approximately 46% of the

employees in the MI Plan at January 31, 2005 transferred to the New Plan. Based on data received from its actuary, B&W expects to make cash contributions to the New Plan totaling approximately $43 million in 2006 and $35 million in 2007. These amounts are preliminary and subject to change pending further analysis by B&W’s actuary.

     B&W has assessed its liquidity position as a result of the Chapter 11 filing and believes that it can continue to fund its 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-related 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. The financial statements of B&W have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. As a result of the Chapter 11 filing and related events, there is no assurance that the carrying amounts of B&W’s assets will be realized or that B&W’s liabilities will be liquidated or settled for the amounts recorded. The independent accountant’s report on the consolidated financial statements of B&W for the years ended December 31, 2004, 2003 and 2002 includes an explanatory paragraph indicating that these issues raise substantial doubt about B&W’s ability to continue as a going concern.

Quantitative and Qualitative Disclosures About Market Risk

     Due to covenants in the DIP Credit Facility, B&W is restricted to certain types of investment instruments. At December 31, 2004, all of B&W’s investments are reported as cash equivalents and consist of investments in short-term money market mutual funds, Eurodollar time deposits and other high-grade investments. At December 31, 2004, B&W had short-term investments attributable to cash used in lieu of issuing letters of credit in other assets totaling approximately $40.5 million. These short term investments are carried in other assets to match the corresponding letter of credit exposure. B&W has limited exposure to market risk from changes in interest rates on these investments. B&W attempts to ensure the safety and preservation of its invested funds by limiting default risk, market risk and reinvestment risk.

     B&W has exposure to changes in interest rates under the DIP Credit Facility. At December 31, 2004 and 2003, B&W had no borrowings outstanding under this facility. B&W also has exposure to changes in interest rates on its variable-rate long-term debt obligations, which totaled $4.52 million at December 31, 2004. At December 31, 2004, this debt carried an interest rate of 2.23%, matures $50,000 per year over the next five years and had an estimated fair value of $4.522 million. B&W has no material future earnings or cash flow exposures from changes in interest rates on the remainder of its long-term debt obligations, which totaled $5.8 million at December 31, 2004, as these obligations have fixed interest rates. Principal cash flows and related weighted average interest rates by expected maturity dates for B&W’s fixed-rate long-term debt obligations are as follows:

						Weighted Average
Maturity Date		Principal Cash Flows				Interest Rate
2005		$	659,000				5.18	%
2006		$	2,488,000				2.93	%
2007		$	328,000				5.32	%
2008		$	338,000				5.36	%
2009		$	338,000				5.36	%
Thereafter		$	1,446,000				6.10	%

These fixed-rate obligations had an estimated fair value totaling $4.0 million at December 31, 2004.

     B&W has operations in foreign locations, and, as a result, its financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in those foreign markets. In order to manage the risks associated with foreign currency exchange fluctuations, B&W regularly hedges those risks with foreign currency forward contracts. B&W does not enter into speculative forward contracts.

Exchange Rate Sensitivity

     The following tables provide information about B&W’s foreign currency forward contracts outstanding at December 31, 2004 and presents such information in U.S. dollar equivalents. The tables present notional amounts and related weighted-average exchange rates by expected (contractual) maturity dates and constitute forward-looking statements. These notional amounts generally are used to calculate the contractual payments to be exchanged under the contract.

Forward Contracts to Purchase Foreign Currencies for U.S. Dollars:
		Year Ending				Fair Value at				Average Contractual
Foreign Currency		December 31, 2005				December 31, 2005				Exchange Rate
Canadian Dollars		$	27,542			$	528				1.2252
Pound Sterling		$	983			$	40				1.8254
Danish Kroner		$	1,789			$	38				5.5110

Forward Contracts to Sell Foreign Currencies for U.S. Dollars:
		Year Ending				Fair Value at				Average Contractual
Foreign Currency		December 31, 2005				December 31, 2005				Exchange Rate
Euros		$	2,164			($	43	)			1.3397
Canadian Dollars		$	32,167			($	3,062	)			1.3343

Selected Historical Consolidated Financial Data of McDermott

     We have prepared the selected historical financial data set forth below for the years ending December 31, 2000 through December 31, 2004 using McDermott’s audited consolidated financial statements. We have prepared the selected historical financial data set forth below for the six months ended June 30, 2005 and 2004 using McDermott’s unaudited consolidated financial statements. You should read the following selected historical financial data together with our consolidated financial statements and the related notes and with the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

		For the Six Months								For the Years Ended
		Ended June 30,								December 31,
		2005				2004				2004				2003				2002				2001				2000(1)
		(In thousands)
STATEMENT OF OPERATIONS DATA:
Revenues		$	954,251			$	999,151			$	1,923,019			$	2,335,364			$	1,733,821			$	1,888,078			$	1,803,179
Cost of Operations			(780,144	)			(892,372	)			(1,673,922	)			(2,252,842	)			(1,734,580	)			(1,653,042	)			(1,606,510	)
Selling, general and administrative expenses			(98,475	)			(92,071	)			(170,953	)			(169,764	)			(157,845	)			(192,134	)			(180,810	)
Gain (loss) on asset sales and impairments			2,540				2,953				32,163				6,171				(7,855	)			(3,739	)			(2,818	)
Impairment of goodwill			—				—				—				—				(313,008	)			—				—
Write-off of investment in The Babcock and Wilcox Company			—				—				—				—				(224,664	)			—				—
Equity in income (loss) from investees			17,269				15,940				35,617				28,382				27,692				34,093				(9,795	)
Income (loss) from operations			95,441				33,601				145,924				(52,689	)			(676,439	)			73,256				3,246
Other income (expense):
Interest income			8,408				1,820				5,574				3,230				8,553				19,553				27,103
Interest expense			(18,619	)			(16,684	)			(36,066	)			(18,993	)			(15,123	)			(39,656	)			(43,603	)
Loss on The Babcock and Wilcox Company bankruptcy settlement			(5,887	)			(1,972	)			(11,187	)			(14,539	)			(86,377	)			—				—
Gain on sale of business			—				—				—				—				—				27,996				—
Other-net			5,298				2,115				(1,779	)			2,123				(4,174	)			4,220				(2,584	)
Income (Loss) before provision for income taxes			84,641				18,880				102,466				(80,868	)			(773,560	)			85,369				(15,838	)
Provision for (benefit from) income taxes			(18,714	)			17,962				40,827				21,290				14,406				110,651				10,635
Net income (loss) from continuing operations			103,355				918				61,639				(102,158	)			(787,966	)			(25,282	)			(26,473	)
Discontinued operations			—				—				—				3,219				11,572				5,260				4,391
Cumulative effect of accounting change			—				—				—				3,710				—				—				—
Net Income (loss)		$	103,355			$	918			$	61,639			$	(95,229	)		$	(776,394	)		$	(20,022	)		$	(22,082	)
Basic earnings (loss) per common share:
Net income from continuing operations		$	1.54			$	0.01			$	0.94			$	(1.59	)		$	(12.74	)		$	(0.42	)		$	(0.44	)
Net income (loss)		$	1.54			$	0.01			$	0.94			$	(1.49	)		$	(12.55	)		$	(0.33	)		$	(0.37	)
Diluted earnings (loss) per common share:
Net income (loss) from continuing operations		$	1.45			$	0.01			$	0.90			$	(1.59	)		$	(12.74	)		$	(0.42	)		$	(0.44	)
Net income (loss)		$	1.45			$	0.01			$	0.90			$	(1.49	)		$	(12.55	)		$	(0.33	)		$	(0.37	)
OTHER FINANCIAL DATA:
Cash flows provided by (used in):
Operating activities		$	74,261			$	(13,637	)		$	65,306			$	(97,546	)		$	(9,806	)		$	176,611			$	(49,066	)
Investing activities			(64,622	)			10,861				57,544				(16,761	)			126,429				11,693				(27,991	)
Financing activities			(7,536	)			(37,326	)			(38,347	)			159,578				(147,300	)			(105,672	)			(255	)
Depreciation and amortization			21,040				19,426				40,293				44,504				40,620				62,264				63,890
Capital expenditures			22,782				8,111				35,644				36,057				64,852				(45,008	)			(49,300	)
Ratio of earnings to fixed charges			4.45				1.62				2.99				0.00				0.00				2.45				1.01
BALANCE SHEET DATA:
Cash and cash equivalents		$	261,378			$	134,694			$	259,319			$	174,790			$	129,517			$	196,912			$	84,620
Restricted cash and cash equivalents			163,514				168,308				177,953				180,480				44,824				—				—
Working capital			123,420				(33,618	)			58,232				(24,304	)			(167,765	)			(164,984	)			(103,391	)
Total assets			1,488,570				1,246,236				1,386,932				1,248,874				1,278,171				2,103,840				2,025,627
Total third party debt			264,425				280,084				280,020				316,899				141,681				309,899				419,503
Total equity (deficit)			(139,954	)			(361,164	)			(261,443	)			(363,177	)			(416,757	)			770,110				776,603

Unaudited Pro Forma Financial Information of McDermott

     Due to the B&W Chapter 11 filing, on February 22, 2000, we stopped consolidating the results of operations of B&W and its subsidiaries in our consolidated financial statements and we began presenting our investment in B&W under the cost method. During the year ended December 31, 2002, due to increased uncertainty with respect to the amounts, means and timing of the ultimate settlement of asbestos claims and the recovery of our investment in B&W, we wrote off our net investment in B&W. The total impairment charge of $224.7 million included our investment in B&W of $187.0 million and other related assets totaling $37.7 million, primarily consisting of accounts receivable from B&W. On December 19, 2002, drafts of a joint plan of reorganization and settlement agreement, together with a draft of a related disclosure statement, were filed in the Chapter 11 proceedings, and we determined that a liability related to the proposed settlement was probable and that the value was reasonably estimable. Accordingly, as of December 31, 2002, we established an estimate for the cost of the settlement of the B&W Chapter 11 proceedings of $110.0 million, including related tax expense of $23.6 million. We revalue this estimate on a quarterly basis to reflect current conditions. For the years ended December 31, 2004 and 2003, the revaluation of the estimated cost of the settlement resulted in an aggregate increase in the provision of $11.9 million and $18.0 million, respectively. The increase in the provision includes associated tax expense of $0.7 million and $3.4 million for the years ended December 31, 2004 and 2003, respectively. For the six months ended June 30, 2005 and 2004, the revaluation of the estimated cost of the settlement resulted in an aggregate increase in the provision of $6.8 million and $1.3 million, respectively, primarily due to changes in interest rates and our stock price. The increase in the provision includes tax expenses (benefits) of $1.0 million and ($0.7) million for the six months ended June 30, 2005 and 2004, respectively. As of June 30, 2005, our estimate for the cost of the settlement is $146.7 million.

     On August 29, 2005, McDermott announced the Proposed Settlement Agreement. Under the terms of the Proposed Settlement Agreement and a related plan of reorganization the Chapter 11 Debtors, the ACC, the FCR and MI, as plan proponents, have jointly proposed (the “Proposed Joint Plan”), the Asbestos PI Trust would be funded by contributions of:

	•		$350 million in cash, which would be paid by MI or one of its subsidiaries on the effective date of the Proposed Joint Plan;
	•		an additional contingent cash payment of $355 million, which would be payable by MI or one of its subsidiaries within 180 days of November 30, 2006, but only if the condition precedent described below is satisfied, which amount would be payable with interest accruing on that amount at 7% per year from December 1, 2006 to the date of payment; and
	•		a note issued by B&W in the aggregate principal amount of $250 million (the “B&W Note”), bearing interest at 7% annually on the outstanding principal balance from and after December 1, 2006, with a five-year term and annual principal payments of $50 million each, commencing on December 1, 2007, provided that, if the condition precedent described below is not satisfied, only $25 million principal amount of the B&W Note would be payable. B&W’s payment obligations under the B&W Note would be fully and unconditionally guaranteed by Babcock & Wilcox Investment Company, a Delaware corporation and a wholly owned subsidiary of MI (“BWICO”), and McDermott. The guarantee obligations of BWICO and McDermott would be secured by a pledge of all of B&W’s capital stock outstanding as of the effective date of the Proposed Joint Plan.

     McDermott and most of its subsidiaries would also contribute to the Asbestos PI Trust substantially the same insurance rights as were to be contributed to the Asbestos PI Trust under the Previously Negotiated Settlement Agreement. See “Description of the Proposed Settlement Agreement—Creation of the Asbestos PI Trust and Contribution of Assets.”

     The Proposed Settlement Agreement includes a mechanism that would potentially limit the consideration to be contributed to the Asbestos PI Trust if the FAIR Act or similar U.S. federal legislation is enacted and becomes law. Specifically, the Proposed Settlement Agreement provides that the right to receive the $355 million contingent

payment (the “Contingent Payment Right”) would vest and amounts under the B&W Note in excess of $25 million would be payable only upon satisfaction of the condition precedent that neither the FAIR Act nor any other U.S. federal legislation designed to resolve asbestos-related personal injury claims through the implementation of a national trust shall have been enacted and become law on or before November 30, 2006 (the “Condition Precedent”). The Proposed Settlement Agreement further provides that:

	•		if such legislation is enacted and becomes law on or before November 30, 2006 and is not subject to a legal proceeding as of January 31, 2007 which challenges the constitutionality of such legislation (any such proceeding is referred to as a “Challenge Proceeding”), the Condition Precedent would be deemed not to have been satisfied, and no amounts would be payable under the Contingent Payment Right and no amounts in excess of $25 million would be payable under the B&W Note; and
	•		if such legislation is enacted and becomes law on or before November 30, 2006, but is subject to a Challenge Proceeding as of January 31, 2007, the Condition Precedent would be deemed not to have been satisfied and any rights with respect to the Contingent Payment Right and payments under the B&W Note in excess of $25 million would be suspended until either:

(1) there has been a final, nonappealable judicial decision with respect to the Challenge Proceeding to the effect that such legislation is unconstitutional as generally applied to debtors in Chapter 11 proceedings whose plans of reorganization have not yet been confirmed and become substantially consummated (i.e., debtors that are similarly situated to B&W as of September 1, 2005), so that such debtors would not be subject to such legislation, in which event the Condition Precedent would be deemed to have been satisfied, and the Contingent Payment Right would vest and the B&W Note would become fully payable pursuant to its terms (in each case subject to the protection against double payment provisions described below); or

(2) there has been a final nonappealable judicial decision with respect to the Challenge Proceeding which resolves the Challenge Proceeding in a manner other than as contemplated by the immediately preceding clause, in which event the Condition Precedent would be deemed not to have been satisfied and no amounts would be payable under the Contingent Payment Right and no amounts in excess of $25 million would be payable under the B&W Note.

     The Proposed Settlement Agreement also includes provisions to provide some protection against double payment so that, if the FAIR Act or similar U.S. federal legislation is enacted and becomes law after November 30, 2006, or the Condition Precedent is otherwise satisfied (in accordance with the provisions described in clause (1) above), any payment McDermott or any of its subsidiaries may be required to make pursuant to the legislation on account of asbestos-related personal injury claims against any of the B&W Entities would reduce, by a like amount:

	•		first, the amount, if any, then remaining payable pursuant to the Contingent Payment right; and
	•		next, any then remaining amounts payable pursuant to the B&W Note.

     Under the Proposed Settlement Agreement and the Proposed Joint Plan, the Apollo/Parks Township Claims will not be channeled to a trust, as contemplated by the Previously Negotiated Settlement Agreement and the Previously Negotiated Joint Plan. Rather, the Apollo/Parks Township Claims would remain the responsibility of the Chapter 11 Debtors and will not be impaired under the terms of the Proposed Joint Plan. While the Proposed Settlement has been structured in a manner to permit all disputes relating to the Apollo/Parks Townships Claims and the associated insurance coverage to be resolved after the Proposed Joint Plan has been confirmed and becomes effective, we are continuing our efforts to negotiate a mutually satisfactory resolution of the disputes involving the current claimants in the Hall Litigation on an expedited basis. We believe that all claims under the Hall Litigation will be resolved within the limits of coverage of our insurance policies. However, there may be an issue as to whether our insurance coverage is adequate and we may be materially adversely impacted if our liabilities exceed our coverage.

     The Proposed Settlement Agreement contemplates that the Proposed Joint Plan must become effective, on a final, nonappealable basis, no later than the Effective Date Deadline. The Proposed Settlement Agreement further contemplates that, if the effective date of the Proposed Joint Plan has not occurred by that date, and is not extended by the ACC, the FCR and us, acting together, then the settlement contemplated by the Proposed Settlement Agreement will be abandoned and the parties will resume their efforts to effect the settlement contemplated by the Previously Negotiated Settlement Agreement and the Previously Negotiated Joint Plan.

     Under the terms of the proposed settlement, McDermott (through MI and BWICO) will retain 100% ownership of B&W and will reacquire control of B&W. McDermott will account for this reacquisition of control over B&W in a manner similar to a purchase business combination.

     McDermott is providing the following unaudited pro forma condensed combined financial statements to help you in your analysis of the financial aspects of the proposed settlement. The unaudited pro forma combined financial statements are based upon the historical financial information of McDermott and B&W, and should be read in conjunction with the historical consolidated financial statements and notes thereto of McDermott, which have been incorporated by reference in this proxy statement, and B&W, which have been included in this proxy statement (see “Financial Statements of The Babcock & Wilcox Company and Subsidiaries”).

     The following unaudited pro forma condensed combined balance sheet is based on the balance sheets of McDermott and B&W, and has been prepared to reflect the transaction as if it had been consummated on June 30, 2005. The following unaudited pro forma condensed combined statements of income combine McDermott’s and B&W’s results of operations for the periods presented, assuming the transaction had occurred on January 1, 2004. The unaudited pro forma condensed combined financial statements are based on estimates and assumptions set forth in the notes to such statements, which are preliminary, subject to change and have been made solely for purposes of developing such pro forma information. The unaudited pro forma condensed combined financial statements are not necessarily an indication of the results that may be achieved in the future. The pro forma information provided includes both scenarios outlined above: If the FAIR Act passes, and no passage of the FAIR Act.

     Because McDermott will reacquire control of B&W as part of the proposed settlement, the settlement will be accounted for in a manner similar to a step purchase in accordance with accounting principles generally accepted in the United States. Tax adjustments required as a result of following the accounting guidelines under purchase business combinations are recorded at an effective tax rate of 35%. Certain adjustments to the purchase price to eliminate previously established tax balances are adjusted using the applicable tax rate present in McDermott’s unaudited consolidated financial statements for the six months ended June 30, 2005.

UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(Assuming passage of the FAIR Act by November 2006)
(In thousands)

		MII				B&W
		As of				As of				Pro forma				Pro forma
		6/30/2005				6/30/2005				Adjustments				Combined
Assets:
Cash & Equivalents		$	373,145			$	346,577			$	(375,000	)	A	$	344,722
Accounts Rec. — Trade			234,281				180,886				—				415,167
Accounts & Notes Rec. — Other			92,832				10,172				(3,443	)	B		99,561
Contracts in Progress			68,119				88,108				—				156,227
Inventories			—				59,267				—				59,267
Deferred Income Taxes			18,813				51,304				—				70,117
Other Current Assets			57,969				19,791				2,004		N		79,764
Total Current Assets			845,159				756,105				(376,439	)			1,224,825
Net PP&E			306,342				105,995				(13,207	)	C		399,130
Long Term Investment Portfolio			60,069				—				—				60,069
Note Receivable-Affiliates			—				10,291				(10,291	)	B		—
Insurance Recoverable			—				1,149,989				(1,149,989	)	J		—
Goodwill			12,926				96,291				(96,291	)	C		12,926
Deferred Income Taxes			72,912				233,086				(47,006	)	D		258,992
Other Intangible Assets			—				—				—				—
Other Long Term Assets			191,162				129,221				(17,316	)	J		303,067
Total Assets		$	1,488,570			$	2,480,978			$	(1,710,539	)		$	2,259,009
Liabilities & Equity:
Notes Payable & Current Debt Maturities			4,250				3,867				—				8,117
Accounts Payable			96,595				110,090				—				206,685
Accounts Payable — Affiliates (B&W)			38,890				22,744				(61,634	)	B		—
Accrued Employee Benefits			62,474				29,201				—				91,675
Accrued Liabilities — Other			237,640				37,445				85,000		E		360,085
Advanced Billings on Contracts			255,739				283,795				—				539,534
Accrued Warranty Expense			—				46,030				—				46,030
Accrued Taxes Payable			26,151				—				(26,151	)	N		—
Total Current Liabilities			721,739				533,172				(2,785	)			1,252,126
Long-Term Debt			260,175				4,239				—				264,414
Accrued Post Retirement Benefit			26,404				2,033				—				28,437
Self Insurance			61,532				11,229				—				72,761
Pension Liability			331,572				127,878				(117,079	)	F		342,371
Accrued Cost of B&W Settlement			117,990				—				(117,990	)	M		—
Products Liability Settlement			—				1,678,218				(1,678,218	)	J		—
Other Long-Term Liabilities			109,112				89,886				(8,723	)	H		190,275
Total Liabilities			1,628,524				2,446,655				(1,924,795	)			2,150,384
Common Stock: Par			71,038				1,001				(1,001	)	G		71,038
Capital In Excess of Par Value			1,139,969				123,067				(123,067	)	G		1,139,969
Accumulated Deficit			(957,553	)			(15,969	)			164,039		G		(809,483	)
Treasury Stock			(61,559	)			—				—				(61,559	)
Other Comprehensive Income (Loss)			(331,849	)			(73,776	)			174,285		G		(231,340	)
Total Stockholders’ Equity			(139,954	)			34,323				214,256				108,625
Total Liabilities & Stockholders’ Equity		$	1,488,570			$	2,480,978			$	(1,710,539	)		$	2,259,009

The accompanying notes are an integral part of these unaudited pro forma condensed combined financial statements.

UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
(Assuming passage of the FAIR Act by November 2006)
(In thousands except per share amounts)

		Six Months Ended
										Pro forma								Pro forma
		MII				B&W				Adjustments								Combined
		6/30/2005				6/30/2005
Revenues		$	954,251			$	713,648			$	(454	)			K			$	1,667,445
Cost and Expenses:
Cost of Operations			780,144				598,870				(9,486	)			I,K				1,369,528
Selling, general and administrative expenses			95,935				80,137				25,000				E				201,072
Sub-total expenses			876,079				679,007				15,514								1,570,600
Equity in income of investees			17,269				(713	)			—								16,556
Operating Income			95,441				33,928				(15,968	)							113,401
Other Income (Expense):
Interest income			8,408				5,351				(806	)			L				12,953
Interest expense			(18,619	)			(1,488	)			806				L				(19,301	)
(Increase) decrease in the estimated cost of the B&W settlement			(5,887	)			—				5,887				I				—
Other — net			5,298				2,985				144,915				G				153,198
Sub-total other — net			(10,800	)			6,848				150,802								146,850
Income before provision for (Benefit from) income taxes			84,641				40,776				134,834								260,251
Provision for (Benefit from) income taxes			(18,714	)			21,736				(25,586	)			I,G,E				(22,564	)
Net Income		$	103,355			$	19,040			$	160,420							$	282,815
Earnings per common share:
Basic: Net income		$	1.54			$	—			$	—							$	4.21
Diluted: Net income		$	1.45			$	—			$	—							$	3.96
Shares used in EPS calculations
Basic			67,181,271																67,181,271
Diluted			71,485,971																71,485,971