UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2006

OR

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

For the transition period from                      to                     

Commission File No. 001-08430

McDERMOTT INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

REPUBLIC OF PANAMA	72-0593134
(State or Other Jurisdiction of	(I.R.S. Employer Identification No.)
Incorporation or Organization)
777 N. ELDRIDGE PKWY. HOUSTON, TEXAS	77079
(Address of Principal Executive Offices)	(Zip Code)

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

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

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

Large accelerated filer þ          Accelerated filer o          Non-accelerated filer o

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

     The number of shares of the registrant’s common stock outstanding at July 31, 2006 was 109,978,824.

McDERMOTT INTERNATIONAL, INC.

INDEX — FORM 10-Q

		PAGE
PART I — FINANCIAL INFORMATION
	Item 1 — Condensed Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets June 30, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Income Three and Six Months Ended June 30, 2006 and 2005	5
	Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended June 30, 2006 and 2005	6
	Condensed Consolidated Statements of Cash Flows Six Months Ended June 30, 2006 and 2005	7
	Notes to Condensed Consolidated Financial Statements	8
	Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
	Item 3 — Quantitative and Qualitative Disclosures About Market Risk	39
	Item 4 — Controls and Procedures	39
PART II — OTHER INFORMATION
	Item 1 — Legal Proceedings	39
	Item 4 — Submission of Matters to a Vote of Securities Holders	40
	Item 5 — Other Information	40
	Item 6 — Exhibits	41
SIGNATURES		42
Rule 13a-14(a) Certification of CEO
Rule 13a-14(a) Certification of CFO
Section 1350 Certification of CEO
Section 1350 Certification of CFO

2

PART I

McDERMOTT INTERNATIONAL, INC.

FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	June 30,		December 31,
	2006		2005
	(Unaudited)
	(In thousands)
ASSETS
Current Assets:
Cash and cash equivalents	$	436,625	$	19,263
Restricted cash and cash equivalents (Note 11)		84,991		152,086
Investments		238,270		384,202
Accounts receivable — trade, net		500,445		232,236
Accounts receivable from The Babcock & Wilcox Company (Note 10)		—		3,778
Accounts and notes receivable — unconsolidated affiliates		36,306		52,867
Accounts receivable — other		55,975		32,982
Contracts in progress		180,325		73,732
Inventories (Note 1)		68,164		319
Deferred income taxes		78,055		32,131
Assets held for sale (Note 2)		—		10,886
Other current assets		22,182		8,147
Total Current Assets		1,701,338		1,002,629
Restricted Cash and Cash Equivalents		—		2,886
Property, Plant and Equipment		1,465,796		1,097,427
Less accumulated depreciation		997,921		779,694
Net Property, Plant and Equipment		467,875		317,733
Investments		152,121		116,304
Goodwill		88,791		12,926
Deferred Income Taxes		440,805		93,880
Other Assets		330,129		121,928
TOTAL	$	3,181,059	$	1,668,286

See accompanying notes to condensed consolidated financial statements.

3

	June 30,			December 31,
	2006			2005
	(Unaudited)
	(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Notes payable and current maturities of long-term debt	$	12,406		$	4,250
Accounts payable		307,195			110,970
Accounts payable to The Babcock & Wilcox Company (Note 10)		—			11,429
Accrued employee benefits		113,563			81,196
Accrued liabilities — other		224,187			132,932
Accrued contract cost		73,144			56,566
Advance billings on contracts		852,415			314,467
Liabilities held for sale (Note 2)		—			7,182
U.S. and foreign income taxes payable		54,737			49,696
Total Current Liabilities		1,637,647			768,688
Long-Term Debt		15,339			207,861
Accumulated Postretirement Benefit Obligation		80,554			25,519
Self-Insurance		82,368			60,989
Pension Liability		505,148			311,319
Accrued Cost of The Babcock & Wilcox Company Bankruptcy Settlement		660,308			117,990
Deferred Babcock & Wilcox Company Pension Plan Spin-Off		—			150,136
Other Liabilities		74,735			109,082
Commitments and Contingencies (Note 7)
Stockholders’ Equity (Deficit):
Common stock, par value $1.00 per share, authorized 150,000,000 shares; issued 112,926,450 at June 30, 2006 and 110,786,883 at December 31, 2005		112,926			110,787
Capital in excess of par value		1,190,557			1,146,194
Accumulated deficit		(756,339	)		(862,931	)
Treasury stock at cost, 3,056,301 shares at June 30, 2006 and 3,082,644 at December 31, 2005		(59,775	)		(56,496	)
Accumulated other comprehensive loss		(362,409	)		(420,852	)
Total Stockholders’ Equity (Deficit)		124,960			(83,298	)
TOTAL	$	3,181,059		$	1,668,286

4

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Unaudited)
	(In thousands, except per share amounts)
Revenues	$	1,048,930		$	509,650		$	1,693,837		$	945,609
Costs and Expenses:
Cost of operations		844,373			412,837			1,347,299			774,261
(Gain) loss on asset disposals and impairments — net		(1,085	)		(244	)		14,921			(2,540	)
Selling, general and administrative expenses		101,841			50,400			168,835			97,489
		945,129			462,993			1,531,055			869,210
Equity in Income of Investees		7,340			7,398			14,887			17,269
Operating Income		111,141			54,055			177,669			93,668
Other Income (Expense):
Interest income		12,467			5,490			20,002			8,399
Interest expense		(7,108	)		(8,923	)		(17,411	)		(18,619	)
IRS interest expense adjustment		(2,620	)		—			10,590			—
Increase in estimated cost of the B&W bankruptcy settlement		—			(6,355	)		—			(5,887	)
Loss on early retirement of debt		(49,016	)		—			(49,016	)		—
Other income (expense) — net		(4,438	)		2,820			(5,999	)		5,578
		(50,715	)		(6,968	)		(41,834	)		(10,529	)
Income from Continuing Operations before Provision for (Benefit from) Income Taxes		60,426			47,087			135,835			83,139
Provision for (Benefit from) Income Taxes		28,768			(33,612	)		49,162			(19,126	)
Income from Continuing Operations		31,658			80,699			86,673			102,265
Income from Discontinued Operations		13,786			220			12,894			1,090
Net Income	$	45,444		$	80,919		$	99,567		$	103,355
Earnings per Common Share:
Basic:
Income from Continuing Operations	$	0.29		$	0.80		$	0.80		$	1.02
Income from Discontinued Operations	$	0.13		$	0.00		$	0.12		$	0.01
Net Income	$	0.42		$	0.80		$	0.92		$	1.03
Diluted:
Income from Continuing Operations	$	0.28		$	0.75		$	0.77		$	0.95
Income from Discontinued Operations	$	0.12		$	0.00		$	0.11		$	0.01
Net Income	$	0.40		$	0.75		$	0.88		$	0.96

See accompanying notes to condensed consolidated financial statements.

5

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Unaudited)
	(In thousands)
Net Income	$	45,444		$	80,919		$	99,567		$	103,355
Other Comprehensive Income (Loss):
Currency translation adjustments:
Foreign currency translation adjustments		4,418			(1,162	)		4,240			(1,377	)
Reclassification adjustment for impairment of investment		—			—			16,448			—
Reconsolidation of The Babcock & Wilcox Company		—			—			15,833			—
Unrealized gains (losses) on derivative financial instruments:
Unrealized gains (losses) on derivative financial instruments		5,585			(2,885	)		7,332			(5,859	)
Reclassification adjustment for losses (gains) included in net income		(774	)		1,394			(860	)		3,186
Reconsolidation of The Babcock & Wilcox Company		—			—			(269	)		—
Minimum pension liability adjustment attributable to the reconsolidation of The Babcock & Wilcox Company		—			—			15,578			—
Unrealized gains (losses) on investments:
Unrealized gains (losses) arising during the period		27			(208	)		207			(274	)
Reclassification adjustment for losses (gains) included in net income		(66	)		1			(66	)		1
Other Comprehensive Income (Loss)		9,190			(2,860	)		58,443			(4,323	)
Comprehensive Income	$	54,634		$	78,059		$	158,010		$	99,032

See accompanying notes to condensed consolidated financial statements.

6

McDERMOTT INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended
	June 30,
	2006			2005
	(Unaudited)
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income	$	99,567		$	103,355
Depreciation and amortization		25,954			21,040
Income of investees, less dividends		(3,149	)		(6,261	)
(Gain) loss on asset disposals and impairments — net		14,921			(2,540	)
Gain on sale of business		(13,786	)		—
Provision for (benefit from) deferred taxes		90,678			(50,065	)
Estimated loss on The Babcock & Wilcox Company bankruptcy settlement		—			5,887
Excess tax benefits from stock-based compensation		(13,163	)		—
Other		18,421			11,972
Changes in assets and liabilities, net of effects of acquisitions and divestitures:
Accounts receivable		114,023			1,878
Income taxes receivable		(92,437	)		—
Net contracts in progress and advance billings		114,723			42,822
Accounts payable		(19,979	)		(33,919	)
Income taxes		31,241			7,539
Accrued and other current liabilities		(7,905	)		(6,787	)
Accrued employee benefits		(24,576	)		(16,852	)
Other, net		(3,274	)		(3,808	)
NET CASH PROVIDED BY OPERATING ACTIVITIES		331,259			74,261
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash and cash equivalents		69,981			14,439
Purchases of property, plant and equipment		(64,386	)		(22,782	)
Purchases of available-for-sale securities		(917,884	)		(194,307	)
Sales of available-for-sale securities		172,521			2,450
Maturities of available-for-sale securities		859,706			131,545
Proceeds from asset disposals		21,549			8,690
Cash acquired from the reconsolidation of The Babcock & Wilcox Company		164,200			—
Other		(2,549	)		(4,657	)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES		303,138			(64,622	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt		592			—
Payment of long-term debt		(236,941	)		(12,734	)
Issuance of common stock		13,323			4,928
Payment of debt issuance costs		(8,606	)		(940	)
Excess tax benefits from stock options exercised		13,163			—
Other		(336	)		1,210
NET CASH USED IN FINANCING ACTIVITIES		(218,805	)		(7,536	)
EFFECTS OF EXCHANGE RATE CHANGES ON CASH		1,770			(44	)
NET INCREASE IN CASH AND CASH EQUIVALENTS		417,362			2,059
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		19,263			259,319
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	436,625		$	261,378
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized)	$	31,516		$	9,394
Income taxes — net	$	21,811		$	32,258

See accompanying notes to condensed consolidated financial statements.

7

McDERMOTT INTERNATIONAL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)

NOTE 1 — BASIS OF PRESENTATION

     We have presented our condensed consolidated financial statements in U.S. Dollars in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and GAAP footnotes required for complete financial statements. We have included all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. These condensed consolidated financial statements include the accounts of McDermott International, Inc. and its subsidiaries and controlled joint ventures consistent with the Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities.” We use the equity method to account for investments in joint ventures and other entities we do not control, but over which we have significant influence. We have eliminated all significant intercompany transactions and accounts. We have reclassified certain amounts previously reported to conform to the presentation at June 30, 2006 and for the three and six months ended June 30, 2006. We present the notes to our condensed consolidated financial statements on the basis of continuing operations, unless otherwise stated.

     McDermott International, Inc., a Panamanian corporation (“MII”), is the parent company of the McDermott group of companies, which includes:

• J. Ray McDermott, S.A., a Panamanian subsidiary of MII (“JRM”), and its consolidated subsidiaries;

• McDermott Incorporated, a Delaware subsidiary of MII (“MI”), and its consolidated subsidiaries;

• Babcock & Wilcox Investment Company, a Delaware subsidiary of MI (“BWICO”);

• BWX Technologies, Inc., a Delaware subsidiary of BWICO (“BWXT”), and its consolidated subsidiaries; and

• The Babcock & Wilcox Company, a Delaware subsidiary of BWICO (“B&W”), and its consolidated subsidiaries.

     We operate in three business segments:

• Offshore Oil and Gas Construction, previously referred to as Marine Construction Services, includes the results of operations of JRM 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, the Middle East, India, the Caspian Sea and Asia Pacific.

• Government Operations includes the results of operations of BWXT and its subsidiaries. This segment supplies nuclear components to the U.S. Government and provides various services to the U.S. Government, including uranium processing, environmental site restoration services and management and operating services for various U.S. Government-owned facilities, primarily within the nuclear weapons complex of the U.S. Department of Energy (“DOE”).

• Power Generation Systems primarily includes the results of operations of B&W and its subsidiaries. This segment provides a variety of services, equipment and systems to generate steam and electric power at energy facilities worldwide. See Note 10 for further information on B&W.

8

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

     Operating results for the three and six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2005.

     On February 22, 2000, B&W and certain of its subsidiaries (collectively, the “Debtors”) filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana in New Orleans (the “Bankruptcy Court”) to reorganize under Chapter 11 of the U.S. Bankruptcy Code. The Debtors took this action as a means to determine and comprehensively resolve their asbestos liability. From February 22, 2000 until February 22, 2006, B&W’s operations had been subject to the jurisdiction of the Bankruptcy Court, and as a result, our access to cash flows of B&W and its subsidiaries was restricted. See Note 10 for further information on B&W.

Stock-Based Compensation

     Effective January 1, 2006, we adopted the provisions of the revised Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share-Based Payment” (“SFAS 123(R)”), on a modified prospective application basis. SFAS 123(R) eliminates the alternative permitted under SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to use Accounting Principles Board (“APB”) Opinion No. 25’s, “Accounting for Stock Issued to Employees” (“APB 25”), intrinsic value method of accounting, under which issuing stock options to employees generally did not result in recognition of compensation. Under the provisions of SFAS 123(R) and using the modified prospective application method, we recognize stock-based compensation based on the grant date fair value, net of an estimated forfeiture rate, for all share-based awards granted after December 31, 2005 and granted prior to, but not yet vested as of, December 31, 2005 on a straight-line basis over the requisite service periods of the awards, which is generally equivalent to the vesting term. Under the modified prospective application, the results of prior periods are not restated.

     Prior to January 1, 2006, we accounted for our stock-based compensation plans using the intrinsic value method under APB 25 and related interpretations. Under APB 25, if the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the measurement date, no compensation expense was recognized. If the measurement date is later than the date of grant, compensation expense was recorded to the measurement date based on the quoted market price of the underlying stock at the end of each reporting period.

     Under SFAS 123(R), the fair value of equity-classified awards, such as restricted stock and employee stock options, is determined on the date of grant and is not remeasured. Grant date fair values are determined using either the closing price of our common stock on the date of grant or an option-pricing model. We use the Black-Scholes option-pricing model (“Black-Scholes”) for measuring the fair value of stock options granted. The determination of the fair value of a share-based payment award on the date of grant using an option-pricing model requires the input of highly subjective assumptions, such as the expected life of the award and stock price volatility. For liability-classified awards, such as cash-settled performance units, fair values are determined at grant date and are remeasured at the end of each reporting period through the date of settlement.

     SFAS 123(R) requires compensation expense to be recognized net of an estimate for forfeitures, such that compensation expense is recorded only for those awards expected to vest. We will review the estimate for forfeitures on a quarterly basis and record any adjustments deemed necessary for each reporting period. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period.

     Additionally, SFAS 123(R) amends SFAS No. 95, “Statement of Cash Flows,” to require reporting of excess tax benefits to be reported as a financing cash flow, rather than as a reduction of taxes paid. These

9

excess tax benefits result from tax deductions in excess of the cumulative compensation expense recognized for options exercised. Prior to the adoption of SFAS 123(R), we presented all tax benefits resulting from the exercise of stock options as operating cash flows in the condensed consolidated statement of cash flows.

     On March 29, 2005, the SEC issued Staff Accounting Bulletin (“SAB”) 107 to address certain issues related to SFAS 123(R). SAB 107 provides guidance on transition methods, valuation methods, income tax effects and other share-based payment topics, and we applied this guidance in our adoption of SFAS 123(R).

     On November 10, 2005, the FASB issued FASB Staff Position (“FSP”) No. FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards” (“FSP 123(R)-3”). FSP 123(R)-3 provides for an alternative transition method for establishing the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123(R). We have elected to adopt this alternative transition method, otherwise known as the “simplified method,” in establishing our beginning APIC pool at January 1, 2006.

     See Note 4 for further discussion on stock-based compensation.

     Stock options granted to employees of B&W during the pendency Chapter 11 proceedings were accounted for using the fair value method of SFAS 123, “Accounting for Stock-Based Compensation,” as B&W employees were not considered employees of MII for purposes of APB 25. In addition, for the three and six months ended June 30, 2005, our stock-based compensation cost included amounts related to stock options that required variable accounting.

Inventories

     We carry our inventories (principally in B&W and its consolidated subsidiaries, which were not consolidated at December 31, 2005) at the lower of cost or market. We determine cost principally on the first-in-first-out basis except for certain materials inventories, for which we use the last-in-first-out method. Inventories are summarized below:

	June 30,		December 31,
	2006		2005
	(Unaudited)
	(In thousands)
Raw Materials and Supplies	$	49,813	$	305
Work in Progress		5,896		14
Finished Goods		12,455		—
Total Inventories	$	68,164	$	319

Recent Pronouncements

     In April 2006, the FASB issued FSP No. 46(R)-6, “Determining the Variability to be Considered in Applying FASB Interpretation No. 46(R)” (“FSP 46(R)-6”). This FSP addresses how a reporting enterprise should determine the variability to be considered in applying FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities,” and is effective for reporting periods starting after June 15, 2006. We do not expect FSP 46(R)-6 to have a significant impact on our financial condition, results of operations or cash flows.

     In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), to clarify the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently reviewing this new guidance to determine the expected impact on our financial condition, results of operations and cash flows.

     There have been no material changes to the recent pronouncements as previously reported in our annual

10

report on Form 10-K for the year ended December 31, 2005.

NOTE 2 — DISCONTINUED OPERATIONS

     In April 2006, we completed the sale of our Mexican subsidiary, Talleres Navales del Golfo, S.A. de C.V. (“TNG”), a component of our Offshore Oil and Gas Construction segment. Pursuant to this sale, we received proceeds of $19.5 million and recorded a gain of $13.8 million. The gain is included in discontinued operations in our condensed consolidated statements of income.

     In accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the condensed consolidated statements of income for the three and six months ended June 30, 2005 has been restated for consistency to reflect TNG as a discontinued operation. Condensed financial information for our operations reported in discontinued operations is as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006			2005
	(Unaudited)
	(In thousands)
Revenues	$	—	$	5,486	$	4,466		$	8,642
Income (Loss) before Provision for (Benefit from) Income Taxes	$	—	$	422	$	(802	)	$	1,502

     We have reported the assets and liabilities of TNG in our condensed consolidated balance sheets as held for sale, which are primarily comprised of the following at December 31, 2005 (unaudited; in thousands):

Net Property, Plant and Equipment	$	9,476
Other Current Assets	$	1,410
Accrued Liabilities — Other	$	7,182

NOTE 3 — LONG-TERM DEBT AND NOTES PAYABLE

     On June 6, 2006, JRM completed a cash tender offer for all the outstanding 11% senior secured notes due 2013 (“JRM Secured Notes”). The tender offer consideration was based on a fixed-spread over specified U.S. Treasury securities, which equated to an offer price of approximately 119% of the principal amount of the notes. JRM used cash on hand to purchase the entire $200 million in aggregate principal amount of the JRM Secured Notes outstanding for approximately $249.0 million, including accrued interest of approximately $10.9 million. As a result of this early retirement of debt, JRM recognized $49.0 million of expense during the three months ended June 30, 2006.

     On June 6, 2006, JRM entered into a new $500 million senior secured credit facility with a syndicate of lenders arranged by Credit Suisse Securities (USA) LLC (the “JRM Credit Facility”). The JRM Credit Facility is comprised of a five-year, $400 million revolving credit and letter of credit subfacility (all of which may be used for the issuance of letters of credit and $250 million of which may be used for revolver borrowings), which matures on June 6, 2011, and a six-year, $100 million synthetic letter of credit subfacility, which matures on June 6, 2012. The proceeds of the JRM Credit Facility are available for working capital needs and other general corporate purposes of JRM and its subsidiaries.

NOTE 4 — STOCK-BASED COMPENSATION

     At June 30, 2006, we had several stock-based employee compensation plans, which are described below. Where required, disclosures have been adjusted for our May 2006 stock split effected in the form of a stock dividend. See Note 12 for further information regarding our stock split.

11

2001 Directors and Officers Long-Term Incentive Plan

     In May 2006, our shareholders approved the amended and restated 2001 Directors and Officers Long-Term Incentive Plan. Members of the Board of Directors, executive officers, key employees and consultants are eligible to participate in the plan. The Compensation Committee of the Board of Directors selects the participants for the plan. The plan provides for a number of forms of stock-based compensation, including nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, deferred stock units, performance shares and performance units, subject to satisfaction of specific performance goals. In addition to shares previously available under this stock plan that have not been awarded, or that were subject to awards that have been canceled, terminated, forfeited, expired, settled in cash, or exchanged for consideration not involving shares, up to 3,750,000 additional shares of our common stock were authorized for issuance through the plan in May 2006. Options to purchase shares are granted at not less than 100% of the fair market value on the date of grant, become exercisable at such time or times as determined when granted and expire not more than seven years after the date of the grant. Options granted prior to the amendment of this plan expire not more than ten years after the date of the grant.

1997 Director Stock Program

     Under our 1997 Director Stock Program, we grant options to purchase 1,350 shares of our common stock in the first year of a director’s term and 450 shares in subsequent years of such term at a purchase price that is not less than 100% of the fair market value (average of the high and low trading price) on the date of grant. These options become exercisable, in full, six months after the date of grant and expire ten years and one day after the date of grant. Under this program, we also grant rights to purchase 675 shares in the first year of a director’s term and 225 shares in subsequent years of such term at par value ($1.00 per share). These shares are subject to transfer restrictions and forfeiture provisions that lapse at the end of the director’s term.

     At June 30, 2006, we had a total of 4,161,694 shares of our common stock available for award under the 2001 Directors and Officers Long-Term Incentive Plan and the 1997 Director Stock Program.

     In the event of a change in control of our company, all these stock-based compensation programs have provisions that may cause restrictions to lapse and accelerate the exercisability of outstanding options.

     Pursuant to the adoption of SFAS 123(R), we recognized stock-based compensation expense of $1.1 million and $2.3 million related to employee stock options during the three and six months ended June 30, 2006, respectively. During the three and six months ended June 30, 2005, there was no stock-based compensation expense for employee stock options, other than for stock options subject to variable accounting. For stock options granted prior to the adoption of SFAS 123(R), the effect on net income and earnings per share, if we had applied the fair value recognition provisions of SFAS 123 to employee stock options, would have been as follows for the three and six months ended June 30, 2005:

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	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005
	(Unaudited)
	(In thousands, except per share data)
Net income, as reported	$	80,919		$	103,355
Add back: employee stock option compensation cost included in net income, net of related tax effects		1,662			2,689
Deduct: total employee stock option compensation cost determined under fair-value-based method, net of related tax effects		(1,609	)		(3,343	)
Pro forma net income	$	80,972		$	102,701
Earnings per share:
Basic, as reported	$	0.80		$	1.03
Basic, pro forma	$	0.80		$	1.02
Diluted, as reported	$	0.75		$	0.96
Diluted, pro forma	$	0.75		$	0.96

     For our other stock-based compensation awards, such as restricted stock and performance units, the adoption of SFAS 123(R) did not significantly change our accounting policies for the recognition of compensation expense, as we have recognized such expense in prior periods. Total compensation expense recognized for the three and six months ended June 30, 2006 and 2005 was as follows:

	Compensation		Tax			Net
	Expense		Benefit			Impact
	(Unaudited)
	(In thousands)
	Three Months Ended June 30, 2006
Stock Options	$	1,135	$	(252	)	$	883
Restricted Stock		773		(31	)		742
Performance Shares		983		(325	)		658
Performance and Deferred Stock Units		947		(280	)		667
TOTAL	$	3,838	$	(888	)	$	2,950

	Three Months Ended June 30, 2005
Repriced Stock Options	$	901	$	(216	)	$	685
Restricted Stock		190		(44	)		146
Performance and Deferred Stock Units		1,361		(378	)		983
TOTAL	$	2,452	$	(638	)	$	1,814

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	Compensation		Tax			Net
	Expense		Benefit			Impact
			(Unaudited)
			(In thousands)
	Six Months Ended June 30, 2006
Stock Options	$	2,274	$	(510	)	$	1,764
Restricted Stock		956		(70	)		886
Performance Shares		983		(325	)		658
Performance and Deferred Stock Units		6,747		(1,779	)		4,968
TOTAL	$	10,960	$	(2,684	)	$	8,276

	Six Months Ended June 30, 2005
Repriced Stock Options	$	1,180	$	(274	)	$	906
Restricted Stock		751		(177	)		574
Performance and Deferred Stock Units		2,173		(588	)		1,585
TOTAL	$	4,104	$	(1,039	)	$	3,065

     The impact on both basic and diluted earnings per share of stock-based compensation expense recognized for the three months ended June 30, 2006 and 2005 was $0.03 and $0.02 per share, respectively. The impact on basic earnings per share of stock-based compensation expense recognized for the six months ended June 30, 2006 and 2005 was $0.08 and $0.03 per share, respectively, and on diluted earnings per share was $0.07 and $0.03 per share, respectively.

     As of June 30, 2006, total unrecognized estimated compensation expense related to nonvested awards was $19.7 million, net of estimated tax benefits of $7.0 million. This total unrecognized estimated compensation expense consists of $4.5 million for stock options, $0.3 million for restricted stock and $14.9 million for performance shares, which are expected to be recognized over weighted average periods of 1.4 years, 0.6 years and 2.8 years, respectively. Performance and deferred stock units are marked-to-market at the end of each quarter, so there was no unrecognized compensation expense as of June 30, 2006.

Stock Options

     The fair value of each option grant was estimated at the date of grant using Black-Scholes, with the following weighted-average assumptions:

	Six Months Ended
	June 30,
	2006			2005
Risk-free interest rate		5.00	%		3.90	%
Expected volatility		50.00	%		70.70	%
Expected life of the option in years		4.94			5.70
Expected dividend yield		0.00	%		0.00	%

     The risk-free interest rate is based on the implied yield on a U.S. Treasury zero-coupon issue with a remaining term equal to the expected term of the option. The expected volatility is based on historical implied volatility from publicly traded options on our common stock, historical implied volatility of the price of our common stock and other factors. The expected life of the option is based on observed historical patterns. The dividend yield is based on the projected annual dividend payment per share divided by the stock price at the date of grant. This amount is zero because we have not paid dividends for several years and do not expect to pay dividends in the foreseeable future.

     The following table summarizes activity for our stock options for the six months ended June 30, 2006 (share data in thousands):

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						Weighted-
				Weighted-		Average	Aggregate
	Number			Average		Remaining	Intrinsic
	of			Exercise		Contractual	Value
	Shares			Price		Term	(in millions)
Outstanding, beginning of period		6,577		$	7.93
Granted		6			41.83
Exercised		(2,071	)		7.05
Cancelled/expired/forfeited		(38	)		9.69
Outstanding, end of period		4,474		$	8.37	6.2 Years	$	165.7
Exercisable, end of period		3,484		$	7.85	5.6 Years	$	130.9

     The aggregate intrinsic value included in the table above represents the total pretax intrinsic value that would have been received by the option holders had all option holders exercised their options on June 30, 2006. The intrinsic value is calculated as the total number of option shares multiplied by the difference between the closing price of our common stock on the last trading day of each period and the exercise price of the options. This amount changes based on the fair market value of our common stock.

     The weighted average fair value of the stock options granted in the six months ended June 30, 2006 and 2005 was $20.63 and $8.69, respectively. During the six months ended June 30, 2006, the total intrinsic value of stock options exercised was $66.0 million, and we recorded cash received in the six months ended June 30, 2006 from the exercise of these stock options totaling $14.9 million. The excess tax benefits related to the stock options exercised during the six months ended June 30, 2006 was $11.5 million.

Restricted Stock

     Nonvested restricted stock awards as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows (share data in thousands):

				Weighted-
	Number			Average
	of			Grant Date
	Shares			Fair Value
Nonvested, beginning of period		1,064		$	7.07
Granted		17			45.63
Vested		(324	)		10.33
Cancelled/forfeited		(4	)		6.01
Nonvested, end of period		753		$	6.54

     The excess tax benefits related to the restricted stock vested during the six months ended June 30, 2006 was $1.7 million.

Performance Shares

     Nonvested performance share awards as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows (share data in thousands):

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			Weighted-
	Number		Average
	of		Grant Date
	Shares		Fair Value
Nonvested, beginning of period		—	$	—
Granted		458		46.72
Vested		—		—
Cancelled/forfeited		—		—
Nonvested, end of period		458	$	46.72

Performance and Deferred Stock Units

     Nonvested performance and deferred stock unit awards as of June 30, 2006 and changes during the six months ended June 30, 2006 were as follows (share data in thousands):

				Aggregate
	Number			Intrinsic
	of			Value
	Units			(in millions)
Nonvested, beginning of period		693
Granted		174
Vested		(740	)
Cancelled/forfeited		—
Reconsolidation of B&W		162
Nonvested, end of period		289		$	13.1

     The aggregate intrinsic value included in the table above represents the total pretax intrinsic value recorded as a liability at June 30, 2006 in the condensed consolidated balance sheets. During the six months ended June 30, 2006, we paid $24.2 million for the settlement of vested performance and deferred stock units.

NOTE 5 — PENSION PLANS AND POSTRETIREMENT BENEFITS

     Components of net periodic benefit cost are as follows:

	Pension Benefits												Other Benefits
	Three Months Ended						Six Months Ended						Three Months Ended				Six Months Ended
	June 30,						June 30,						June 30,				June 30,
	2006			2005			2006			2005			2006		2005		2006		2005
	(Unaudited)
	(In thousands)
Service cost	$	5,725		$	4,702		$	8,455		$	10,323		$	14	$	—	$	27	$	—
Interest cost		19,106			18,561			30,639			41,106			1,271		570		2,541		1,140
Expected return on plan assets		(19,508	)		(20,242	)		(31,451	)		(45,036	)		—		—		—		—
Amortization of prior service cost		469			599			648			1,225			6		—		12		—
Recognized net actuarial loss		14,568			5,584			23,849			13,037			448		416		898		833
Net periodic benefit cost	$	20,360		$	9,204		$	32,140		$	20,655		$	1,739	$	986	$	3,478	$	1,973

Note: Amounts for 2006 include costs related to pension plans for B&W.

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NOTE 6 — ACCUMULATED OTHER COMPREHENSIVE LOSS

     The components of accumulated other comprehensive loss included in stockholders’ equity (deficit) are as follows:

	June 30,			December 31,
	2006			2005
	(Unaudited)
	(In thousands)
Currency Translation Adjustments	$	5,047		$	(31,474	)
Net Unrealized Loss on Investments		(648	)		(789	)
Net Unrealized Gain (Loss) on Derivative Financial Instruments		5,346			(857	)
Minimum Pension Liability		(372,154	)		(387,732	)
Accumulated Other Comprehensive Loss	$	(362,409	)	$	(420,852	)

NOTE 7 — COMMITMENTS AND CONTINGENCIES

Investigations and Litigation

     Other than as noted below, there have been no material changes in the status of the legal proceedings disclosed in Note 10 to the consolidated financial statements in Part II of our annual report on Form 10-K for the year ended December 31, 2005:

Antitrust Litigation

     In the action filed in June 1998 against MII, JRM, MI, certain JRM subsidiaries and others in the U.S. District Court for the Southern District of Texas by Shell Offshore, Inc. and several related entities, with additional parties subsequently intervening as plaintiffs, alleging that the defendants engaged in anticompetitive acts in violation of Sections 1 and 2 of the Sherman Act (the “Antitrust Litigation”), Heerema Marine Contractors (“Heerema”) has filed a motion to compel arbitration on one of the projects, and we filed a motion to compel arbitration on the Petronius project. The court has ordered all activity in the litigation be stayed and all deadlines suspended pending the court’s ruling on the arbitration motions. After Chevron filed a motion to recuse the then presiding judge in the U.S. District Court, that judge issued an order recusing himself from the proceeding and assigning the matter to a new judge.

Petronius Litigation

     On May 5, 2006, the United States Court of Appeals for the Fifth Circuit affirmed the district court’s dismissal of Texaco’s builder’s risk insurers’ subrogation claim against JRM’s vessel owning subsidiary in Texaco Exploration and Production, Inc. v. AmClyde Engineered Products Company, Inc., et al., Civil Action No. 99-3623. The deadline for Underwriters to file writs to the U.S. Supreme Court and a petition for rehearing with the Fifth Circuit have now passed. Therefore, the Fifth Circuit decision affirming the dismissal of Underwriters’ claims against JRM’s vessel owning subsidiary is final.

Apollo/Parks Township Claims — Hall Litigation

     In the lawsuit filed by Donald F. Hall, Mary Ann Hall and others against B&W and Atlantic Richfield Company, and related claims against our insurers, referred to as the “Hall Litigation” and the “Apollo/Parks Townships Claims” in our annual report on Form 10-K for the year ended December 31, 2005, we have filed a motion with the United States Bankruptcy Court for the Eastern District of Louisiana, the court which presided over the B&W Chapter 11 proceedings, to enforce the settlement agreement which was approved by the Bankruptcy Court. The Court has not yet ruled on the motion. See Note 10 for additional information.

Citgo Litigation and Settlement

     The August 2003 proceeding entitled Citgo Petroleum Corporation and PDV Midwest Refinery L.L.C. v. McDermott International, Inc, et al., filed in the Circuit Court of Cook County, Illinois and alleging claims against B&W, MII, JRM, MI and J. Ray McDermott, Inc. for damages in connection with the manufacture and sale by a former B&W division of a pipe fitting facility in 1981 that allegedly caused an August 2001 fire at a

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refinery in the Chicago, Illinois area, has been set for trial on October 2, 2006. First-and second-layer excess insurers have withdrawn their reservations of rights.

Other Litigation and Settlements

• In the proceeding entitled Jose Fragoso, et al. v. American Optical Corp., et al., filed in the 404^th Judicial District Court of Cameron County, Texas against a subsidiary of JRM and other defendants by plaintiffs and alleging negligence and claiming unspecified damages for exposure to silica while working at an unspecified location, the Court has entered an order dismissing the JRM subsidiary from the case pursuant to a settlement with all claimants who alleged claims against the JRM subsidiary.

• In the proceeding entitled Warren Lester, et al. v. Exxon Mobil, et al., filed in Civil District Court, Orleans Parish, Louisiana, by approximately 600 plaintiffs against MI and other defendants and alleging personal injuries and property damages and also seeking punitive damages as a result of oilfield service pipe cleaning operations along an industrial corridor in Harvey, Louisiana, MI has been dismissed from the case by the plaintiffs without prejudice to their ability to refile the action.

For a detailed description of these proceedings, please refer to Notes 10 and 20 to the consolidated financial statements included in Part II of our annual report on Form 10-K for the year ended December 31, 2005.

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

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

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

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

     See Note 10 for information regarding B&W’s settlement of its Chapter 11 proceedings.

Other

     One of B&W’s Canadian subsidiaries has received notice of a possible warranty claim on one of its projects. This project included a limited-term performance bond totaling approximately $140 million for which MII entered into an indemnity arrangement with the surety underwriters. At this time, B&W’s subsidiary is analyzing the facts and circumstances surrounding this issue. It is possible that B&W’s subsidiary may incur warranty costs in excess of amounts provided for as of June 30, 2006. It is also possible that a claim could be initiated by the B&W subsidiary’s customer against the surety underwriter should certain events occur. If such a claim were successful, the surety could seek to recover from B&W’s subsidiary the costs incurred in satisfying the customer claim. If the surety seeks recovery from B&W’s subsidiary, we believe that B&W’s subsidiary has adequate liquidity to satisfy its obligations.

     We have been advised by the Internal Revenue Service (“IRS”) of potential proposed unfavorable tax adjustments related to open tax years extending back to 2001. We have reviewed the IRS positions and have been in discussions with the IRS regarding these issues. We are presently analyzing the facts and circumstances and evaluating the potential impact, if any, regarding these issues. We have provided for amounts that we believe will be ultimately payable under the proposed adjustments, however, these proposed IRS adjustments are approximately $25 million in excess of amounts provided for in our consolidated financial statements.

NOTE 8 — SEGMENT REPORTING

     Our Power Generation Systems segment for the six months ended June 30, 2006 includes approximately four months (March through June 2006) of results attributable to B&W. We began consolidating the results

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of B&W when B&W emerged from bankruptcy, effective February 22, 2006. Our three and six months ended June 30, 2005 do not include any results attributable to B&W.

     An analysis of our operations by segment is as follows:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2006			2005			2006			2005
	(Unaudited)
	(In thousands)
REVENUES:
Offshore Oil and Gas Construction	$	398,848		$	349,742		$	694,287		$	633,189
Government Operations		163,480			159,940			324,479			312,533
Power Generation Systems		488,710			—			677,733			—
Adjustments and Eliminations(1)		(2,108	)		(32	)		(2,662	)		(113	)
	$	1,048,930		$	509,650		$	1,693,837		$	945,609
(1) Segment revenues are net of the following intersegment transfers and other adjustments:
Offshore Oil and Gas Construction Transfers	$	1,769		$	12		$	2,255		$	62
Government Operations Transfers		224			20			267			51
Power Generation Systems Transfers		115			—			140			—
	$	2,108		$	32		$	2,662		$	113
OPERATING INCOME:
Segment Operating Income (Loss):
Offshore Oil and Gas Construction	$	64,605		$	30,122		$	102,304		$	55,942
Government Operations		23,645			22,642			43,557			37,056
Power Generation Systems		23,246			(219	)		48,994			(438	)
	$	111,496		$	52,545		$	194,855		$	92,560
Gain (Loss) on Asset Disposal and Impairments — Net:
Offshore Oil and Gas Construction	$	38		$	242		$	(16,012	)	$	2,534
Government Operations		1,069			2			1,069			6
Power Generation Systems		(22	)		—			22			—
	$	1,085		$	244		$	(14,921	)	$	2,540
Equity in Income (Loss) of Investees:
Offshore Oil and Gas Construction	$	(715	)	$	(175	)	$	(1,381	)	$	(269	)
Government Operations		6,046			7,092			12,499			16,715
Power Generation Systems		2,009			481			3,769			823
	$	7,340		$	7,398		$	14,887		$	17,269
Segment Income:
Offshore Oil and Gas Construction	$	63,928		$	30,189		$	84,911		$	58,207
Government Operations		30,760			29,736			57,125			53,777
Power Generation Systems		25,233			262			52,785			385
		119,921			60,187			194,821			112,369
Corporate		(8,780	)		(6,132	)		(17,152	)		(18,701	)
TOTAL	$	111,141		$	54,055		$	177,669		$	93,668

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NOTE 9 — EARNINGS PER SHARE

     The following table sets forth the computation of basic and diluted earnings per share, as adjusted for the stock split effected in the form of a stock dividend in May 2006 (see Note 12):

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
	(Unaudited)
	(In thousands, except shares and per share amounts)
Basic:
Net income for basic computation	$	45,444	$	80,919	$	99,567	$	103,355
Weighted average common shares		108,636,007		101,403,455		108,001,976		100,782,407
Basic earnings per common share	$	0.42	$	0.80	$	0.92	$	1.03
Diluted:
Net income for diluted computation	$	45,444	$	80,919	$	99,567	$	103,355
Weighted average common shares (basic)		108,636,007		101,403,455		108,001,976		100,782,407
Effect of dilutive securities:
Stock options, restricted stock and performance shares		5,324,227		6,833,118		5,455,607		6,446,550
Adjusted weighted average common shares and assumed conversions		113,960,234		108,236,573		113,457,583		107,228,957
Diluted earnings per common share	$	0.40	$	0.75	$	0.88	$	0.96

NOTE 10 — THE BABCOCK & WILCOX COMPANY

General

     As a result of asbestos-containing commercial and utility boilers and other products B&W and certain of its subsidiaries sold, installed or serviced in prior decades, B&W was subject to a substantial volume of nonemployee liability claims asserting asbestos-related injuries. All of the personal injury claims were 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 and other types of cancer, asbestosis or pleural changes).

     On February 22, 2000, B&W and certain of its subsidiaries filed a voluntary petition in the U.S. Bankruptcy Court for the Eastern District of Louisiana (the “Bankruptcy Court”) in New Orleans to reorganize under Chapter 11 of the U.S. Bankruptcy Code. Included in the filing were B&W and its subsidiaries, Americon, Inc., Babcock & Wilcox Construction Co., Inc. and Diamond Power International, Inc. (collectively with B&W, the “Debtors”). The Debtors took this action as a means to determine and comprehensively resolve all pending and future asbestos liability claims against them. On February 22, 2006, the Debtors emerged from Chapter 11.

Settlement and Plan of Reorganization

     During the course of the B&W Chapter 11 proceedings, we engaged in settlement negotiations with the Asbestos Claimants Committee (“ACC”) and the Legal Representative for Future Asbestos-Related Claimants (the “Future Claimants Representative” or the “FCR”). Those discussions led to a settlement (the “Settlement”), which was embodied in a plan of reorganization and related settlement agreement, which we and the other plan proponents jointly filed with the Bankruptcy Court on September 29, 2005 (the “plan of

20

reorganization”). The plan of reorganization was confirmed on January 17, 2006 by the United States District Court for the Eastern District of Louisiana, was approved by our shareholders on January 18, 2006 and became effective February 22, 2006.

     Under the terms of the plan of reorganization, MII and all of its subsidiaries, including its captive insurers, and all of their respective directors and officers, received the full benefit of the protections afforded by Section 524(g) of the Bankruptcy Code with respect to asbestos-related personal injury claims (other than workers’ compensation claims) attributable to the business or operations of B&W or any of its subsidiaries and that are subject to the jurisdiction of courts in the United States.

     The plan of reorganization provided for a trust created for the benefit of asbestos personal injury claimants. The trust received contributions of:

• $350 million in cash, which was paid by B&W on February 22, 2006;

• a contingent right to receive an additional cash payment of $355 million, which will be payable by MI or one of its subsidiaries within 180 days of November 30, 2006, if the condition precedent described below is satisfied, with interest accruing on that amount at 7% per year from December 1, 2006 to the date of payment (the “Contingent Payment Right”);

• 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 will be payable (with that entire $25 million due on December 1, 2007). B&W’s payment obligations under the B&W Note will be fully and unconditionally guaranteed by BWICO and MII. The guarantee obligations of BWICO and MII will be secured by a pledge of all of B&W’s capital stock outstanding as of the effective date of the plan of reorganization; and

• rights to the proceeds of certain insurance policies that cover, among other things, asbestos claims, which policies have an aggregate face value of available limits of coverage of approximately $1.15 billion.

     We expect that contributions made by our subsidiaries to the trust should be tax deductible for the purpose of MI’s consolidated U.S. tax return, except to the extent such contributions consist of insurance proceeds or the transfer of rights under insurance policies.

     The terms of the Settlement and the plan of reorganization include a mechanism that would potentially limit the consideration to be contributed to the asbestos personal injury trust if U.S. federal legislation to resolve asbestos claims through a national trust is enacted and becomes law. That legislation includes “The Fairness in Asbestos Injury Resolution Act of 2005” (H.R. 1360), introduced as a bill in March 2005 in the U.S. House of Representatives, and Senate Bill S. 852, introduced in the U. S. Senate on April 19, 2005 and reported favorably out of the Senate Judiciary Committee on May 26, 2005. The Senate subsequently took up for consideration S. 852 but, on February 14, 2006, failed to waive the requirements of the Congressional Budget Act, as a result of which S. 852 was recommitted to the Senate Judiciary Committee. On May 26, 2006, an amended version of S. 852, entitled “The Fairness in Asbestos Injury Resolution Act of 2006,” was introduced as S. 3274. The Senate Judiciary Committee held hearings on S. 3274 on June 7, 2006. H.R. 1360, S. 852 and S. 3274, which we refer to collectively as the “FAIR Act,” would create a privately funded, federally administered trust fund to resolve pending and future asbestos-related personal injury claims.

     The Settlement and the plan of reorganization provide that 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

21

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 Settlement and the plan of reorganization further provide 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 (the “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 relating 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 we describe below); or

2.

there has been a final nonappealable judicial decision relating 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 Settlement and the plan of reorganization also include 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 MII or any of its subsidiaries may be required to make pursuant to the legislation on account of asbestos-related personal injury claims against B&W or any of its subsidiaries would reduce, by a like amount:

• first, the amount, if any, then remaining payable under the Contingent Payment Right; and

• next, any then remaining amounts payable under the B&W Note.

     It is not possible to determine whether the FAIR Act will be presented for a vote or adopted by the full Senate or the House of Representatives, or signed into law. Nor is it possible at this time to predict the final terms of any bill that might become law or its impact on us. We anticipate that, during the legislative process, the terms of the FAIR Act will change, and that any such changes may be material to the impact of such legislation on us.

     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, which has been amended from time to time, presently involves approximately 500 separate claims for compensatory and punitive damages relating to the operation of two nuclear fuel processing facilities located in Apollo and Parks Township, Pennsylvania (the “Hall Litigation”). The plaintiffs in the Hall Litigation allege, among other

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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 plan of reorganization did not impair the claims against B&W for nuclear-related injuries allegedly arising from the operation of the nuclear-fuel processing facilities in Apollo and Parks Township, including the claims asserted in the Hall Litigation (the “Apollo/Parks Township Claims”), which were permitted to pass through the bankruptcy proceeding unaffected by it. Nevertheless, during the process of confirmation of that plan, B&W, representatives of the individuals who have asserted Apollo/Parks Township Claims in the pending Hall Litigation and ARCO negotiated a form of settlement agreement, which was approved by the Bankruptcy Court at the same time that the plan was confirmed. That form of settlement agreement contemplates, among other things, that:

• B&W and ARCO will be provided full and complete releases with respect to all Apollo/Parks Township Claims from each of the “Apollo/Parks Township Releasors” (as that term is defined in the form of settlement agreement generally to mean the existing claimants in the Hall Litigation and other Apollo/Parks Township present claimants that are represented by counsel for the claimants in the Hall Litigation);

• ARCO will make a $27.5 million cash payment to the Apollo/Parks Township Releasors after all conditions precedent to such payment, as set forth in the form of settlement agreement, have occurred;

• B&W will make a $47.5 million cash payment to the Apollo/Parks Township Releasors after all conditions precedent to such payment, as set forth in the form of settlement agreement, have occurred;

• B&W will make a $12.5 million payment to the Apollo/Parks Township Releasors on the third anniversary of the effective date of the Plan, or after all conditions precedent to such payment, as set forth in the form of settlement agreement, have occurred; and

• B&W and ARCO will retain all insurance rights relating to all Apollo/Parks Township Claims.

     After the plan became effective, counsel for the Hall Claimants attempted to change the terms of the settlement agreement that they had previously negotiated and that the Bankruptcy Court had approved. B&W, thereupon, filed a motion with the Bankruptcy Court to enforce the settlement agreement it had previously approved. The hearing on this motion took place on June 28, 2006 and, by Order dated July 6, 2006, the Bankruptcy Court took the matter under advisement. The Bankruptcy Court has not yet ruled on that motion.

     We intend to seek reimbursement from our nuclear insurers for all amounts that would be paid by B&W under this settlement, if and when it is consummated. Our nuclear insurers have not agreed to fund this settlement. Subject to the execution of a definitive settlement agreement, we believe these claims will be resolved within the limits of coverage of our insurance policies. However, should the proposed settlement of the Hall Litigation not be consummated, nonsettling other present claims prove excessive, or additional future claims be asserted, there may be an issue as to whether our insurance coverage is adequate; and, we may be materially and adversely impacted if our liabilities exceed our coverage. See Note 7 for additional information.

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Accounting Treatment

     As a result of the Chapter 11 filing, beginning on February 22, 2000, we stopped consolidating the results of operations of B&W and its subsidiaries in our financial statements, and we began accounting for our investment in B&W under 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 documentation in the Chapter 11 proceedings relating to the previously proposed settlement negotiated in 2002, we determined that a liability related to that proposed 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 settlement of $110 million, including tax expense of $23.6 million, reflecting the present value of our contemplated contributions to the trusts. This estimate had been adjusted since 2002 through June 30, 2005 based on the provisions of the previously proposed settlement, and a liability of $146.7 million was recorded at June 30, 2005. This liability remained frozen through the date B&W emerged from Chapter 11. (See discussion below.)

     Under the terms of the Settlement and the plan of reorganization, MI was allowed to maintain its equity in B&W and reconsolidate B&W’s operations as of February 22, 2006. Based on the Settlement and the plan of reorganization and the fact that we are reacquiring control of B&W, we accounted for the difference between the carrying amount of our investment in B&W and B&W’s net assets in a manner similar to a step acquisition by applying the guidelines of SFAS No. 141, “Business Combinations.” Our investment in B&W consists of the previously proposed settlement liability disclosed above totaling $146.7 million and certain other liabilities and adjustments related to the B&W Chapter 11 proceedings totaling $60.5 million, bringing our total investment basis in B&W to a negative $207.2 million. The net asset basis of B&W reconsolidated at February 22, 2006 totaled a negative $186.3 million. As a result, we had a basis differential between our investment base in B&W and the net assets reconsolidated totaling a negative $20.9 million. We have accounted for this basis difference as negative goodwill and have reduced our consolidated goodwill relating to B&W accordingly in the reconsolidation.

     We have included the results of B&W effective from February 22, 2006 in our consolidated financial statements. In the three and six months ended June 30, 2006, we have included the following for B&W in our consolidated financial statements (in thousands):

	Three Months		Six Months
	Ended		Ended
	June 30, 2006		June 30, 2006
Income Statement Information:
Revenues	$	488,710	$	677,733
Operating Income	$	23,031	$	49,284
Income From Continuing Operations	$	21,627	$	47,369
Net Income	$	13,671	$	30,331
	As of June 30,
	2006
Balance Sheet Information:
Current Assets	$	660,792
Long-Term Assets	$	609,341
Current Liabilities	$	713,433
Long-Term Liabilities	$	585,993

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     The unaudited pro forma information below presents combined results of operations as if B&W and MII had been reconsolidated at the beginning of the respective periods presented. This pro forma information is not necessarily indicative of the results of operations of the combined entities had the combination occurred at the beginning of the periods presented, nor is it indicative of future results.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
	(Unaudited)
	(In thousands, except per share amounts)
Revenues	$	1,048,930	$	878,274	$	1,952,104	$	1,658,803
Operating Income	$	111,141	$	64,835	$	179,347	$	127,596
Net Income	$	45,444	$	87,239	$	101,359	$	122,395
Diluted Earnings per Share	$	0.40	$	0.81	$	0.89	$	1.14

     Credit Facility

     On February 22, 2006, B&W entered into a $650 million senior secured credit facility with a syndicate of lenders arranged by Credit Suisse Securities (USA) LLC (the “B&W Facility”) to replace B&W’s debtor-in-possession credit facility, which was terminated. The B&W Facility includes a five-year, $200 million revolving credit subfacility (the entire availability of which may be used for the issuance of letters of credit or working capital requirements), a six-year, $200 million letter of credit subfacility and a commitment by certain of the lenders to loan B&W up to $250 million in term debt to refinance the B&W Note. The term loan may only be used by B&W in a single draw to refinance amounts outstanding under the B&W Note, and the commitment of the lenders to make this loan expires on December 1, 2006. As of June 30, 2006, no borrowings were outstanding, and letters of credit with an aggregate face amount of $232.8 million were outstanding. In addition, at June 30, 2006 B&W had miscellaneous letters of credit outstanding with a U.S. bank totaling $1.1 million.

NOTE 11 — RESTRICTED CASH

     At June 30, 2006, we had restricted cash and cash equivalents totaling $85.0 million, $5.1 million of which serves as collateral for letters of credit; $1.5 million serves as collateral for foreign exchange trading and other financial obligations; $16.6 million is required to meet reinsurance reserve requirements of our captive insurance companies; and $61.8 million is held in restricted foreign accounts.

NOTE 12 — COMMON STOCK SPLIT

     On May 3, 2006, our Board of Directors declared a three-for-two stock split effected in the form of a stock dividend. The dividend was paid on May 31, 2006 to stockholders of record as of the close of business on May 17, 2006. All share and per share information has been retroactively adjusted to reflect the stock split.

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

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

     The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included under Item 1 and the audited consolidated financial statements and the notes thereto and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2005.

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

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

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

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

• general economic and business conditions and industry trends;

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

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

• decisions on spending by the U.S. Government;

• decisions on spending by utilities;

• the highly competitive nature of our businesses;

• our future financial performance, including compliance with covenants in our credit agreements and other debt instruments, and availability, terms and deployment of capital;

• the continued availability of qualified personnel;

• the operating risks normally incident to our industries;

• changes in, or our failure or inability to comply with, government regulations and adverse outcomes from legal and regulatory proceedings;

• the potential impact on available insurance due to bankruptcy filings by asbestos-troubled companies;

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

• rapid technological changes;

• realization of deferred tax assets;

• consequences of significant changes in interest rates and currency exchange rates;

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

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

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

• effects of asserted and unasserted claims;

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

• our ability to maintain builder’s risk, liability and property insurance in amounts we consider adequate at rates that we consider economical.

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     We believe the items we have outlined above are important factors that could cause estimates in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2005. These factors are not necessarily all the important factors that could affect us. Unpredictable or unknown factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that important factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

GENERAL

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

     As of June 30, 2006, in accordance with the percentage-of-completion method of accounting, we have provided for our estimated costs to complete all our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. The risk on fixed-priced contracts is that revenue from the customer does not cover potential increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, pipeline lay rates, or steel and other raw material prices. Increases in costs on our fixed-price contracts could have a material adverse impact on our results of operations, financial condition and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our results of operations, financial condition and cash flows.

     We have been advised by the Internal Revenue Service (“IRS”) of potential proposed unfavorable tax adjustments related to open tax years extending back to 2001. We have reviewed the IRS positions and have been in discussions with the IRS regarding these issues. We are presently analyzing the facts and circumstances and evaluating the potential impact, if any, regarding these issues. We have provided for amounts that we believe will be ultimately payable under the proposed adjustments, however, these proposed IRS adjustments are approximately $25 million in excess of amounts provided for in our consolidated financial statements.

Offshore Oil and Gas Construction Segment

     At June 30, 2006, JRM had approximately $39 million in accounts and notes receivable due from its joint venture in Mexico. A note receivable is attributable to the sale of JRM’s DB17 vessel during the quarter ended September 30, 2004. This joint venture has experienced liquidity problems. Recognition of a gain of approximately $5.4 million on the sale of the DB17 is currently being deferred. JRM has developed a plan regarding its Mexican market strategy and has entered into negotiations to terminate its interest in this joint venture. As a result, JRM recorded an impairment loss totaling approximately $16.4 million in the six months ended June 30, 2006 attributable to currency translation losses recorded in accumulated other comprehensive loss.

     The amount of revenues our Offshore Oil and Gas Construction segment (previously referred to as Marine Construction Services) generates largely depends on the level of oil and gas development activity in the world’s major hydrocarbon-producing regions. The decision-making process for oil and gas companies in making capital expenditures on our services for a development project differs depending on whether the project involves new or existing development. In the case of new development projects, the demand for our services generally follows the exploratory drilling and, in some cases, initial development drilling activities.

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Based on the results of these activities and evaluations of field economics, customers determine whether to install new platforms and new infrastructure, such as subsea gathering lines and pipelines. For existing development projects, demand for our services is generated by decisions to, among other things, expand development in existing fields and expand existing infrastructure.

Government Operations Segment

     The revenues of our Government Operations segment are largely a function of capital spending by the U.S. Government. As a supplier of major nuclear components for certain U.S. Government programs, BWXT is a significant participant in the defense industry. Additionally, with BWXT’s unique capability of full life-cycle management of special nuclear materials, facilities and technologies, BWXT is well-positioned to continue to participate in the continuing cleanup and management of the Department of Energy’s (“DOE”) nuclear sites and weapons complexes.

Power Generation Systems

     The Power Generation Systems segment consists primarily of the operations of B&W, which were not consolidated in our financial results at December 31, 2005. B&W is a leading supplier of fossil fuel-fired steam generating systems, replacement commercial nuclear steam generators, environmental equipment and components and related services to customers around the world. It designs, engineers, manufactures and services large utility and industrial power generation systems, including boilers used to generate steam in electric power plants, pulp and paper making, chemical and process applications and other industrial uses. See Note 10 to our unaudited condensed consolidated financial statements included in this report for further information regarding B&W.

     For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited condensed consolidated financial statements, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our annual report on Form 10-K for the year ended December 31, 2005. Additionally, see the accounting policy for inventory in Note 1 to our unaudited condensed consolidated financial statements included in this report. Other than changes to policies related to stock-based compensation referenced below, there have been no material changes to these policies during the six months ended June 30, 2006.

Stock-Based Compensation

     We have several stock-based employee compensation plans, which are described more fully in Note 4 to our unaudited condensed consolidated financial statements included in this report. Prior to January 1, 2006, we accounted for these plans using the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. Effective January 1, 2006, we adopted the provisions of the revised Statement of Financial Accounting Standards (“SFAS”) No. 123, “Share-Based Payment” (“SFAS 123(R)”), on a modified prospective application basis. SFAS 123(R) eliminates the alternative permitted under SFAS 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), to use APB 25’s intrinsic value method of accounting, under which issuing stock options to employees generally did not result in recognition of compensation. Under the provisions of SFAS 123(R) and using the modified prospective application method, we recognize stock-based compensation, net of an estimated forfeiture rate, for all share-based awards granted after December 31, 2005 and granted prior to, but not yet vested as of, December 31, 2005 on a straight-line basis over the requisite service periods of the awards, which is generally equivalent to the vesting term. Under the modified prospective application, the results of prior periods are not restated.

     Pursuant to the adoption of SFAS 123(R), we recognized stock-based compensation expense of $1.1 million and $2.3 million related to employee stock options during the three and six months ended June 30, 2006, respectively. During the three and six months ended June 30, 2005, there was no stock-based compensation expense for employee stock options, other than for stock options subject to variable accounting. For our other stock-based compensation awards, such as restricted stock and performance units, the adoption of SFAS 123(R) did not significantly change our accounting policies for the recognition of

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compensation expense, as we have recognized such expense in prior periods. Total compensation expense recognized for the three and six months ended June 30, 2006 and 2005 was as follows:

	Compensation		Tax			Net
	Expense		Benefit			Impact
	(Unaudited)
	(In thousands)
	Three Months Ended June 30, 2006
Stock Options	$	1,135	$	(252	)	$	883
Restricted Stock		773		(31	)		742
Performance Shares		983		(325	)		658
Performance and Deferred Stock Units		947		(280	)		667
TOTAL	$	3,838	$	(888	)	$	2,950
	Three Months Ended June 30, 2005
Repriced Stock Options	$	901	$	(216	)	$	685
Restricted Stock		190		(44	)		146
Performance and Deferred Stock Units		1,361		(378	)		983
TOTAL	$	2,452	$	(638	)	$	1,814
	Six Months Ended June 30, 2006
Stock Options	$	2,274	$	(510	)	$	1,764
Restricted Stock		956		(70	)		886
Performance Shares		983		(325	)		658
Performance and Deferred Stock Units		6,747		(1,779	)		4,968
TOTAL	$	10,960	$	(2,684	)	$	8,276
	Six Months Ended June 30, 2005
Repriced Stock Options	$	1,180	$	(274	)	$	906
Restricted Stock		751		(177	)		574
Performance and Deferred Stock Units		2,173		(588	)		1,585
TOTAL	$	4,104	$	(1,039	)	$	3,065

     The impact on both basic and diluted earnings per share of stock-based compensation expense recognized for the three months ended June 30, 2006 and 2005 was $0.03 and $0.02 per share, respectively. The impact on basic earnings per share of stock-based compensation expense recognized for the six months ended June 30, 2006 and 2005 was $0.08 and $0.03 per share, respectively, and on diluted earnings per share was $0.07 and $0.03 per share, respectively.

     As of June 30, 2006, total unrecognized estimated compensation expense related to nonvested awards was $19.7 million, net of estimated tax benefits of $7.0 million. This total unrecognized estimated compensation expense consists of $4.5 million for stock options, $0.3 million for restricted stock and $14.9 million for performance shares, which are expected to be recognized over weighted average periods of 1.4 years, 0.6 years and 2.8 years, respectively. Performance and deferred stock units are marked-to-market at the end of each quarter, so there was no unrecognized compensation expense as of June 30, 2006.

     The determination of the fair value of a share-based payment award on the date of grant using an option-pricing model requires the input of highly subjective assumptions, such as the expected life of the award and stock price volatility. Prior to the adoption of SFAS 123(R), we used the Black-Scholes option-pricing model (“Black-Scholes”) for the pro forma information required to be disclosed under SFAS 123, as originally issued, and we believe this model will continue to provide appropriate fair values under the provisions of

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SFAS 123(R). See Note 4 to our unaudited condensed consolidated financial statements included in this report for further discussion on stock-based compensation.

RESULTS OF OPERATIONS — THREE MONTHS ENDED JUNE 30, 2006 VS. THREE MONTHS ENDED JUNE 30, 2005

Offshore Oil and Gas Construction

     Revenues increased approximately 14%, or $49.1 million, to $398.8 million in the three months ended June 30, 2006, primarily due to increased fabrication activity in our Middle East region and increases in marine projects worldwide. These increases were partially offset by decreases in fabrication activities in our Americas and Caspian regions. Revenues from other activities in JRM increased slightly in the three months ended June 30, 2006 compared to the three months ended June 30, 2005.

     Segment operating income (loss), which is before equity in income (loss) of investees and gain (loss) on asset disposals and impairments – net, increased $34.5 million from $30.1 million in the three months ended June 30, 2005 to $64.6 million in the three months ended June 30, 2006. Approximately $21 million of this increase is attributable to profit previously deferred at March 31, 2006 since the inception of a project for Dolphin Energy Ltd., which has been accounted for under our deferred profit recognition policy, as disclosed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2005. As of June 30, 2006, this project was substantially complete, and the profit earned since inception to date was recognized during the three months ended June 30, 2006, in accordance with our policy. In addition, we experienced higher margins and improvements in our Middle East and Caspian regions and in our marine projects in the three months ended June 30, 2006 compared to the three months ended June 30, 2005. These increases were partially offset by higher selling, general and administrative expenses in the three months ended June 30, 2006.

     Equity in income (loss) of investees decreased $0.5 million to a loss of $0.7 million in the three months ended June 30, 2006, primarily due to our share of expenses in our deepwater solutions joint venture formed in late 2005.

Government Operations

     Revenues increased approximately 2%, or $3.5 million, to $163.5 million in the three months ended June 30, 2006, primarily due to higher volumes in the manufacture of nuclear components for certain U. S. Government programs. Also, contributing to this increase were higher volumes in commercial nuclear environmental services work that include additional environmental engineering work, an additional fee from a subcontract at a DOE site cleanup in Ohio and work performed for a transition in New Mexico. In addition, we experienced higher volumes from our other government work producing fuel for research test reactors and DOE fuel development for commercial reactors. These increases were partially offset by lower revenues in the three months ended June 30, 2006 due to the completion of a downblending contract to downblend 50 metric tons of highly enriched uranium to low enriched uranium.

     Segment operating income (loss), which is before equity income (loss) of investees and gain (loss) on asset disposals and impairments – net, increased $1.0 million to $23.6 million in the three months ended June 30, 2006, primarily due to an increase in our other government work producing fuel for research test reactors and DOE fuel development for commercial reactors. In addition, there was an increase in our commercial nuclear environmental services work that includes additional environmental engineering work, an additional fee from a subcontract at a DOE site cleanup in Ohio and work performed for a transition in New Mexico. These increases were partially offset by higher general and administrative expenses, primarily due to increased facility management oversight costs, an increased environmental reserve in Pennsylvania and lower margins from our manufacture of nuclear components for certain U.S. Government programs.

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     Gain (loss) on asset disposals and impairments — net increased $1.1 million in the three months ended June 30, 2006, attributable to the sale of noncore machinery.

     Equity in income (loss) of investees decreased $1.0 million to $6.0 million, primarily due to the decision to terminate a joint venture R&D program, partially offset by timing of a fee at a joint venture in Idaho and some improved fees at sites in Texas and Tennessee.

Power Generation Systems

     Our Power Generation Systems segment consists primarily of B&W, which was not consolidated in the three months ended June 30, 2005. The Revenues and Segment Operating Income (Loss) of this segment for the three months ended June 30, 2006 are substantially all attributable to B&W, which was reconsolidated into our results effective February 22, 2006. Equity in income (loss) of investees was higher in the three months ended June 30, 2006 by $1.5 million primarily attributable to income recognized from a joint venture in China, which was placed on the equity method of accounting in 2006.

Corporate

     Unallocated Corporate expenses increased $2.7 million from $6.1 million in the three months ended June 30, 2005 to $8.8 million in the three months ended June 30, 2006, primarily due to higher departmental expenses and additional stock-based compensation expense resulting from the adoption of SFAS 123(R). These increases were partially offset by lower legal expenses related to the B&W Chapter 11 proceedings in the three months ended June 30, 2006 compared to the three months ended June 30, 2005.

Other Income Statement Items

     Interest income increased $7.0 million to $12.5 million in the three months ended June 30, 2006, primarily due to an increase in average cash equivalents and investments and prevailing interest rates.

     Interest expense decreased $1.8 million to $7.1 million in the three months ended June 30, 2006, primarily due to higher interest in June 2005 on the JRM Secured Notes retired in 2006 partially offset by higher amortization of debt issuance costs and fees in the three months ended June 30, 2006 on our credit facilities.

     In the three months ended June 30, 2006 we recorded additional interest expense totaling approximately $2.6 million for potential U. S. tax deficiencies.

     On June 6, 2006, JRM completed a tender offer and used current cash on hand to purchase $200 million in aggregate principal amount of its 11% senior secured notes due 2013 (“JRM Secured Notes”) for approximately $249.0 million, including accrued interest of approximately $10.9 million. As a result of this early retirement of debt, JRM recognized $49.0 million of expense during the three months ended June 30, 2006.

     Other-net expense increased $7.2 million from income of $2.8 million to expense of $4.4 million, primarily due to currency exchange losses incurred in the three months ended June 30, 2006.

Provision for (Benefit from) Income Taxes

     In the three months ended June 30, 2006, the provision for (benefit from) income taxes increased $62.4 million from a benefit of $33.6 million to a provision of $28.8 million, while income before provision for (benefit from) income taxes increased $13.3 million to $60.4 million. Our effective tax rate for the three months ended June 30, 2006 was approximately 47.6%. We recorded no tax benefit on the $49 million expense associated with the retirement of the JRM Secured Notes discussed above.

     As more fully disclosed in Part II of our annual report on Form 10-K for the year ended December 31, 2005, in the three months ended June 30, 2005, we reversed a federal deferred tax asset valuation allowance totaling approximately $50.4 million, which eliminated a MI federal deferred tax asset valuation allowance associated with our minimum pension liability. This adjustment recorded in the three months ended June 30, 2005 resulted in a benefit in our provision for income taxes in that period.

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     MII is a Panamanian corporation that has earned all of its income outside of Panama. Under Panamanian tax law, MII is not subject to income tax in Panama on income earned outside of Panama.

     We have provided for income taxes based on the tax laws and rates in the countries in which we conduct our operations. MII and its subsidiaries operate in the United States and various other taxing jurisdictions around the world. Each of these jurisdictions has a regime of taxation that varies from the others. The taxation regimes vary not only with respect to nominal rates, but also with respect to the allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate.

     Income (loss) before provision for (benefit from) income taxes, provision for (benefit from) income taxes and effective tax rates for MII major subsidiaries are as follows:

	Income (loss) before					Provision for
	Provision for (Benefit from)					(Benefit from)					Effective
	Income Taxes					Income Taxes					Tax Rate
	For the three months ended June 30,
	2006			2005		2006		2005			2006			2005
	(In thousands)					(In thousands)
Primarily United States:
MI	$	45,056		$	19,812	$	16,394	$	(39,277	)		36.39	%		(198.25	)%
J. Ray McDermott Holdings, Inc.	$	(56,757	)	$	5,663	$	6	$	45			(0.01	)%		0.79	%
Non-United States:
International Subsidiaries	$	72,127		$	21,612	$	12,368	$	5,620			17.15	%		26.00	%
Total MII	$	60,426		$	47,087	$	28,768	$	(33,612	)		47.61	%		(71.38	)%

     MI is subject to United States federal income tax at the rate of 35%. The effective tax rate of MI is primarily affected by applicable state income taxes on its profitable U.S. subsidiaries. The effective tax rate of MI for the three months ended June 30, 2005 is impacted by the B&W Chapter 11 settlement adjustment booked in that period, which generated little or no associated U.S income tax effect and the valuation allowance adjustment discussed above.

     J.Ray McDermott Holdings, Inc. (“JRMHI”) is subject to United States income tax at a rate of 35%. No current United States income tax is payable by JRMHI due to its accumulated losses. JRMHI’s valuation allowance for the realization of deferred tax assets had been adjusted in accordance with SFAS No. 109. JRMHI’s provision for income taxes is primarily associated with its operations performed outside of the United States, which has no relationship to its income (loss) before provision for (benefit from) income taxes.

RESULTS OF OPERATIONS — SIX MONTHS ENDED JUNE 30, 2006 vs. SIX MONTHS ENDED JUNE 30, 2005

Offshore Oil and Gas Construction

     Revenues increased approximately 10%, or $61.1 million, to $694.3 million in the six months ended June 30, 2006, primarily due to increased activity in our Middle East region and increases in our marine projects worldwide. These increases were partially offset by decreases in fabrication activities in our Americas region. In addition, revenues from other activities in JRM increased slightly in the six months ended June 30, 2006 compared to the six months ended June 30, 2005.

     Segment operating income (loss), which is before equity in income (loss) of investees and gain (loss) on asset disposals and impairments — net, increased $46.4 million from $55.9 million in the six months ended June 30, 2005 to $102.3 million in the six months ended June 30, 2006. Approximately $21 million of this increase is attributable to profit previously deferred since the inception of a project for Dolphin Energy Ltd.,

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which has been accounted for under our deferred profit recognition policy as disclosed in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our annual report on Form 10-K for the year ended December 31, 2005. As of June 30, 2006, this project was substantially complete, and the profit earned since inception to date was recognized during the three months ended June 30, 2006, in accordance with our policy. In addition, we experienced higher margins and improvements in our Middle East and Caspian regions and in our marine projects in the six months ended June 30, 2006 compared to the six months ended June 30, 2005. These increases were partially offset by decreases in fabrication activities in our Americas region and decreases in our other operations. In addition, selling, general and administrative expenses increased in the six months ended June 30, 2006 compared to the six months ended June 30, 2005.

     Gain (loss) on asset disposals and impairments — net decreased $18.5 million to a loss of $16.0 million in the six months ended June 30, 2006 from a gain of $2.5 million in the six months ended June 30, 2005. This reduction was attributable to an impairment of $16.4 million associated with our joint venture in Mexico in the six months ended June 30, 2006 and gains of approximately $2.5 million on sales of various nonstrategic assets in the six months ended June 30, 2005.

     Equity in income (loss) of investees decreased $1.1 million to a loss of $1.4 million in the six months ended June 30, 2006, primarily due to our share of expenses in our deepwater solutions joint venture formed in late 2005.

Government Operations

     Revenues increased approximately 4%, or $11.9 million, to $324.5 million in the six months ended June 30, 2006, primarily due to higher volumes in the manufacture of nuclear components for certain U. S. Government programs. In addition, there were higher volumes from our other government work producing fuel for research test reactors and DOE fuel development for commercial reactors. Also, contributing to these increases were higher volumes in commercial nuclear environmental services work that include additional environmental engineering work and work performed for a transition in New Mexico. These increases were partially offset by lower revenues from a fuel cell development project, which has been terminated, along with lower revenues from a subcontract at a DOE site cleanup in Ohio. In addition, these increases were also partially offset by lower revenues in the six months ended June 30, 2006 due to the completion of a downblending contract to downblend 50 metric tons of highly enriched uranium to low enriched uranium.

     Segment operating income (loss), which is before equity in income (loss) of investees, increased $6.5 million to $43.6 million in the six months ended June 30, 2006, primarily due to higher volume and margins from our manufacture of nuclear components for certain U.S. Government programs, our commercial nuclear environmental services work and other commercial work. These increases were partially offset by higher general and administrative expenses, primarily due to higher facility management oversight costs and an increased environmental reserve in Pennsylvania.

     Gain (loss) on asset disposals and impairments — net increased $1.1 million in the six months ended June 30, 2006, attributable to the sale of noncore machinery.

     Equity in income (loss) of investees decreased $4.2 million to $12.5 million in the six months ended June 30, 2006, primarily due to the decision to terminate a joint venture R&D program along with decreased scope at a joint venture in Idaho.

Power Generation Systems

     Our Power Generation Systems segment consists primarily of B&W, which was not consolidated in the six months ended June 30, 2005. The Revenues and Segment Operating Income (Loss) of this segment for the six months ended June 30, 2006 are substantially all attributable to B&W, which was reconsolidated into our results effective February 22, 2006 and include approximately four months’ results in the six months ended June 30, 2006. Equity in income (loss) of investees was higher in the six months ended June 30, 2006

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by $2.9 million, primarily attributable to income recognized from a joint venture in China, which was placed on the equity method of accounting during the six months ended June 30, 2006.

Corporate

     Unallocated corporate expenses decreased $1.5 million from $18.7 million in the six months ended June, 2005 to $17.2 million in the six months ended June 30, 2006. The six months ended June 30, 2005 included approximately $2.3 million of pension plan expense related to B&W and unfavorable results from one of our captive insurance companies totaling approximately $3.0 million. In addition, we experienced lower departmental expenses in the six months ended June 30, 2006 compared to the six months ended June 30, 2005. These lower departmental expenses were partially offset by higher stock-based compensation expense attributable to the rise in our stock price and our adoption of SFAS 123(R) in the six months ended June 30, 2006.

Other Income Statement Items

     Interest income increased $11.6 million to $20.0 million in the six months ended June 30, 2006, primarily due to increases in average cash equivalents and investments and prevailing interest rates.

     We recorded a reduction in interest expense for the six months ended June 30, 2006 totaling approximately $13.2 million attributable to a settlement MI reached with the U.S. and Canadian tax authorities related to transfer pricing issues. In addition, in the six months ended June 30, 2006, we recorded an increase in interest expense totaling approximately $2.6 million for potential U.S. tax deficiencies.

     Interest expense decreased $1.2 million to $17.4 million in the six months ended June 30, 2006, primarily due to higher interest expense in the prior period on retired debt partially offset by higher costs in the current period on our credit facilities.

     On June 6, 2006, JRM completed a tender offer and used current cash on hand to purchase $200 million in aggregate principal amount of the JRM Secured Notes for approximately $249.0 million, including accrued interest of approximately $10.9 million. As a result of this early retirement of debt, JRM recognized $49.0 million of expense during the six months ended June 30, 2006.

     Other-net increased $11.6 million from income of $5.6 million to expense of $6.0 million in the six months ended June 30, 2006, primarily due to currency exchange losses in the current period and dividends received from cost method investments in the prior period.

Provision for (Benefit from) Income Taxes

     In the six months ended June 30, 2006, the provision for (benefit from) income taxes increased $68.3 million from a benefit of $19.1 million to a provision of $49.2 million, while income before provision for (benefit from) income taxes increased $52.7 million to $135.8 million. Our effective tax rate for the six months ended June 30, 2006 was approximately 36.2%. We recorded no tax benefit on the $49 million expense associated with the retirement of the JRM Secured Notes discussed above.

     As more fully disclosed in Part II of our annual report on Form 10-K for the year ended December 31, 2005, in the six months ended June 30, 2005, we reversed a federal deferred tax asset valuation allowance totaling approximately $50.4 million, which eliminated our MI federal deferred tax asset valuation allowance associated with our minimum pension liability. This adjustment recorded in the six months ended June 30, 2005 resulted in a benefit in our provision for income taxes in that period.

     MII is a Panamanian corporation that has earned all of its income outside of Panama. Under Panamanian tax law, MII is not subject to income tax in Panama on income earned outside of Panama.

     We have provided for income taxes based on the tax laws and rates in the countries in which we conduct our operations. MII and its subsidiaries operate in the United States and various other taxing jurisdictions around the world. Each of these jurisdictions has a regime of taxation that varies from the others. The

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taxation regimes vary not only with respect to nominal rates, but also with respect to the allowability of deductions, credits and other benefits and tax bases (for example, revenue versus income). These variances, along with variances in our mix of income from these jurisdictions, are responsible for shifts in our effective tax rate.

     Income (loss) before provision for (benefit from) income taxes, provision for (benefit from) income taxes and effective tax rates for MII major subsidiaries are as follows:

	Income (loss) before						Provision for
	Provision for (Benefit from)						(Benefit from)					Effective
	Income Taxes						Income Taxes					Tax Rate
	(Unaudited)
	For the six months ended June 30,
	2006			2005			2006		2005			2006			2005
	(In thousands)						(In thousands)
Primarily United States:
MI	$	104,597		$	35,943		$	29,018	$	(32,732	)		27.74	%		(91.07	)%
J. Ray McDermott Holdings, Inc.		(89,085	)		(2,407	)		12		51			(0.01	)%		(2.12	)%
Non-United States:
International Subsidiaries		120,323			49,603			20,132		13,555			16.73	%		27.33	%
Total MII	$	135,835		$	83,139		$	49,162	$	(19,126	)		36.19	%		(23.00	)%

     MI is subject to United States federal income tax at the rate of 35%. The effective tax rate of MI is primarily affected by applicable state income taxes on its profitable U.S. subsidiaries. In the six months ended June 30, 2006, MI reached a settlement in a tax dispute with United States and Canadian tax authorities, primarily related to transfer pricing matters, resulting in an adjustment to the tax liability and associated accrued interest established for the disputed item. This favorably impacted MI’s income before income taxes and provision for income taxes by $13.2 million and $4.7 million, respectively. In addition, the effective tax rate of MI for the six months ended June 30, 2005 is impacted by the B&W Chapter 11 settlement adjustment booked in that period, which generated little or no associated U.S income tax effect and the valuation allowance adjustment discussed above.

     J.Ray McDermott Holdings, Inc. (“JRMHI”) is subject to United States income tax at a rate of 35%. No current United States income tax is payable by JRMHI due to its accumulated losses. JRMHI’s valuation allowance for the realization of deferred tax assets had been adjusted in accordance with SFAS No. 109. JRMHI’s provision for income taxes is primarily associated with its operations performed outside of the United States, which has no relationship to its income (loss) before provision for income taxes.

Backlog

	June 30,		December 31,
	2006		2005
	(Unaudited)
	(In thousands)
Offshore Oil and Gas Construction	$	3,231,059	$	1,781,917
Government Operations		1,524,306		1,772,258
Power Generation Systems		3,056,313		—
TOTAL BACKLOG	$	7,811,678	$	3,554,175

     At June 30, 2006, our Offshore Oil and Gas Construction’s backlog included approximately $22 million for a project for Dolphin Energy Ltd. that was accounted for under our deferred profit recognition policy, as disclosed in our annual report on Form 10-K for the year ended December 31, 2005. At June 30, 2006, we reached a completion level of greater than 70% on this project, with its gross profit probable and reasonably estimable. As a result, we have recognized the gross profit previously deferred totaling $21 million in the

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three months ended June 30, 2006. Of the June 30, 2006 backlog in this segment, we expect to recognize revenues of approximately $807 million in the remainder of 2006, $1.2 billion in 2007 and the remainder thereafter.

     At June 30, 2006, our Government Operations’ backlog with the U. S. Government was $1.5 billion, which is substantially fully funded. Only $36.0 million has not been funded as of June 30, 2006. Of the June 30, 2006 backlog in this segment, we expect to recognize revenues of approximately $290 million in the remainder of 2006, $473 million in 2007 and the remainder thereafter.

     At June 30, 2006, our Power Generation Systems’ backlog is attributable to B&W, which was not consolidated in our financial results at December 31, 2005. Backlog for B&W at December 31, 2005 totaled approximately $2.1 billion. At June 30, 2006, Power Generation Systems’ backlog with the U. S. Government was $80.8 million, which was fully funded. Of the June 30, 2006 backlog in this segment, we expect to recognize revenues of approximately $820 million in the remainder of 2006, $1.3 billion in 2007 and the remainder thereafter.

Liquidity and Capital Resources

JRM

     On June 6, 2006, JRM completed a cash tender offer for all the outstanding 11% senior secured notes due 2013 (“JRM Secured Notes”). The tender offer consideration was based on a fixed-spread over specified U.S. Treasury securities, which equated to an offer price of approximately 119% of the principal amount of the notes. JRM used cash on hand to purchase the entire $200 million in aggregate principal amount of the JRM Secured Notes outstanding for approximately $249.0 million, including accrued interest of approximately $10.9 million. As a result of this early retirement of debt, JRM recognized $49.0 million of expense during the three months ended June 30, 2006.

     On June 6, 2006, JRM entered into a new $500 million senior secured credit facility with a syndicate of lenders arranged by Credit Suisse Securities (USA) LLC (the “JRM Credit Facility”). The JRM Credit Facility is comprised of a five-year, $400 million revolving credit and letter of credit subfacility (all of which may be used for the issuance of letters of credit and $250 million of which may be used for revolver borrowings), which matures on June 6, 2011, and a six-year, $100 million synthetic letter of credit subfacility, which matures on June 6, 2012. The proceeds of the JRM Credit Facility are available for working capital needs and other general corporate purposes of JRM and its subsidiaries.

     JRM’s obligations under the JRM Credit Facility are unconditionally guaranteed by substantially all of JRM’s wholly owned subsidiaries and secured by liens on substantially all of JRM’s and these subsidiaries’ assets (other than cash, cash equivalents, equipment and certain foreign assets), including their major marine vessels. JRM is permitted to prepay amounts outstanding under the JRM Credit Facility at any time without penalty. Other than customary mandatory prepayments on certain contingent events, the JRM Credit Facility requires only interest payments on a quarterly basis until maturity. Amounts outstanding under the revolving credit and letter of credit subfacility bear interest at either the Eurodollar rate plus a margin ranging from 2.25% to 2.50% per annum or the base prime rate plus a margin ranging from 1.25% to 2.25% per annum. The applicable margin varies depending on JRM’s credit rating. JRM is charged a commitment fee on the unused portions of the $400 million revolving credit and letter of credit subfacility, which fee varies between 0.375% and 0.50% per annum depending on JRM’s credit rating. Additionally, JRM is charged a letter of credit fee of between 2.25% and 2.50% per annum with respect to the undrawn amount of each letter of credit issued under the revolving credit and letter of credit subfacility and a fee of 2.60% per annum on the full amount of the synthetic letter of credit subfacility.

     The JRM Credit Facility contains customary financial covenants relating to leverage and interest coverage and includes covenants that restrict, among other things, debt incurrence, liens, investments, acquisitions, asset dispositions, dividends, prepayments of subordinated debt, mergers, transactions with affiliates and capital expenditures.

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     At June 30, 2006, JRM had no borrowings outstanding, and letters of credit on the JRM Credit facility totaled $142.6 million. In addition, JRM had $128.3 million in outstanding unsecured letters of credit at June 30, 2006.

     On December 22, 2005, JRM, as guarantor, and its subsidiary, J. Ray McDermott Middle East, Inc., entered into a $105.2 million unsecured performance guarantee issuance facility with a syndicate of commercial banking institutions. This facility provides credit support for bank guarantees issued in favor of two projects awarded to JRM. The term of this facility is for the duration of these projects, and the initial commission rate is less than 4.25% on an annualized basis. This facility increased JRM’s unrestricted cash, as prior letters of credit secured with cash were transferred to this facility.

     In April 2006, JRM completed the sale of a Mexican subsidiary, Talleres Navales del Golfo, S.A. de C.V., and received approximately $19.5 million in proceeds.

     Based on JRM’s liquidity position, we believe JRM has sufficient cash and letter of credit capacity to fund its operating requirements for at least the next 12 months.

BWXT

     On December 9, 2003, BWXT entered into a three-year, unsecured, $125 million revolving credit facility (the “BWXT Credit Facility”). The size of the BWXT Credit Facility was increased to $135 million in January 2004, and in March 2005, the maturity date was extended to March 18, 2010. The BWXT Credit Facility is not guaranteed by MII. On November 7, 2005, BWXT and its lenders amended the BWXT Credit Facility to, among other things, remove the limitation on the aggregate principal amount of loans allowed to be extended under the BWXT Credit Facility.

     The BWXT Credit Facility is a revolving credit agreement providing for borrowings and issuances of letters of credit in an aggregate amount of up to $135 million. The BWXT Credit Facility requires BWXT to comply with various financial and nonfinancial covenants and reporting requirements. The financial covenants require BWXT to maintain a minimum leverage ratio, a minimum fixed charge coverage ratio and a maximum debt to capitalization ratio. BWXT was in compliance with these covenants at June 30, 2006. The interest rate at June 30, 2006 was 8.75%. BWXT is charged a commitment fee at a per annum rate of 0.375%, which is payable quarterly. At June 30, 2006, BWXT had no borrowings outstanding, and letters of credit outstanding under the facility totaled $50.4 million.

     Based on BWXT’s liquidity position, we believe BWXT has sufficient cash and letter of credit and borrowing capacity to fund its operating requirements for at least the next 12 months.

B&W

     On February 22, 2006, B&W entered into a $650 million senior secured credit facility with a syndicate of lenders arranged by Credit Suisse Securities (USA) LLC (the “B&W Facility”) to replace B&W’s debtor-in-possession credit facility, which was terminated. The B&W Facility includes a five-year, $200 million revolving credit subfacility (the entire availability of which may be used for the issuance of letters of credit or working capital requirements), a six-year, $200 million letter of credit subfacility and a commitment by certain of the lenders to loan B&W up to $250 million in term debt to refinance the B&W Note (as defined in Note 10 to our unaudited condensed consolidated financial statements included in this report). The term loan may only be used by B&W in a single draw to refinance amounts outstanding under the B&W Note, and the commitment of the lenders to make this loan expires on December 1, 2006. As of June 30, 2006, no borrowings were outstanding, and letters of credit with an aggregate face amount of $232.8 million were outstanding. In addition, at June 30, 2006 B&W had miscellaneous letters of credit outstanding with a U.S. bank totaling $1.1 million.

     On February 22, 2006, B&W paid $350 million to a trust for the benefit of asbestos personal injury claimants under the B&W Chapter 11 plan of reorganization. For additional information concerning the settlement of

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B&W’s Chapter 11 proceedings, see Notes 20 and 22 to the consolidated financial statements in Part II of our annual report on Form 10-K for the year ended December 31, 2005.

     We intend to fund our obligations under the B&W Settlement (as defined in Note 10 to our unaudited condensed consolidated financial statements included in this report) with existing cash on hand, cash from operations, possible third-party financing, a potential equity offering or some combination of all four alternatives.

     Based on B&W’s liquidity position, we believe B&W has sufficient cash and letter of credit and borrowing capacity to fund its operating requirements for at least the next 12 months.

OTHER

     As of June 30, 2006, MII had outstanding performance guarantees for two JRM projects. MII has not previously been required to satisfy a material performance guarantee for JRM or any of its other subsidiaries. Both of these guarantees (with a total cap of $70 million) relate to projects which have been completed and are in the warranty periods, the latest of which expires in November 2006. JRM has incurred minimal warranty costs in prior years, and any substantial warranty costs in the future could possibly be covered in whole or in part by insurance.

     One of B&W’s Canadian subsidiaries has received notice of a possible warranty claim on one of its projects. This project included a limited-term performance bond totaling approximately $140 million for which MII entered into an indemnity arrangement with the surety underwriters. At this time, B&W’s subsidiary is analyzing the facts and circumstances surrounding this issue. It is possible that B&W’s subsidiary may incur warranty costs in excess of amounts provided for as of June 30, 2006. It is also possible that a claim could be initiated by the B&W subsidiary’s customer against the surety underwriter should certain events occur. If such a claim were successful, the surety could seek to recover from B&W’s subsidiary the costs incurred in satisfying the customer claim. If the surety should seek recovery from B&W’s subsidiary, we believe that B&W’s subsidiary has adequate liquidity to satisfy its obligations.

     At June 30, 2006, we had total restricted cash and cash equivalents of $85.0 million. The restricted cash and cash equivalents include the following: $5.1 million, which serves as collateral for letters of credit; $1.5 million, which serves as collateral for foreign exchange trading and other financial obligations; $16.6 million, which is required to meet reinsurance reserve requirements of our captive insurance companies; and $61.8 million, which is held in restricted foreign accounts.

     At June 30, 2006 and December 31, 2005, our balance in cash and cash equivalents on our consolidated balance sheets included approximately $22.5 million and $7.3 million, respectively, in adjustments for bank overdrafts, with a corresponding increase in accounts payable for these overdrafts. The June 30, 2006 amount includes approximately $18.2 million related to B&W.

     Our working capital, excluding restricted cash and cash equivalents, decreased by approximately $103.2 million from $81.9 million at December 31, 2005 to a negative $21.3 million at June 30, 2006, primarily attributable to cash used to fund the early retirement of the JRM Secured Notes.

     Our net cash provided by operations was approximately $331.3 million for the six months ended June 30, 2006, compared to approximately $74.3 million for the six months ended June 30, 2005. This increase was primarily attributable to favorable cash flows from our contracts in progress and accounts receivable.

     Our net cash provided by (used in) investing activities changed by approximately $367.7 million to cash provided by investing activities totaling $303.1 million for the six months ended June 30, 2006, compared to cash used in investing activities totaling $64.6 million for the six months ended June 30, 2005. This increase is primarily attributable to the reconsolidation of B&W and the sale/maturity of available-for-sale securities.

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     Our net cash used in financing activities increased by approximately $211.3 million to $218.8 million in the six months ended June 30, 2006 from $7.5 million in the six months ended June 30, 2005. This increase is primarily attributable to the early retirement of the JRM Secured Notes.

     At June 30, 2006, we had investments with a fair value of $390 million. Our investment portfolio consists primarily of investments in government obligations and other highly liquid money market instruments. As of June 30, 2006, we had pledged approximately $42 million fair value of these investments to secure a letter of credit in connection with certain reinsurance agreements.

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Our exposures to market risks have not changed materially from those disclosed in Item 7A included in Part II of our annual report on Form 10-K for the year ended December 31, 2005.

Item 4. Controls and Procedures

     As of the end of the period covered by this quarterly report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) adopted by the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures were developed through a process in which our management applied its judgment in assessing the costs and benefits of such controls and procedures, which, by their nature, can provide only reasonable assurance regarding the control objectives. You should note that the design of any system of disclosure controls and procedures is based in part upon various assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based on the evaluation referred to above, our Chief Executive Officer and the Chief Financial Officer concluded that the design and operation of our disclosure controls and procedures are effective as of June 30, 2006 to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and forms and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding disclosure. There has been no change in our internal control over financial reporting during the quarter ended June 30, 2006 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

     For information regarding ongoing investigations and litigation, see Note 7 to our unaudited condensed consolidated financial statements in Part I of this report, which we incorporate by reference into this Item.

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Item 4. Submission of Matters to a Vote of Securities Holders

     At our annual meeting of stockholders held on May 3, 2006, we submitted the following matters to our stockholders, with voting as follows:

(a)	The election of four directors:
	Class II — For a three-year term

Nominee	Votes For		Votes Withheld
Robert L. Howard		66,718,641		1,103,256
D. Bradley McWilliams		66,887,137		934,760
Thomas C. Schievelbein		66,888,358		940,160

Class III — For a one-year term

Nominee	Votes For		Votes Withheld
Robert W. Goldman		66,881,737		940,160

	Effective at the annual meeting, Joe B. Foster retired from our Board of Directors.
	Roger A. Brown, Ronald C. Cambre, Bruce DeMars, Oliver D. Kingsley, Jr. and Bruce W. Wilkinson continued as directors pursuant to their prior election.
(b)	A proposal to approve the amended and restated McDermott International, Inc. 2001 Directors and Officers Long-Term Incentive Plan:

Votes For		Votes Against		Abstentions
	54,082,847		1,948,577		1,741,172

(c) A proposal to approve the McDermott International, Inc. Executive Incentive Compensation Plan:

Votes For		Votes Against		Abstentions
	62,634,059		4,968,182		219,656

(d) A proposal to ratify the appointment of Deloitte & Touche LLP as our independent registered public accounting firm for the year ending December 31, 2006:

Votes For		Votes Against		Abstentions
	67,581,515		171,676		68,706

Item 5. Other Information

     From time to time, our directors, officers and employees may adopt trading plans pursuant to Exchange Act Rule 10b5-1(c). John T. Nesser, III adopted a 10b5-1 trading plan on May 8, 2006, and John A. Fees adopted a 10b5-1 trading plan on May 25, 2006.

40

Item 6. Exhibits

Exhibit 3.1 ^* — McDermott International, Inc.’s Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to McDermott International, Inc.’s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (File No. 1-08430)).

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

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

Exhibit 4.1* — Credit Agreement dated as of June 6, 2006, by and among J. Ray McDermott, S.A., certain lenders, synthetic investors and issuers party thereto, Credit Suisse, Cayman Islands Branch, Bank of America, N.A., Calyon New York Branch, Fortis Capital Corp. and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.1 to McDermott International, Inc.’s Current Report on Form 8-K filed dated June 6, 2006 (File No. 1-08430)).

Exhibit 4.2* — Pledge and Security Agreement by J. Ray McDermott, S.A. and certain of its subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as Administrative Agent and Collateral Agent, dated as of June 6, 2006(incorporated by reference to Exhibit 10.2 to McDermott International, Inc.’s Current Report on Form 8-K filed dated June 6, 2006 (File No. 1-08430)).

Exhibit 10.1* — McDermott International, Inc.’s Amended and Restated 2001 Directors & Officers Long-Term Incentive Plan (incorporated by reference to Appendix B to McDermott International, Inc.’s Proxy Statement for its Annual Meeting of Stockholders held on May 3, 2006, as filed with the Commission under a Schedule 14A (File No. 1-08430)).

Exhibit 10.2* — Form of 2001 LTIP Restricted Stock Grant Agreement to Nonemployee Directors (incorporated by reference to Exhibit 10.1 to McDermott International, Inc.’s Current Report on Form 8-K filed May 3, 2006 (File No. 1-08430)).

Exhibit 10.3* — Form of 2001 LTIP Performance Shares Grant Agreement (incorporated by reference to Exhibit 10.2 to McDermott International, Inc.’s Current Report on Form 8-K filed May 3, 2006 (File No. 1-08430)).

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

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

Exhibit 32.1 — Section 1350 certification of Chief Executive Officer.

Exhibit 32.2 — Section 1350 certification of Chief Financial Officer.

^* Incorporated by reference to the filing indicated.

41

SIGNATURES

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

	McDERMOTT INTERNATIONAL, INC.
	/s/ Francis S. Kalman
By:	Francis S. Kalman
	Executive Vice President and Chief Financial
	Officer (Principal Financial Officer and Duly
	Authorized Representative)
	/s/ Michael S. Taff
By:	Michael S. Taff
	Vice President and Chief Accounting Officer
	(Principal Accounting Officer and Duly
	Authorized Representative)

August 7, 2006

42

EXHIBIT INDEX

Exhibit		Description
3.1*		McDermott International, Inc.’s Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to McDermott International, Inc.’s Annual Report on Form 10-K for the fiscal year ended March 31, 1996 (File No. 1-08430)).
3.2*		McDermott International, Inc.’s Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to McDermott International, Inc.’s Current Report on Form 8-K filed dated May 3, 2006 (File No. 1-08430)).
3.3*		Amended and Restated Certificate of Designation of Series D Participating Preferred Stock (incorporated by reference herein to Exhibit 3.1 to McDermott International, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (File No. 1-08430)).
	4.1*	Credit Agreement dated as of June 6, 2006, by and among J. Ray McDermott, S.A., certain lenders, synthetic investors and issuers party thereto, Credit Suisse, Cayman Islands Branch, Bank of America, N.A., Calyon New York Branch, Fortis Capital Corp. and Wachovia Bank, National Association (incorporated by reference to Exhibit 10.1 to McDermott International, Inc.’s Current Report on Form 8-K filed dated June 6, 2006 (File No. 1-08430)).
	4.2*	Pledge and Security Agreement by J. Ray McDermott, S.A. and certain of its subsidiaries in favor of Credit Suisse, Cayman Islands Branch, as Administrative Agent and Collateral Agent, dated as of June 6, 2006(incorporated by reference to Exhibit 10.2 to McDermott International, Inc.’s Current Report on Form 8-K filed dated June 6, 2006 (File No. 1-08430)).
	10.1*	McDermott International, Inc.’s Amended and Restated 2001 Directors & Officers Long-Term Incentive Plan (incorporated by reference to Appendix B to McDermott International, Inc.’s Proxy Statement for its Annual Meeting of Stockholders held on May 3, 2006, as filed with the Commission under a Schedule 14A (File No. 1-08430)).
	10.2*	Form of 2001 LTIP Restricted Stock Grant Agreement to Nonemployee Directors (incorporated by reference to Exhibit 10.1 to McDermott International, Inc.’s Current Report on Form 8-K filed May 3, 2006 (File No. 1-08430)).
	10.3*	Form of 2001 LTIP Performance Shares Grant Agreement (incorporated by reference to Exhibit 10.2 to McDermott International, Inc.’s Current Report on Form 8-K filed May 3, 2006 (File No. 1-08430)).
	31.1	Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer.
	31.2	Rule 13a-14(a)/15d-14(a) certification of Chief Financial Officer.
	32.1	Section 1350 certification of Chief Executive Officer.
	32.2	Section 1350 certification of Chief Financial Officer.

^* Incorporated by reference to the filing indicated.