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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 1999

                                       OR

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

             For the transition period from           to

                        COMMISSION FILE NUMBER: 0-22595

                          FRIEDE GOLDMAN HALTER, INC.
             (Exact name of registrant as specified in its charter)

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                 MISSISSIPPI                                     64-0900067
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)

              13085 SEAWAY ROAD                                    39503
            GULFPORT, MISSISSIPPI                                (Zip Code)
   (Address of principal executive offices)
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                                 (228) 896-0029
              (Registrant's telephone number, including area code)

Securities Registered Pursuant to Section 12(b) of the Act: COMMON STOCK, $.01,
                                   PAR VALUE

        Securities Registered Pursuant to Section 12(g) of the Act: NONE

     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. [X]  No. [ ]

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 229.405 under the Securities Exchange Act of 1934)
is not contained herein, and will not be contained, to the best of registrant's
knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.

     As of March 20, 2000 there were 39,972,844 shares of Common Stock, $.01 par
value, of Friede Goldman Halter, Inc. issued and outstanding, 27,680,464 of
which shares having an aggregate market value of approximately $171.3 million,
were held by non-affiliates of the registrant (affiliates being, for these
purposes only, directors, executive officers and holders of more than 5% of the
registrant's Common Stock).

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the proxy statement related to the registrant's 2000 annual
meeting of shareholders, which proxy statement will be filed under the
Securities Exchange Act of 1934 are incorporated by reference into Part III of
this Form 10-K.

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                               TABLE OF CONTENTS

                                     PART I

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                                                                        PAGE
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Item 1.  Business....................................................     3
         Risk Factors................................................    18
Item 2.  Properties..................................................    25
Item 3.  Legal Proceedings...........................................    28
Item 4.  Submission of Matters to a Vote of Security Holders.........    29
         Executive Officers of the Registrant........................    29

                                  PART II
Item 5.  Market for the Registrant's Common Equity and Related
         Stockholder Matters.........................................    31
Item 6.  Selected Financial Data.....................................    32
Item 7.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................    34
Item     Quantitative and Qualitative Disclosures about Market
  7a.    Risk........................................................    41
Item 8.  Financial Statements and Supplementary Data.................    42
Item 9.  Changes in and Disagreements with Accountants on Accounting
         and Financial Disclosure....................................    42

                                  PART III
Item     Director and Executive Officers of the Registrant...........
  10.                                                                    43
Item     Executive Compensation......................................
  11.                                                                    43
Item     Security Ownership of Certain Beneficial Owners and
  12.    Management..................................................    43
Item     Certain Relationships and Related Transactions..............
  13.                                                                    43

                                  PART IV
Item     Exhibits, Financial Statement Schedules and Reports on Form
  14.    8-K.........................................................    44
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                           FORWARD-LOOKING STATEMENTS

     This Report on Form 10-K contains "forward-looking statements" within the
meaning of Section 21E of the Securities Exchange Act of 1934, as amended. All
statements, other than statements of historical facts, included in this Form
10-K, are forward-looking statements. Such forward-looking statements are
subject to certain risks, uncertainties and assumptions, including (i) risks of
reduced levels of demand for the Company's products and services resulting from
reduced levels of capital expenditures of oil and gas companies relating to
offshore drilling and exploration activity and reduced levels of capital
expenditures of offshore drilling contractors, which levels of capital
expenditures may be affected by prevailing oil and natural gas prices,
expectations about future oil and natural gas prices, the cost of exploring for,
producing and delivering oil and gas, the sale and expiration dates of offshore
leases in the United States and overseas, the discovery rate of new oil and gas
reserves in offshore areas, local and international political and economic
conditions, the ability of oil and gas companies to access or generate capital
sufficient to fund capital expenditures for offshore exploration, development
and production activities, and other factors, (ii) risks related to expansion of
operations, either at its shipyards or one or more other locations, (iii)
operating risks relating to conversion, retrofit and repair of drilling rigs,
new construction of drilling rigs and production units and the design of new
drilling rigs, new construction and repair of vessels and the design of new
vessels, and the design and manufacture of engineered products (iv) contract
bidding risks, (v) risks related to dependence on significant customers, (vi)
risks related to the failure to realize the level of backlog estimated by the
Company due to determinations by one or more customers to change or terminate
all or portions of projects included in such estimation of backlog, (vii) risks
related to regulatory and environmental matters, (viii) risks related to future
government funding for certain vessel contracts and prospects, (ix) risks
related to the completion of contracts to construct offshore drilling rigs and
vessels at costs not in excess of those currently estimated by the Company and
prior to the contractual delivery dates and (x) risks of untimely performance by
companies which provide services to the Company as subcontractors under
construction contracts. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those anticipated, estimated or projected. Although the
Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations will
prove to have been correct.
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ITEM 1. BUSINESS

GENERAL

     Friede Goldman Halter, Inc. ("FGH" or, together with its subsidiaries, "the
Company") is a world leader in the design and manufacture of equipment for the
maritime and offshore energy industries. Formerly Friede Goldman International,
Inc. ("FGI"), the Company's name was changed to FGH effective with the merger
with Halter Marine Group, Inc. ("HMG") on November 3, 1999. FGH is incorporated
under the laws of the State of Mississippi. FGI, the predecessor company, was
formed in February 1997 to hold the combined assets of HAM Marine, Inc. ("HAM
Marine") and Friede & Goldman, Ltd. ("FGL") and completed an initial public
offering in July of 1997.

     At the time of its initial public offering in July 1997, FGI conducted all
of its conversion, retrofit and repair services at its 32-acre shipyard, located
in Pascagoula, Mississippi (the "Pascagoula Facility" or "FGO West Facility").
Since the initial public offering, the Company has (i) opened its new shipyard
on Greenwood Island, Mississippi (the "Greenwood Island" or "FGO East
Facility"), (ii) added two Canadian shipyards to its operations, (iii) acquired
a group of affiliated French companies engaged in the design and fabrication of
marine and offshore rig deck equipment, and (iv) merged with HMG, a leading
provider of design, new construction, conversion and repair services for
ocean-going vessels, offshore drilling rigs and production platforms and
engineered products.

     Through its subsidiary Friede Goldman Offshore, Inc. ("FGO", formerly HAM
Marine, Inc.), the Company has been continuously engaged in the business of
converting, retrofitting and repairing offshore drilling rigs since 1982.
Through F&G Ltd., also a subsidiary, the Company has been engaged in the
business of offshore rig design for more than 50 years. The merger with HMG
significantly expanded the Company's capacity to convert, retrofit, repair and
modify offshore drilling rigs; greatly expanded the product offerings of the
Company's Engineered Products segment, and made it a leader in designing,
building, and repairing a wide range of marine vessels.

     The Company conducts its operations in three primary segments: Offshore,
Vessels, and Engineered Products.

  Offshore Segment

     Services provided by the Offshore segment include the conversion, retrofit,
repair and modification of existing offshore drilling rigs and the design,
construction and equipping of new offshore drilling units. The Company's
Offshore segment customers consist primarily of drilling contractors that drill
offshore exploratory and development wells for oil and gas companies throughout
the world, particularly in the Gulf of Mexico, the North Sea and areas offshore
of West Africa, South America and eastern Canada.

  Vessels Segment

     The Company's Vessels segment is the largest builder of small to
medium-sized ocean-going vessels in the United States. Services provided by the
Vessels segment include the design, new construction, conversion and repair for
ocean-going vessels including offshore support vessels ("OSV's"), double hull
fuel barges, oceanographic research and survey ships, high speed patrol boats
and ferries, tug boats, tow boats and offshore barges. Customers of the Vessels
segment consist of offshore energy service companies, domestic and foreign
governments and other commercial enterprises. The Vessels segment also provides
a wide variety of repair and conversion services for vessels and barges that
service the offshore energy and commercial markets.

  Engineered Products Segment

     The Engineered Products segment services include the design and manufacture
of the world's largest cranes, mooring systems, marine deck equipment, jacking
systems, specialty mechanical

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systems, and a comprehensive aftermarket repair and retrofitting operation. The
primary customers of the Company's Engineered Products Group, in addition to the
customers of the Company's Offshore segment, include offshore construction
contractors, shipyards, commercial cruise-liner operators, general merchant
marine, the fishing industry, on-land general construction contractors and the
U.S. Government.

MERGER WITH HALTER MARINE GROUP, INC.

     On November 3, 1999, FGI completed a merger with HMG. HMG was a leading
provider of design, new construction, conversion and repair services for
ocean-going vessels, offshore drilling rigs and production platforms and
engineered products servicing the offshore energy, government and commercial
markets. Its Vessels segment was also the largest builder of small to
medium-sized ocean-going vessels in the United States. HMG maintained multiple
domestic production facilities and four international joint ventures. Through
combining operations with HMG, the Company believes it should be able to achieve
various synergies, cost savings and other benefits, including: (i) the ability
of the combined company to achieve greater efficiencies from integrating
production capacity; (ii) the diversification of product markets potentially
reducing dependence of the combined company on the cyclical offshore energy
market; (iii) the ability to pursue additional opportunities for construction of
deepwater exploration and production equipment through the greater production
capacity and larger workforce of the combined company; and (iv) the ability to
combine design and engineering expertise, as well as integrating the
complementary engineered products operations of both companies, to achieve a
broader range of engineered products for a larger customer base. As set forth in
the merger agreement, stockholders of HMG received 0.57 of a share of the
Company's Common Stock in exchange for each share of HMG common stock. A total
of 16,450,292 shares was issued at a value of $193.3 million. The merger is
being accounted for as a purchase business combination.

     Operations acquired through the merger are primarily conducted through the
wholly-owned subsidiary, Halter Marine, Inc. ("Halter"). Halter has multiple
wholly-owned subsidiaries, including among others: (i) Maritime Holdings, Inc.
which encompasses the Texas operations now referred to by the Company as Friede
Goldman Offshore Texas ("FGOT"), a division of the Offshore Segment; and (ii)
Halter Engineered Products Group, Inc. ("EPG") which conducts the operations of
its Engineered Products segment. Halter has several other wholly-owned
subsidiaries through which it conducts its operations within the Company's
Vessels segment.

OVERVIEW OF PRODUCTS AND SERVICES

  Offshore Segment

     Primary customers of the Company's Offshore segment are drilling
contractors with operations offshore in the Gulf of Mexico, the North Sea, West
Africa, eastern Canada and South America and other offshore areas of the world.
These drilling contractors generally own and operate offshore drilling rigs and
provide drilling services to oil and gas companies. Several factors determine
the type of rig most suitable for a particular project, the more significant of
which are the marine environment, water depth and seabed conditions at the
proposed drilling location, whether the drilling is to be done over a production
platform or other fixed structure, the intended well depth, and variable deck
load and well control requirements. A brief description of the types of offshore
drilling rigs and production units currently serviced by the Offshore segment is
set forth below.

     Semi-submersibles. Semi-submersible rigs consist of an upper working and
living deck resting on vertical columns connected to lower hull members. Such
rigs operate in a "semi-submerged" position, remaining afloat, in a position
which places the water-line approximately half way between the top of the lower
hulls and bottom of the deck. The rig is typically anchored in position and
remains stable for drilling in the semi-submerged floating position.

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     There have been four generations of semi-submersible drilling rigs, with
each successive generation incorporating improvements that enable the rigs to
drill more efficiently and in increasingly harsh marine environments. Fourth
generation semi-submersibles are typically capable of operating in water depths
of up to 5,000 feet and, in some cases, greater depths. Certain fourth
generation semi-submersibles are equipped with computer controlled thrusters to
allow for dynamic positioning, which allows the rig to remain on location over a
drill site in deep waters without the use of anchors and mooring lines.

     A major portion of the Company's work to date has involved the retrofit,
repair and conversion of earlier generation semi-submersibles which generally
operate in maximum water depths of between 1,000 to 2,000 feet into deepwater
semi-submersible. The design of many of these earlier generation
semi-submersible rigs, including long fatigue-life and advantageous stress
characteristics, together with increasing demand for deepwater drilling
capabilities have made them well-suited for significant retrofitting projects.

     Jackups. Jackup rigs are mobile, self-elevating drilling platforms equipped
with legs that are lowered to the ocean floor until a foundation is established
to support the drilling platform. The rig hull includes the drilling rig,
jacking system, crew quarters, loading and unloading facilities, storage areas
for bulk and liquid materials, heliport and other related equipment. Jackups are
used extensively for drilling in water depths from 20 feet to 400 feet. Some
jackup rigs have a lower hull (mat) attached to the bottom of the rig legs,
while others have independent legs.

     Jackup rigs can be generally characterized by their design as either slot
jackups or cantilevered jackups. Slot jackups are generally of an older vintage
and are configured for drilling operations to take place through a slot at the
aft of the hull. A slot design is generally appropriate for drilling exploratory
wells in the absence of any existing permanent structure, such as a production
platform. A cantilevered jackup can extend its drill floor and derrick and
either drill exploratory wells or drill over an existing, fixed structure,
thereby permitting the rig to drill new wells or work over existing wells
through such a structure. The Company has converted many slot-design rigs into
cantilever configurations.

     Drillships. Drillships, which are typically a self-propelled ship shape
hull, are positioned over a drill site through the use of either a mooring
system or a computer controlled dynamic positioning system similar to those used
on certain fourth generation semi-submersible rigs. Drill-ships are capable of
operating in water depths ranging from 200 feet to 10,000 feet.

     Floating Production Facilities. A floating production facility ("FPF")
consists of a ship or semi-submersible vessel upon which production equipment is
mounted. In many cases, the hull is a converted tanker (often referred to as a
floating, production, storage and offloading, or FPSO, unit). In addition,
semi-submersible drilling units have been converted into floating production
units. In a few cases, a new hull has been purpose-built as an FPF. For harsh
weather locations, FPFs are designed with a mooring system that provides
weathervaning capability so that the FPF can be rotated on location to minimize
the effects of wave, wind and current actions. The production risers in these
FPFs are connected to the hull through a swivel system that also accommodates
the mooring system. The hull of an FPF is typically used for on-board oil
storage, which is an important feature for remote locations where export
pipelines are not available and fixed oil storage availability is limited or
nonexistent.

     Design and Engineering Services. Through its FGL subsidiary, the Company
performs design and engineering of offshore drilling and production units,
including jackups, semi-submersibles, drillships and floating production,
storage and offloading vessels. FGL has a long history of successful designs
with 50 F&G Ltd. designed semi-submersible drilling, pipelaying, and
accommodation units in service worldwide, and over 30 jackup drilling units of
FGL design operating worldwide.

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  Vessels Segment

     Primary customers of the Company's Vessels segment are offshore energy
service companies, domestic and foreign governments and other commercial
enterprises. Services provided by the Vessels segment include the design, new
construction, conversion and repair of ocean-going vessels including offshore
support vessels ("OSV's") and double hull fuel barges for energy service
companies; oceanographic research and survey ships, high speed patrol boats and
ferries for domestic and foreign governments; and, tugboats, towboats and
offshore barges for other commercial enterprises. The Vessels segment also
provides a wide variety of repair and conversion services for vessels and barges
that service the offshore energy and commercial markets. A brief description of
the products offered by the Vessels segment follows.

     Offshore Support Vessels and Double-hull tank barges. The Company
constructs supply boats, anchor handling tug supply boats and anchor handling
tugs (collectively, "offshore support vessels" or "OSV's") which serve oil and
gas drilling and production facilities and support offshore construction and
maintenance work. The Company's supply boats range from 205 feet to 254 feet in
length and generally range in price from $7.0 million to $25.0 million. In
addition to transporting deck cargo, such as pipe or drummed materials, supply
boats transport liquid mud, potable water, diesel fuel, dry bulk cement and dry
bulk mud. Supply boats constructed by the Company range from standard supply
boats to multi-purpose sophisticated ships with high horsepower and bollard
pull, automated controls, dynamic positioning, controllable pitch propellers,
articulated rudders, kort nozzles and any type of auxiliary, deck or towing
equipment. Anchor handling tugs and anchor handling tug supply boats constitute
a separate class of offshore support vessels. These vessels have more powerful
engines and deck mounted winches and are capable of towing and positioning
mobile offshore rigs and their anchors as well as providing supply vessel
services.

     The Company builds a variety of offshore barges for the energy market,
primarily offshore double-hull tank barges. Contract prices for such barges
range from $15.0 million to $26.0 million. These barges are used by operators to
carry cargo such as liquefied petroleum gas, molten sulfur, propane, butane,
propylene, heavy oil, phenol, jet fuel and other petroleum products and range
from 400 feet to 580 feet in length with as many cargo tanks, decks and support
systems as necessary for the barge to be used for its intended function.

     Oceanographic Research and Survey Ships, High Speed Patrol Boats and
Ferries. The largest customer of the Vessels segment is the U.S. Navy for which
the Company constructs several types of vessels, principally oceanographic
survey and research ships and patrol boats. Oceanographic survey and research
ships range in length from 210 feet to 325 feet and range in price from $50.0
million to $70.0 million. Patrol boats are high-speed special operations craft,
which are approximately 80 feet in length and which generally range in price
from $3.0 million to $5.0 million.

     In addition to the U.S. Navy, the Company constructs vessels for state,
federal and foreign governments. The Company constructs 78 foot patrol craft
fast ("FCFs") for foreign navies. The Company has also built passenger/vehicle
ferries for governmental operators on all three U.S. Coasts. These vessels range
in length from 90 feet to 383 feet and range in price from $1.0 million to $76.0
million.

     Other Commercial Vessels. The Company constructs several types of vessels
for the non-energy related commercial market, principally offshore barges,
tugboats and inland tow boats. The Company builds a variety of offshore barges
for the non-energy related commercial market, including container and deck
barges. Contract prices for such barges range from approximately $2.0 million to
$26.0 million. These barges are used by operators to carry commodities such as
grain, coal, wood products, containers and rail cars. Other barges function as
pipe laying barges, cement unloaders and split hull dump scows. Such barges
range from 250 feet to 410 feet in length.

     The Company builds both tug boats and inland tow boats. Tug boats are used
for towing and pushing, port management, shipping, piloting, fire fighting and
salvage. Tug boats are built with two

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or three engines, standard propellers, controllable pitch propellers, azimuthing
Z-drives, cycloidal propulsion, and with or without steerable or fixed nozzles.
Inland tow boats are used by waterway operators to push inland barges. The
Company manufactures a full line of tow or push boats. Tug and tow boats range
from 70 feet to 120 feet in length and generally range in price from $1.5
million to $5.0 million.

     Repair Services. The Company repairs a wide range of marine vessels and
barges utilizing its 15 drydocks at five different facilities. Repair jobs can
range in value from $10,000 to $1.5 million. In addition, the Company performs
double hulling of single hull ocean-gling barges to its repair facilities that
range in price from $8.0 million to $16.0 million.

  Engineered Products Segment

     Primary customers of the Company's Engineered Products Group, in addition
to the customers of the Company's Offshore segment, include offshore
construction contractors, shipyards, commercial cruise-liner ship-owners,
general merchant marine, the fishing industry, on-land general construction
contractors and the U.S. Government. The Engineered Products segment services
include the design and manufacture of the world's largest cranes, mooring
systems, marine deck equipment, jacking systems, specialty mechanical systems,
and a comprehensive aftermarket repair and retrofitting operation.

     Cranes, Mooring Systems, Drilling and Marine Deck Equipment. The Company's
Engineered Products Group includes AmClyde Engineered Products Company, Inc.
("AmClyde") and Friede Goldman France ("BLM").

     AmClyde represents the following brand names: AmClyde (marine cranes,
shipyard gantry cranes, stevedoring cranes, stiffleg derricks, mooring systems,
winches, windlasses and specialty mechanical systems; Unit Mariner (pedestal
cranes); Lucker (linear winches and jacking systems); Hepburn (winches and
mooring systems); Fritz Culver (winches, deck equipment and related machinery);
McElroy (winches and deck equipment); Sauerman (material handling machinery,
bucket and components); and J & B (drilling rig machinery and related
equipment).

     Friede Goldman France is a holding company with two operating subsidiaries:
Brissoneau & Lotz Marine S.A. ("BLM") and BOPP S.A. ("BOPP"). These entities are
collectively referred to herein as the "BLM Companies." The BLM Companies
represent the following brand names: BLM (deck equipment, including mooring,
anchoring and cargo handling equipment such as deck cranes, provision cranes and
hose handling cranes for general marine and merchant vessels); BLM Offshore
(rack and pinion jacking systems used on offshore drilling jack-up rigs, mooring
systems used on semi-submersible drilling rigs, and pedestal cranes used on
drilling rigs), and BOPP (fishing winches for tuna seiners and related
equipment. BOPP also includes the brand name Kerdranvant (steering gear for
marine vessels).

     Drilling equipment typically consists of the items such as derricks, rotary
tables, top drive units, blow out preventers, pipe handling equipment, mud
pumps, etc. required to conduct drilling operations. Marine deck equipment
typically consists of mooring, anchoring, cargo handling equipment, pedestal
cranes, skidding equipment and rig jacking equipment (on jackup rigs). In
connection with most major retrofit, conversion or new build projects, the owner
of the drilling unit contracts directly with the suppliers of drilling and
marine deck equipment for the purchase of such equipment for the rig. Typically
such equipment will be installed by the shipyard, and is often referred to as
Owner Furnished Equipment or "OFE". Through the acquisition of the BLM Companies
and the merger with HMG, the Company has developed the Engineered Products
segment. The Company's Engineered Products segment has the capability to supply
a wide variety of marine deck equipment to its offshore drilling unit customers
and to participate in the market for the marine deck equipment on drilling units
being modified or constructed by other shipyards. The combined companies of the
Engineered Products segment are also involved in the design and manufacturing of
marine equipment for marine shipyards throughout the world (for fitting on
cruise

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liners, bulk carriers, cargo vessels, tankers, LNG's etc.) and are the leading
provider of large marine cranes for the world's offshore construction
contractors.

     After-Market Sales and Service. The Engineered Products segment also sells
parts and service to support its products once they are delivered. It has a
service team who performs repair services worldwide and it maintains an
inventory of spare parts to support its products.

DESCRIPTION OF OPERATIONS

  Offshore Segment

     Through its Offshore segment, 1999 operations of the Company consisted of
several conversion, retrofit and repair projects for offshore drilling
contractors and work on the new build completion of three semi-submersible
offshore drilling units. Additionally, through its merger with HMG, the Company
was performing the new construction of three semi-submersible drilling units;
although, at year-end, fabrication on two of these units had been delayed. (See
Item 14 -- Note 14 of the Notes to the Consolidated Financial Statements for
additional information regarding the status of these two units.) Also, two
semi-submersible rigs were under conversion. Significant conversion or retrofit
projects generally take 8 to 14 months to complete, whereas certain repair
projects may require only 1 to 3 months to complete. New rig construction
projects can require from 18 to 30 months to complete.

     Conversions. Conversions consist generally of the conversion of one type of
drilling rig into a different type, such as the conversion of a slot jackup to a
cantilevered jackup, the conversion of a submersible rig to a semi-submersible
rig, or the conversion of a drilling rig or tanker into an FPF. FPF conversions
typically require the demolition and removal of all drilling equipment and
substructure (including the derrick system, rotary system, tubulars, mud
treating and pumping units and well control systems) and the reconfiguration of
the decks to accommodate heavy skid mounted processing modules, production
risers and handling equipment. This production equipment is then interconnected
through the installation of piping, electrical wiring and walkways. Because
production, processing and storage facility additions typically increase a rig's
variable deck load, the Company is typically required to complete hull
reinforcements and buoyancy and stability enhancements.

     The Company completed two conversions in 1999 and performed the final
outfitting of one other rig conversion. At December 31, 1999, the Company was in
the process of converting one submersible into a semi-submersible and had
entered into contracts to convert one additional submersible into a
semi-submersible and one jackup into a production unit.

     Retrofits. Retrofits consist generally of improvements to the technical
capabilities, tolerances and systems of drilling and production equipment.
Retrofits performed on semi-submersible rigs include buoyancy and stability
enhancements (typically pontoon extensions and additional column sponsons) and
the addition or improvement of self-propulsion systems, positioning thrusters
and self-contained mooring systems. Jackup retrofits include strengthening and
extending the rig legs and reinforcing the spud cans on the existing legs. The
Company is also capable of upgrading living quarters and facilities to
accommodate harsh environment drilling conditions and to meet North Sea
regulatory requirements, improving ventilation systems and strengthening or
replacing heliports to accommodate larger aircraft.

     At December 31, 1999, the Company was in the process of retrofitting two
semi-submersible drilling units.

     Repairs. The Company performs a broad range of inspection and repair work
for its clients. Necessary repairs are identified both in connection with
retrofit and conversion projects as well as in connection with periodic
inspections performed at the shipyard which are required by the U.S. Coast Guard
and by vessel classification societies such as the American Bureau of Shipping.
Rigs are typically inspected for systems operability and structural integrity,
with ultrasonic thickness gauge

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readings employed to detect structural fatigue or aberrations. Repair work may
include the repair or renewal of piping, spud cans, electrical and drilling
systems, removal and replacement of deteriorated or pitted steel and blasting,
coating and painting of exterior surfaces. The Company's repair work has also
included the refurbishment of drilling systems as well as the overhaul of
generators, boilers, condensers, ballast and cargo valves, rig cranes and
production compressors.

     New Completion and Construction. The FGO East Facility was designed
specifically for the efficient new build completion and construction of offshore
drilling rigs. Moreover, the combined capacity of the FGO East Facility (which
now has the added capacity of the Pascagoula facility acquired in the HMG
merger) and the FGO West Facility allows the Company to work on new build
completion and construction projects without any significant loss in its
capacity to perform conversion, retrofit and repair projects. In addition,
through the merger with HMG, FGOT's Orange Facility is ideally suited for the
construction of semi-submersible rigs. During 1999, the Company was working on
the new build completion of three semi-submersible hulls and the construction of
three new build semi-submersible drilling rigs. At year end, fabrication on two
of the new build units had been delayed. (See Item 14 -- Note 14 of the Notes to
the Consolidated Financial Statements for additional information regarding the
status of these two units.) A new build completion involves performing the
addition of decks, quarters, equipment installation and final outfitting of an
existing bare deck hull, while the construction of new build semi-submersibles
involves the above activities as well as building the hull.

     Design and Engineering Services. Through its FGL subsidiary, the Company
performs design and engineering of offshore drilling and production units,
including jackups, semi-submersibles, drillships and floating production,
storage and offloading vessels.

  Vessels Segment

     Through the HMG merger, the Company added the operations of the Vessels
segment effective November 3, 1999. At December 31, 1999, Vessels segment
activities included the design, new construction, conversion and repair of
ocean-going vessels including offshore support vessels ("OSV's"), double hull
fuel barges, oceanographic research and survey ships, high speed patrol boats
and ferries, tug boats, tow boats and offshore barges. The Vessels segment also
provides a wide variety of repair and conversion services for vessels and barges
that service the offshore energy and commercial markets.

     Design and New Construction. Through its Vessels segment, the Company
conducts its new construction and conversion operations for vessels at seven
shipyards. These shipyards employ advanced manufacturing techniques including
modular construction methods, advanced welding techniques, panel line
fabrication, computerized plasma arc metal cutting and automated sandblasting
and painting. The Company conducts its design activities at its engineering
facility located near corporate headquarters. At December 31, 1999, the Company
had 52 vessels under construction or conversion.

     Repairs and Conversions. The Company performs a broad range of repair work
for vessels and barges that service the offshore energy and commercial markets,
including general repair and conversion and, gas freeing and cleaning services
on tank barges that carry fuels or other hazardous cargoes. In addition, its
conversion activities include the conversion of single hull barges to double
hull barges.

  Engineered Products Segment

     Through its Engineered Products segment, the Company designs, manufactures,
and services cranes, mooring, anchoring, rack-and-pinion jacking systems, cargo
handling equipment, deck machinery and equipment and steering systems. The
Company has the capability to outfit rigs for existing customers and to supply
other offshore rig manufacturers with rig kits consisting of legs,

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jacking systems, anchoring winches and offshore handling cranes and other marine
deck equipment, including spare parts and after sale services.

     Cranes, Mooring Systems, and Marine Deck Equipment. As of December 31,
1999, the Engineered Products segment was performing work on several major new
equipment and after-market upgrades in the course of the Group's normal
business. In view of the Company's broad international scope of operations, the
design, procurement and project management functions were performed in the
Group's U.S. facilities for AmClyde projects and at the BLM facility in Nantes,
France. Primary manufacturing was performed at the Group's Gulf Coast Division
in Slidell, Louisiana, and at BLM in France, with a significant percentage at
various global subcontracting facilities.

     The Engineered Products Group was involved in manufacturing several major
projects during the year: a 600-ton kingpost crane, a specialty "J-Lay"
pipelaying system, a 150-metric ton floating crane, three 50-ton pedestal
cranes, two floating 115-ton cranes, upgrading a very large marine crane, two
shipsets of deepwater mooring systems for semi-submersible drilling rigs, three
80-ton kingpost cranes, one rig-set of jacking units for a jack-up drilling rig,
and anchor windlasses and mooring equipment for the world's largest cruise
liner.

     Marine deck equipment is typically manufactured to individual customer
specifications based on the planned application of the equipment. Manufacture of
the equipment required to complete a customer's order may require from a few
weeks to several months.

     After-Market Sales and Service. The Engineered Products segment also sells
parts and service to support its products once they are delivered. It has a
service team that performs repair services worldwide and it maintains an
inventory of spare parts to support its products.

CUSTOMERS AND MARKETING

  Offshore Segment

     The Company's Offshore segment customers are primarily offshore drilling
contractors, many of whom have been customers of the Company for more than 15
years. The Company believes that it has developed strong relationships with its
customer base. The Company's marketing efforts are conducted from its sales
offices in Houston and target drilling contractors located primarily in the Gulf
Coast area, South America and in Europe. The Company's sales staff attempts to
identify future contracts by contacting its clients on a regular basis in order
to anticipate projects that will be competitively bid or negotiated exclusively
with the Company.

  Vessels Segment

     The Company's Vessels segment customers are primarily offshore energy
service companies, domestic and foreign governments, and other commercial inland
and near coastal shipping enterprises. The Company's marketing efforts for its
Vessels segment are coordinated at the Company's headquarters in Gulfport,
Mississippi. The sales staff attempts to identify future contracts by contacting
its clients on a regular basis in order to anticipate projects that will be
competitively bid or negotiated exclusively with the Company.

  Engineered Products Segment

     The Company's Engineered Products segment customers include offshore
drilling contractors, offshore marine construction contractors, oil companies
and operators in the offshore oil production sector, other shipyards, cruise
lines, shipping companies on-land construction contractors, general merchant
marine, the fishing industry, and the U.S. Government. Marketing efforts of this
segment are conducted through its offices in St. Paul, Minnesota with satellite
offices in Houston, Texas; Metairie, Louisiana; Slidell, Louisiana; Covington,
Louisiana; and Gulfport, Mississippi and in concert with other of the Company's
domestic marketing efforts. The Engineered Products segment

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<PAGE>   11

also has a marketing office at its BLM headquarters in Nantes, France and sales
representatives in various locations in Europe, China and Asia.

  Significant Customers

     A large portion of the Company's revenue has historically been generated by
a few customers although not necessarily the same customers from year-to-year.
For example, the Company's largest customers (those which individually accounted
for more than 10% of revenue in a particular year) collectively accounted for
70%, 66%, and 62% of revenue for 1997, 1998, and 1999, respectively. For 1999,
the Company earned more than 10% of its revenue from Noble Drilling Corporation,
Marine Drilling Corporation and Ocean Rig ASA. In 1999, the Company derived more
than 10% of its revenue from each of three companies. Because the level of new
construction, conversion, retrofit or repair work that the Company may provide
to any particular customer depends on the size of that customer's capital
expenditure budget devoted to such projects in a particular year, customers that
account for a significant portion of revenue in one fiscal year may represent an
immaterial portion of revenue in subsequent years.

CONTRACT STRUCTURE AND PRICING

     The Company generally performs conversion, retrofit and repair work
pursuant to contracts that provide for a portion of the work to be performed on
a fixed-price basis and a portion of the work to be performed on a cost-plus
basis. New construction projects typically involve a greater portion of the work
performed on a fixed-price basis. In many cases, the Company commences work with
respect to certain portions of a drilling rig or vessel conversion, retrofit or
repair project on a cost-plus arrangement as soon as the drilling rig or vessel
arrives in the Company's shipyard, and, thereafter, the scope and pricing
arrangements with respect to other aspects of the project are negotiated. In the
interest of expediting the completion of a conversion, retrofit or repair
project, a drilling rig or vessel may arrive in the Company's shipyard before
the design work for such project is finished or before all necessary budgetary
approval for such project has been reviewed at the appropriate level of
management of the customer. In many of these cases, the portion of the project
as to which no firm pricing arrangement has been agreed to at the time the
drilling rig arrives at the Company's shipyard ultimately becomes a significant
portion of the overall project. In addition, the scope of the services to be
performed with respect to a particular drilling rig often increases as the
project progresses due to additional retrofits or modifications requested by the
customer or additional repair work necessary to meet the safety, environmental
or construction standards established by the U.S. Coast Guard or other
regulatory or vessel classification authorities.

     With respect to the fixed-price portions of a project, the Company receives
the price fixed in the contract for such aspect of the project, subject to
adjustment only for change orders placed by the customer. In its Offshore
segment, the Company typically receives a significant number of change orders on
each of its fixed-price projects as to which the Company and its customer
negotiate a separate charge. With respect to fixed-price contracts, the Company
generally retains the ability to capture cost savings and must absorb cost
over-runs. Under cost-plus arrangements, the Company receives specified amounts
in excess of its direct labor and materials cost and so is protected against
cost overruns but does not benefit directly from cost savings. The Company
generally prices materials at a mark-up under its contracts. The Company has
recently realized a majority of its revenue under fixed-price contracts,
although historically the percentages of revenue it has derived from fixed-price
contracts and cost-plus contracts have fluctuated significantly from project to
project and from period to period based on the nature of the projects involved,
the type of pricing arrangements preferred by its customers, the timing of the
commencement of work on a project in relation to the timing of the completion of
the negotiation and contracting process, and other factors.

     Cranes, mooring systems, and marine deck equipment are generally sold
pursuant to fixed-price contracts.

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COMPETITION

     The Company believes that its reputation for quality and reliability, its
long-standing relationships with most of the large drilling contractors, energy
service companies, domestic and foreign governments and other commercial
enterprises, its experienced management team, its existing skilled labor force
and its extensive fabrication experience with drilling rigs and marine vessels
are its key advantages in competing for projects. In the Offshore segment
businesses, the Company competes in a global market with companies based in the
United States, Europe and Asia. The Company believes that its long-term
investment in the design of new drilling rigs and production units will provide
it with a competitive advantage with respect to the new rig construction
business.

     The Company's Offshore segment competes in a local market against other
companies based on the Gulf Coast for repair projects for drilling rigs that
operate in the Gulf of Mexico. The market for smaller retrofit and conversion
projects is also primarily local, but the market for larger retrofit and
conversion projects includes international competitors. The Company believes it
competes favorably against companies located in Europe or the Far East for
retrofit and conversion projects relating to drilling rigs operating in the Gulf
of Mexico and, to a lesser extent, rigs operating offshore West Africa and South
America due to, among other things, high European labor costs and the Company's
favorable geographical location. The Company believes that the addition of the
Marystown Facilities with their lower costs structure, enables the Company to
compete favorably for retrofit and conversion projects relating to drilling rigs
operating in the North Sea and offshore Canada.

     In the Vessels segment, the Company offers a wide range of products. The
number and identity of competitors on particular projects vary greatly,
depending upon the type of vessel and the size of the project. There are several
domestic shipyards that compete with the Company for domestic shipbuilding
contracts depending upon the nature of the project. Most of the Company's
domestic competitors are significantly smaller than the Company. In pursuing
international contracts, the Company also competes with many foreign shipyards,
some of which are subsidized by their governments. In the vessel repair
business, the Company believes that it is the second largest participant on the
Gulf Coast; and, in addition to the one large competitor, it competes with
numerous repair yards along the Gulf Coast.

     The Company competes in a global market in the design and manufacture of
deck equipment, although several competitors are domestically based. The
Company's Engineered Products segment competes with several domestic and foreign
manufacturers in the market for offshore marine cranes and shipyard gantry
cranes, and mooring systems.

     The Company believes that certain barriers exist that prevent new companies
from competing with the Company for new rig and vessel construction, conversion,
retrofit and repair activities including the investment required to establish an
adequate facility, the difficulty of locating a facility adjacent to an adequate
waterway due to environmental and wetland regulations, and the limited
availability of experienced supervisory and management personnel. Although new
companies can enter the market for repair projects and small retrofit and
conversion projects more easily, management believes these factors will likely
limit the increase in domestic competition for larger projects, especially major
conversions and retrofits and new rig constructions.

BACKLOG

     As of December 31, 1999, the Company's backlog was approximately $689.1
million, approximately 73% of which management expects to be performed within
the 12 months ending December 31, 2000. The Company's backlog as of December 31,
1998 was approximately $364.7 million.

     The Company's backlog is based on management's estimate of future revenue
attributable to (i) the remaining amounts to be invoiced with respect to those
projects, or portions of projects, as to which a customer has authorized the
Company to begin work or purchase materials and

                                       12
<PAGE>   13

(ii) projects, or portions of projects, that have been awarded to the Company as
to which the Company has not commenced work. Management's estimates are often
based on incomplete engineering and design specifications and as engineering and
design plans are finalized or changes to existing plans are made, management's
estimate of the total revenue for such projects is likely to change. In
addition, many projects currently included in the Company's backlog are subject
to termination at the option of the customer, although the customer in that case
is generally required to pay the Company for work performed and materials
purchased.

     In February 1999, the Company entered into a $143.2 million contract with a
Brazilian company for the new build construction of a Friede & Goldman, Ltd.
designed Millennium S.A. semi-submersible drilling rig. The contract contained a
financing contingency which was not met; therefore, it is not included in the
Company's backlog at December 31, 1999. The Company does not currently
anticipate that this project will result in a firm contract.

MATERIALS

     The principal materials used by the Company in its fabrication business are
standard steel shapes, steel plate, pipe, welding wire and gases, fuel oil,
gasoline and paint. Other materials used in large quantities include aluminum,
steel pipe, electrical cable and fittings. Similar materials are used in the
manufacture of cranes, moorings, and marine deck equipment. In addition,
electric motor components, steel forgings and castings are used. The Company
believes that such materials are currently available in adequate supply from
many sources. The Company does not depend upon any single supplier or source.
The Company seeks to obtain favorable pricing and payment terms for its
purchases by coordinating purchases among all of its facilities and buying in
large quantities. The Company has not engaged, and does not presently intend to
engage in hedging transactions with respect to its purchase requirements for
materials.

SAFETY AND QUALITY ASSURANCE

     Management is concerned with the safety and health of the Company's
employees and maintains a stringent safety assurance program to reduce the
possibility of accidents. The Company's safety department establishes guidelines
to ensure compliance with all applicable foreign, federal and state safety
regulations. The Company provides training and safety education through
orientations for new employees and subcontractors, weekly crew safety meetings
and first aid and CPR training. The Company also employs emergency medical
technicians and registered nurses as in-house medics. The Company has a
comprehensive drug program and conducts periodic employee health screening. A
safety committee, whose members consist of management representatives and field
supervisors, meets monthly to discuss safety concerns and suggestions that could
prevent future accidents. The Company has contracted with a third party safety
consultant to provide training and suggestions and a licensed emergency medical
technician in its ongoing commitment to a safe and healthy work environment.
Similar practices are in place at the Company's foreign facilities. The Company
believes that its safety program and commitment to quality are vital to
attracting and retaining customers and employees.

     Many of the Company's properties construct according to the standards of
certain regulatory and quality organizations including: the American Bureau of
Shipping, Det Norske Veritas, American Petroleum Institute, the American Welding
Society, the American Society of Mechanical Engineers and specific customer
specifications. The Company's international operations fabricate according to
certain of the above standards and certain additional standards, including those
of the Lloyds Registry of Shipping, the Canadian Welding Bureau and Bureau
Veritas. All of the Company's welding and fabrication procedures are performed
in accordance with the latest technology and industry requirements. The
Company's Engineered Products businesses are quality certified ISO9001 by Det
Norske Veritas. The Company also maintains training programs at each of its
facilities to train skilled personnel and to maintain high quality standards.
Management believes that these programs enhance the quality of its products and
reduce their repair rate.

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GOVERNMENT AND ENVIRONMENTAL REGULATION

     Overview. Many aspects of the Company's operations and properties are
materially affected by foreign, federal, state and local regulation, as well as
certain international conventions and private industry organizations. These
regulations govern worker health and safety and the manning, construction and
operation of vessels. For example, the Company is subject to the jurisdiction of
the U.S. Coast Guard, the National Transportation Safety Board, the U.S. Customs
Service and the Maritime Administration of the U.S. Department of
Transportation, as well as private industry organizations such as the American
Bureau of Shipping. These organizations establish safety criteria and are
authorized to investigate vessel accidents and recommend improved safety
standards. In addition, the exploration and development of oil and gas
properties located on the outer continental shelf of the United States is
regulated primarily by the Minerals Management Service ("MMS"). The MMS has
promulgated federal regulations under the Outer Continental Shelf Lands Act
requiring the construction of offshore platforms located on the outer
continental shelf to meet stringent engineering and construction specifications.
Violations of these regulations and related laws can result in substantial civil
and criminal penalties as well as injunctions curtailing operations. The Company
believes that its operations are in compliance with these and all other
regulations affecting the fabrication of platforms for delivery to the outer
continental shelf of the United States.

     In addition, the Company depends on the demand for its services from the
oil and gas industry and, therefore, is affected by changing taxes, price
controls and other laws and regulations relating to the oil and gas industry.
For example, the U.S. Coast Guard regulates and enforces various aspects of
marine offshore vessel operations, such as certification, routes, drydocking
intervals, manning requirements, tonnage requirements and restrictions, hull and
shafting requirements and vessel documentation. U.S. Coast Guard regulations
require that all drilling and production vessels are drydocked for inspection at
least once within a five-year period, and such inspections and resulting repair
requirements have constituted a significant portion of the Company's revenues in
some prior years. While the Company is not aware of any proposals to reduce the
frequency or scope of such inspections, any such reduction could adversely
affect the Company's results of operations. In addition, offshore construction
and drilling in certain areas have been opposed by environmental groups and, in
certain areas, has been restricted. To the extent laws are enacted or other
governmental actions are taken that prohibit or restrict offshore construction
and drilling or impose environmental protection requirements that result in
increased costs to the oil and gas industry in general and the offshore
construction industry in particular, the business and prospects of the Company
could be adversely affected. The Company cannot determine to what extent future
operations and earnings of the Company may be affected by new legislation, new
regulations or changes in existing regulations.

     Environmental. The Company's operations and properties are subject to a
wide variety of increasingly complex and stringent foreign, federal, state and
local environmental laws and regulations, including those governing discharges
into the air and water, the handling and disposal of solid and hazardous wastes,
the remediation of soil and groundwater contaminated by hazardous substances and
the health and safety of employees. These laws may provide for "strict
liability" for damages to natural resources and threats to public health and
safety, rendering a party liable for the environmental damage without regard to
negligence or fault on the part of such party. Sanctions for noncompliance may
include revocation of permits, corrective action orders, administrative or civil
penalties and criminal prosecution. Certain environmental laws provide for
strict, joint and several liability for remediation of spills and other releases
of hazardous substances, as well as damage to natural resources. In addition,
the Company may be subject to claims alleging personal injury or property damage
as a result of alleged exposure to hazardous substances. Such laws and
regulations may also expose the Company to liability for the conduct of or
conditions caused by others, or for acts of the Company that were in compliance
with all applicable laws at the time such acts were performed.

                                       14
<PAGE>   15

     The Comprehensive Environmental Response, Compensation, and Liability Act
of 1980, as amended, and similar laws provide for responses to and liability for
releases of hazardous substances into the environment. Additionally, the Clean
Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the
Safe Drinking Water Act, the Emergency Planning and Community Right to Know Act,
each as amended, and similar foreign, state or local counterparts to these
federal laws, regulate air emissions, water discharges, hazardous substances and
wastes, and require public disclosure related to the use of various hazardous
substances. For example, the Company's paint operations must comply with a
number of environmental regulations. All blasting and painting is done in
accordance with the requirements of the Company's air discharge permit and
disposal of paint waste is made in accordance with the National Pollution
Discharge Elimination System storm water pollution plan. Lead based paint is
vacuum blasted and all blasting debris is contained for hazardous waste
disposal. Company policy requires that existing coating be sampled and tested
prior to blasting operations to eliminate the possibility of lead contamination
and to assure that lead based paint is appropriately treated. The Company has
been classified as a "large quantity hazardous waste generator" and is
registered with the State of Mississippi Department of Environmental Quality as
such. Compliance with these and other environmental laws and regulations may
require the acquisition of permits or other authorizations for certain
activities and compliance with various standards or procedural requirements. The
Company believes that its facilities are in substantial compliance with current
regulatory standards.

     The federal Resource Conservation and Recovery Act ("RCRA") and similar
state laws regulate the generation, treatment, storage, disposal, and other
handling of solid wastes, with the most stringent regulations applying to solid
wastes that are considered hazardous wastes. RCRA also may impose stringent
requirements on the closure, and the post-closure care, of facilities where
hazardous waste was treated, disposed of or stored. The Company generates solid
waste, including hazardous and non-hazardous waste, in connection with its
routine operations. Management believes that the Company's wastes are handled
properly under RCRA.

     Amendments to the federal Clean Air Act in 1990 resulted in numerous
changes which the Environmental Protection Agency and similar state agencies
fully implemented by regulations. The Company does not expect these Clean Air
Act amendments to result in material expenses at its properties, but the amount
of increased expenses, if any, resulting from such amendments is not presently
determinable.

     In connection with the Company's purchase of the Marystown Facilities, the
Newfoundland provincial government agreed to carry out and pay for a complete
environmental assessment and remediation program. The Phase I investigation
identified several issues surrounding possible subsurface contamination on site
at one of the Marystown Facilities. As a result of Phase I findings, remediation
work will commence at the shipyard facility in April 2000. Remediation efforts
will include the removal of underground oil storage tanks, removal and proper
disposal of contaminated soils and re-installation of new oil storage tanks at
the shipyard facility. The Phase II investigation has been completed and
additional environmental issues have been identified. The Company expects that
additional remediation efforts will be required; however, the specific nature of
these efforts is unknown at this time. The Newfoundland provincial government
has agreed to bear the cost of remediation procedures associated with the
Marystown Facilities and to indemnify the Company against any environmental
liabilities associated therewith.

     The Company's fabrication site in Carquefou, France was named a "classified
installation" under French environmental law. Under French law, the operator of
a "classified installation" has various obligations with respect to the site,
including compliance with certain operating activities and clean-up obligations
upon cessation of the classified activity. In addition, the French authorities
may assess fines in the event of non-performance by the operator. As a
"classified installation", the site operates under an Arrete Prefectoral, or
administrative authorization, issued by regional environmental authorities. An
administrative authorization with respect to the Carquefou site was granted in
July of 1984 and renewed in January 1991. The administrative authorization
requires, among other

                                       15
<PAGE>   16

things, that the Company follow any instructions that authorities may impose in
the interest of public health and agriculture and gives them the right to
conduct tests on air and waste quality at the site at any time. The Company does
not believe that "classified installation" status of the Carquefou site or the
requirements of the administrative authorization will have a material effect on
its operations.

     The Company's compliance with environmental laws and regulations has
entailed certain additional expenses and changes in operating procedures. The
Company believes that compliance with these laws and regulations will not have a
material adverse effect on the Company's business or financial condition for the
foreseeable future. However, future events, such as changes in existing laws and
regulations or their interpretation, more vigorous enforcement policies of
regulatory agencies, or stricter or different interpretations of existing laws
and regulations, may require additional expenditures by the Company, which
expenditures may be material.

     Health and Safety Matters. The Company's facilities and operations are
governed by laws and regulations, including the federal Occupational Safety and
Health Act, relating to worker health and workplace safety. The Company believes
that appropriate precautions are taken to protect employees and others from
workplace injuries and harmful exposure to materials handled and managed at its
facilities. While it is not anticipated that the Company will be required in the
near future to expend material amounts by reason of such health and safety laws
and regulations, the Company is unable to predict the ultimate cost of
compliance with these changing regulations.

     Jones Act. The Jones Act requires that all vessels transporting products
between U.S. ports must be constructed in U.S. shipyards, owned and crewed by
U.S. citizens and registered under U.S. law, thereby eliminating competition
from foreign shipbuilders with respect to vessels to be constructed for the U.S.
coastwise trade. Many customers elect to have vessels constructed at U.S.
shipyards, even if such vessels are intended for international use, in order to
maintain flexibility to use such vessels in the U.S. coastwise trade in the
future. In 1996 a legislative bill seeking to substantially modify the
provisions of the Jones Act mandating the use of ships constructed in the United
States for U.S. coastwise trade was introduced in Congress; however, it did not
pass. Similar bills seeking to rescind or substantially modify the Jones Act and
eliminate or adversely affect the competitive advantages it affords to U.S.
shipbuilders have been introduced in Congress from time to time and are expected
to be introduced in the future. Any recission or material modification of the
Jones Act could adversely affect the Company's future prospects because many
foreign shipyards with which the Company competes are heavily subsidized by
their governments.

     OPA '90. Demand for double hull carriers has been created by the Oil and
Pollution Act of 1990 ("OPA '90"), which generally requires U.S. and foreign
vessels carrying fuel and certain other hazardous cargoes and entering U.S.
ports to have double hulls by 2015. OPA '90 established a phase-out schedule
that began January 1, 1995 for all existing single hull vessels based on the
vessel's age and gross tonnage. The Company estimates that OPA '90 will require
66 barges engaged in domestic trade to be retrofitted or replaced by 2005 and
another 22 such barges to be retrofitted or replaced by 2010.

     Title XI Loan Guarantee Amendments and OECD. In late 1993, Congress amended
the loan guarantee program under Title XI of the Merchant Marine Act of 1936
("MARAD"), to permit MARAD to guarantee loan obligations of foreign vessel
owners who construct new vessels in the United States. As a result of these
amendments, MARAD was authorized to guarantee loan obligations of foreign owners
for foreign-flagged vessels that are built in U.S. shipyards on terms generally
more advantageous than available under guarantee or subsidy programs of foreign
countries. Under the OECD Accord, which was negotiated in December 1994, among
the United States, the European Union, Finland, Japan, Korea, Norway and Sweden
(which collectively control over 75% of the market share for worldwide vessel
construction), the Title XI guarantee program will be required to be amended,
once the OECD Accord is ratified by the United States, to eliminate the
competitive advantages provided by the 1993 amendments to Title XI. In December
1995, a subcommittee of the Ways and Means Committee of the U.S. House of
Representatives passed a

                                       16
<PAGE>   17

bill providing for the implementation of the OECD Accord and elimination of the
competitive advantages provided by the 1993 amendments to Title XI. To date,
such bill has not been approved by either the U.S. House of Representatives or
the U.S. Senate. If the OECD Accord is ratified by the U.S. (the only remaining
party to the OECD Accord that has not yet ratified the OECD Accord), the OECD
Accord would virtually eliminate all direct and indirect governmental
shipbuilding subsidies by the party nations. Despite the fact that the OECD
Accord will require the elimination of the competitive advantages provided to
U.S. shipbuilders by the 1993 amendments to Title XI, management believes that
the OECD Accord should significantly improve the ability of U.S. shipbuilders to
compete successfully for international commercial contracts with foreign
shipbuilders, many of which currently are heavily subsidized by their
governments. Governmental subsidies to foreign shipbuilders currently range up
to 19% of the vessel construction cost.

INSURANCE

     The Company maintains a property and casualty insurance program protecting
it against damage caused by fire, flood, explosion and similar catastrophic
events. The Company also maintains commercial general liability insurance
including coverage for products and completed operations. The Company has in
place both builder's risk and ship repairer's construction risk programs. The
Company has workers' compensation and employers' liability insurance with
respect to its operations that satisfies the Federal and State Workers'
Compensation Acts and includes the U.S. Longshore and Harbor Workers Act and
maritime and outer continental shelf endorsements. The Company currently
maintains limits it deems are proper and necessary in the course of its
business. Although management believes that the Company's insurance is adequate
with respect to all of its domestic and international operations there can be no
assurance that the Company will be able to maintain adequate insurance at rates
which management considers commercially reasonable, nor can there be any
assurance such coverage will be adequate to cover all claims that may arise.

     Some of the Company's contracts require a performance bond. The Company has
arranged a facility with a group of insurance companies to provide these bonds
when required.

     The Company's wholly-owned subsidiary, Offshore Marine Indemnity Company
("OMIC") acts as a fronted re-insurance captive company for the Company's
worker's compensation program. This program provides both specific and aggregate
insurance products which limit the exposure of OMIC. OMIC is not involved in any
other business or any other lines of coverage.

EMPLOYEES

     The Company's workforce varies based on the level of ongoing fabrication
activity at any particular time. As of December 31, 1999, the Company had
approximately 9,860 employees, including 9,242 in the United States, 229 in
Canada and 389 in France. Total workforce included contract labor of
approximately 1,077 employees at December 31, 1999.

     None of the Company's United States employees is employed pursuant to a
collective bargaining agreement. The Company entered into a five-year collective
bargaining agreement with three Canadian unions in connection with the
acquisition of the Marystown Facilities. The Company is currently subject to two
collective bargaining agreements with respect to its French employees. The
Company is a member of two employers' federations which are party to the
respective collective bargaining agreements. The collective bargaining
agreements have no expiration date and, under French law, remain in force unless
canceled or modified. The Company believes that its relationship with its
employees is good.

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                                  RISK FACTORS

     THE COMPANY'S BUSINESS AND OPERATIONS DEPEND PRINCIPALLY UPON CONDITIONS
PREVAILING IN THE OFFSHORE DRILLING INDUSTRY; CHANGES IN THAT INDUSTRY COULD
MATERIALLY ADVERSELY AFFECT FRIEDE GOLDMAN HALTER'S OPERATING RESULTS.

     The level of demand for Friede Goldman Halter's services is affected by the
level of demand for the services of offshore drilling contractors, including the
demand for specific types of offshore drilling rigs having required drilling
capabilities or technical specifications. This, in turn, is dependent upon the
condition of the oil and gas industry and, in particular, the level of capital
expenditures of oil and gas companies with respect to offshore drilling
activities and the ability of oil and gas companies to access or generate
capital sufficient to fund capital expenditures for offshore exploration,
development, and production activities. These capital expenditures are
influenced by prevailing oil and natural gas prices, expectations about future
prices, the level of activity in offshore oil and gas exploration, development
and production, the cost of exploring for, producing and delivering oil and gas,
the sale and expiration dates of offshore leases in the United States and
overseas, the discovery rate of new oil and gas reserves in offshore areas,
local and international political and economic conditions, and the ability of
oil and gas companies to access or generate capital sufficient to fund capital
expenditures for offshore exploration, development and production activities.

     Over the past several years, oil and natural gas prices and the level of
offshore drilling activity have fluctuated substantially. A significant or
prolonged reduction in oil and natural gas prices or the expectation that prices
will be lower in the future would likely depress offshore drilling and
development activity which would reduce demand for the Company's services and
could result in a material adverse effect on our operating results. Our
business, including the types of projects it undertakes, will also be affected
by other factors affecting offshore drilling contractors, including factors such
as:

     - the condition and drilling capabilities of the existing offshore drilling
       rigs operated by offshore drilling contractors; and

     - the relative costs of building a new offshore drilling rig with advanced
       capabilities versus the costs of retrofitting or converting an existing
       offshore drilling rig to provide similar capabilities.

     See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

WE RECENTLY COMPLETED THE MERGER WITH HALTER MARINE GROUP, INC. ANY FAILURE TO
SUCCESSFULLY INTEGRATE THEIR OPERATIONS WITH OURS OR TO MANAGE THE COMBINED
COMPANY COULD MATERIALLY ADVERSELY AFFECT OUR OPERATING RESULTS.

     Friede Goldman Halter has a brief operating history with respect to the HMG
entities. The acquisitions caused a significant increase in our costs due to
increased labor, lease rental and depreciation, amortization and interest
expenses in 1999. If such activity were to continue at levels greater than
management anticipates, our financial condition and results of operations could
be materially adversely affected.

     The HMG merger involves the integration of separate companies that, prior
to the closing of the merger transaction, have operated independently and have
different corporate cultures. The process of combining the companies may be
disruptive to our businesses and may cause an

                                       18
<PAGE>   19

interruption of, or a loss of momentum in, these businesses as a result of the
following difficulties, among others:

     - loss of key employees;

     - failures or delays in getting new contracts with present and potential
       customers of the former FGI or HMG as a result of their concerns related
       to the integration of FGI and HMG;

     - possible inconsistencies in standards, controls, procedures and policies
       between FGI and HMG and the need to implement, integrate and harmonize
       various business-specific operating procedures and systems, as well as
       company-wide financial, accounting, information and other systems; and

     - the diversion of management's attention from the day-to-day business of
       Friede Goldman Halter as a result of the need to deal with integration
       issues and the possible need to add management resources to do so.

     These disruptions and difficulties, if they occur, may cause us to fail to
realize the revenue enhancements and operating efficiencies that it currently
expects to result from the integration and may cause material adverse short-term
and long-term effects on the operating results and financial condition of Friede
Goldman Halter.

THERE IS A RISK OF CONTINUED LITIGATION BETWEEN FRIEDE GOLDMAN HALTER AND
PETRODRILL

     In April 1998, TDI-Halter, L.P., now Friede Goldman Offshore Texas, L.P.
("FGOT"), a subsidiary of the Company, entered into contracts to construct two
semi-submersible drilling rigs for Petrodrill IV Ltd. and Petrodrill V, Ltd.
("Petrodrill") with the combined contract value of $168.0 million (the
"Contracts"). FGOT provided certain bonds issued by Fireman's Fund guaranteeing
FGOT's performance under the Contracts. After FGOT commenced construction of the
two rigs, FGOT began to experience delays in the production schedule and
increased costs due, in whole or part, to delays caused by Petrodrill and by
certain subcontractors nominated for FGOT's use by Petrodrill, and by FGOT's
performing as the lead yard as opposed to a follow-on yard as anticipated by the
parties.

     In April 1999, and in connection with a transaction whereby the Federal
Maritime Administration ("MARAD") agreed to finance the Petrodrill rigs, FGOT
and Petrodrill entered into an amendment to the Contracts that provided, among
other things, for extensions to the delivery dates of approximately six months
for each rig. Thereafter, production delays continued. Under the Contracts, FGOT
is entitled to extensions of the delivery dates for permissible delay as defined
in the Contracts ("Permissible Delay") and for delays caused by Petrodrill
breaches of contract. FGOT notified Petrodrill that, as a result of such delays,
it was entitled to additional extension of the delivery dates and to additional
compensation. Petrodrill refused to acknowledge FGOT's right to extension of the
delivery dates. Petrodrill was also advised that the rigs could not be completed
by their respective existing delivery dates.

     Due to Petrodrill's refusal to grant extensions to the delivery dates FGOT
notified Petrodrill in January 2000 that it was mitigating its and Petrodrill's
damages by deferring certain fabrication efforts until engineering work could be
completed so that construction could go forward in an efficient manner. FGOT
also notified Petrodrill that it believed it was entitled to additional monetary
compensation from Petrodrill as a result of delay, disruption, inefficiencies
and other direct and indirect costs caused by, among other things, delays by
Petrodrill and its nominated subcontractors and by FGOT being required to
perform as the lead yard.

     On January 13, 2000, Petrodrill filed suit against the Company and FGO, in
state court in Houston, Texas asserting, among other things, that the Company
and FGO had tortiously interfered with FGOT's Contracts with Petrodrill, seeking
injunctive relief and damages. On January 19, 2000, the case was removed to the
federal district court in Houston (the "US litigation"). On January 27,

                                       19
<PAGE>   20

2000, the Company filed a counterclaim and FGOT filed a complaint against
Petrodrill in the US litigation asserting breach of contract, and seeking
monetary damages, reformation of contract and declaratory relief.

     On January 27, 2000, Petrodrill filed an action against FGOT in the court
in London, England, (the "UK action") seeking essentially the same relief on
different theories as it had in the US litigation. In March, the court in London
dismissed Petrodrill's application for interim relief that FGOT was not entitled
to cease construction work; confirmed that the proper jurisdiction and forum for
the disputes was the court in London; and ordered a stay of the US litigation.
As directed by the UK court, FGOT filed a counterclaim seeking monetary damages
in an amount of at least $68.5 million, and extension of the delivery dates
under various legal theories.

     In late March 2000, FGOT and Petrodrill reached an agreement, which is
subject to various approvals, including that of MARAD and the Boards of
Directors of each Company, to further amend the Contracts (the "Amendment No.
2"). Amendment No. 2 will stay the UK action for six months and dismiss the US
litigation, with prejudice except as to FGOT's rights to pursue its enumerated
claims against Petrodrill for additional compensation in the UK action. Under
the Amendment, the delivery dates for the rigs will be extended until August 1,
2001 and November 1, 2001, respectively; Petrodrill will waive all of its claims
against FGOT accruing prior to the Amendment, including its right to terminate
the Contracts for events occurring prior to the Amendment; total liquidated
damages for late delivery beyond the new delivery dates will be capped at $6.6
million for each rig; any future right of Petrodrill to terminate each Contract
will accrue only if the respective rig is not delivered within 180 days of its
extended delivery date, as such date may be further extended under other
contractual provisions; and FGOT will credit Petrodrill up to $2 million per rig
against any amounts awarded against Petrodrill, but only to the extent FGOT
recovers against Petrodrill. After the six-month stay of the UK action, FGOT
intends to vigorously pursue its claims for additional compensation.

     Notwithstanding the Amendment, the Company intends to proceed with
construction of the rigs while pursuing any and all remedies available to it
under the Contracts and applicable law. If the contract delivery dates are not
extended as provided in Amendment No. 2 for any reason, including any failure to
obtain an approval required for Amendment No. 2 to become effective, FGOT will
not be in a position to deliver the rigs on or before the pre-Amendment delivery
dates, or the date on which Petrodrill's contractual right to terminate the
Contracts will accrue. Petrodrill's remedies upon termination include among
others, the right to rescind the Contracts, transfer the rigs to FGOT, and
demand reimbursement for all amounts paid, including amounts paid for owner
furnished equipment. FGOT would likely not be in a position to meet such a
demand, and if such demand was successfully asserted, it could have a material
adverse effect on the Company.

     Based upon current estimates, the Company believes that it will incur
approximately $60 million in costs in excess of the contract prices as adjusted
for change orders, to complete the contracts. A provision for these excess costs
has been provided in the Company's purchase accounting treatment of assets and
liabilities acquired through the merger with HMG. The funding of these costs
could have a significant impact on the Company's liquidity. The balance of the
excess costs at December 31, 1999 was approximately $49.7 million and is
included in the reserve for losses on uncompleted contracts in the consolidated
balance sheets. Management expects such costs will be expended by the Company
over eighteen months beginning in April 2000. See "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."

FRIEDE GOLDMAN HALTER'S BUSINESS INVOLVES SIGNIFICANT OPERATING RISKS

     Friede Goldman Halter's activities involve the fabrication, refurbishment
and repair of large steel structures, including drilling rigs and production
units. These activities have inherent risks associ-

                                       20
<PAGE>   21

ated with them that could result in significant injury and loss of life, severe
damage and destruction of property and suspension of operations. These risks
include:

     - operating hazards, including the operation of cranes and other heavy
       machinery;

     - the structural failure of a drilling rig or vessel;

     - liabilities associated with a defect in design or a failure or
       malfunction of a product developed or manufactured by Friede Goldman
       Halter;

     - marine accidents, including collisions with other vessels and sinkings;
       and

     - physical damage of Friede Goldman Halter's facilities caused by
       hurricanes or flooding.

     Litigation arising from any of these occurrences may result in Friede
Goldman Halter being named as a defendant in lawsuits asserting large claims.
Although we maintain and will continue to maintain insurance that we consider to
be economically prudent, it cannot be assured that this insurance will be
sufficient or effective under the circumstances. A successful claim for which we
are not fully insured could have a material adverse effect on Friede Goldman
Halter.

     If Friede Goldman Halter is unable to manage this expansion efficiently or
effectively, or if we are unable to attract and retain additional qualified
management personnel to run the expanded operations, this could result in a
material adverse effect on Friede Goldman Halter.

FRIEDE GOLDMAN HALTER'S DEBT LEVEL REQUIRES THE ALLOCATION OF A SUBSTANTIAL
PORTION OF OPERATING CASH FLOW TO PAY INTEREST.

     Friede Goldman Halter's debt level requires it to use a substantial portion
of operating cash flow to pay interest on debt instead of for other corporate
purposes. The inability to meet such cash flow requirements could have a
material adverse effect on our liquidity.

     See Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Item 14 -- Note 8 of the Notes to the
Consolidated Financial Statements.

FRIEDE GOLDMAN HALTER'S INSURANCE PROTECTION COULD BE INSUFFICIENT OR
INEFFECTIVE.

     Although Friede Goldman Halter maintains such insurance protection as we
consider economically prudent, there can be no assurance that any such insurance
will be sufficient or effective under all circumstances or against all hazards
to which we may be subject. In particular, due to the high cost of errors and
omissions policies relating to the design of drilling rigs and production units,
we do not carry insurance covering claims for personal injury, loss of life or
property damage relating to such design activity. A successful claim for which
Friede Goldman Halter is not fully insured could have a material adverse effect
on us. Moreover, no assurance can be given that Friede Goldman Halter will be
able to maintain adequate insurance in the future at rates that it considers
economical.

FRIEDE GOLDMAN HALTER COULD BEAR FINANCIAL LOSSES IN CONNECTION WITH CONTRACTS
STRUCTURED ON A FIXED-PRICE BASIS OR CONTRACTS CONTAINING LIQUIDATED DAMAGES
PROVISIONS.

     A significant portion of Friede Goldman Halter's existing contracts are on
a fixed-price basis. We would be liable for the full amount of any cost overruns
under these fixed-price contracts. we generally attempt to cover anticipated
increased costs through an estimation of these costs, which is reflected in the
original price of the contract. However, revenue, cost and gross profit realized
on a fixed-price contract will often vary from the estimated amounts because of
many factors, including changes in job conditions and variations in labor and
equipment productivity over the term of the contract. The results of operations
and financial condition of Friede Goldman Halter could be materially adversely
affected if significant contracts are underpriced or revenue and gross profits
on large projects are different from those originally estimated.

                                       21
<PAGE>   22

     The construction of offshore drilling rigs involves complex design and
engineering and equipment and supply delivery coordination throughout
construction periods that may exceed two years. It is not unusual in such
circumstances to encounter design, engineering, equipment delivery schedule
changes and other factors that impact the builder's ability to complete
construction of the rig in accordance with the original contractual delivery
schedule. Our rig construction contracts generally require the customer to
compensate us for additional work or expenses incurred due to customer requested
change orders or failure of the customer to provide us with design or
engineering information or equipment, if specified in the contract for the
customer to provide these items. Under these circumstances, we generally
negotiate with the customer with respect to the amount of compensation to be
paid to us following the time at which the change order was requested or the
customer failed to provide us with items required by the contract to be provided
by the customer to us. We are subject to the risk that we are unable to obtain,
through negotiation, arbitration, litigation or otherwise, adequate amounts to
compensate us for the additional work or expenses incurred by us due to customer
requested change orders or failure by the customer to timely provide items
required to be provided by the customer. A failure to obtain adequate
compensation for these matters could require us to record an adjustment to
amounts of revenue and gross profit that were recognized in prior periods under
the percentage of completion accounting method. Any such adjustments, if
substantial, could have a material adverse effect on our results of operations
and financial condition.

     Additionally, many of our existing contracts contain provisions requiring
us to pay liquidated damages in the event that we fail to meet specified
performance deadlines. It cannot be assured that we will not be required to make
payments under these liquidated damages provisions or that the requirement to
make payments will not have a material adverse effect on the Friede Goldman
Halter's operating results.

     See Item 14 -- Note 14 of the Notes to the Consolidated Financial
Statements for more information on specific contractual matters involving Friede
Goldman Halter.

USE OF PERCENTAGE-OF-COMPLETION ACCOUNTING BY FRIEDE GOLDMAN HALTER COULD RESULT
IN MATERIAL CHARGES AGAINST OUR EARNINGS.

     Most of Friede Goldman Halter's revenue is earned on a
percentage-of-completion basis based generally on the ratio of total costs
incurred to the total estimated costs. Accordingly, contract price and cost
estimates are reviewed periodically as the work progresses, and adjustments to
income proportionate to the percentage of completion are reflected in the period
when such estimates are revised. To the extent that these adjustments result in
a reduction or elimination of previously reported profits, we would have to
recognize a charge against current earnings, which may be significant depending
on the size of the project or the adjustment.

     See Item 7 -- "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

FRIEDE GOLDMAN HALTER'S BUSINESS DEPENDS ON A FEW SIGNIFICANT CUSTOMERS

     Friede Goldman Halter expects that a significant portion of our revenues in
any year will be derived from a few customers due to the relatively large nature
of many of the projects we have historically undertaken and to the relatively
small number of potential customers for projects related to the offshore oil and
gas industry. The loss of a significant customer could result in a substantial
loss of Friede Goldman Halter's revenue and could have a material adverse effect
on our Company.

     Construction and conversion contracts from the U.S. Navy are important to
our Vessels segment. Contracts from the U.S. Navy accounted for 13% of our total
backlog at December 31, 1999. The reduced level of shipbuilding activity by the
U.S. Navy during the past decade has resulted in fewer contracts and workforce
reductions in the shipbuilding industry and has significantly intensified
competition. Furthermore, the Company cannot assure you that the shipbuilding
and

                                       22
<PAGE>   23

conversion programs currently in progress will continue to be funded, or that
those planned in the future by the U.S. Navy and other branches of the U.S.
military will be implemented. Purchases of vessels by the U.S. government are
generally subject to uncertainties inherent in the budgeting and appropriations
process, which is affected by political events over which we have no control.
Any significant reduction in the level of congressional appropriations for
shipbuilding programs could have a material adverse effect on our vessels
business.

     See "Business -- Customers and Marketing."

INCORRECT ESTIMATES OF EXPECTED REVENUE RESULTING FROM FRIEDE GOLDMAN HALTER'S
BACKLOG OF PROJECTS MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR COMPANY.

     Friede Goldman Halter's backlog is based on management's estimate of future
revenue to be earned under projects as to which a customer has authorized us to
begin work or purchase materials; and projects that have been awarded to us as
to which we have not commenced work. Substantially all of the projects in our
backlog are subject to change or termination by the customer, which could
substantially reduce the amount of backlog currently reported and could have a
material adverse effect on the Company's revenue, net income and cash flow.

     In the case of a termination, the customer is required to pay Friede
Goldman Halter for work performed and materials purchased through the date of
termination; however, due to the large dollar amounts of backlog estimated for
each of a small number of projects, amounts included in our backlog could
decrease substantially if one or more of these projects were to be terminated by
one or more of our customers. In particular, approximately 51.0% of our backlog
as of December 31, 1999 was attributable to six projects with four different
customers. A termination of one or more of these large projects or the loss of a
significant customer could have a material adverse effect on Friede Goldman
Halter's revenue, net income and cash flow for 2000.

     See "Business -- Backlog."

FRIEDE GOLDMAN HALTER COULD BE MATERIALLY ADVERSELY AFFECTED BY GOVERNMENT
REGULATIONS

     Friede Goldman Halter's business and operations will be subject to and
affected by various types of governmental regulation, including numerous
federal, state and local environmental protection laws and regulations.
Compliance with these laws is increasingly complex and expensive. We could be
held strictly liable for damages to natural resources or threats to public
health and safety, without regard to our negligence or fault. We could also be
held liable for the conduct of or conditions caused by others or for its actions
that were in compliance with all applicable laws at the time the acts were
performed. Sanctions for noncompliance may include revocation of permits,
corrective action orders, administrative and civil penalties and criminal
prosecution.

     Since the Friede Goldman Halter will depend on the demand for our services
from the oil and gas industry, changing taxes, price controls and other laws and
regulations which affect the oil and gas industry in general could impact the
operations of the combined company. The adoption of laws and regulations
curtailing exploration and development drilling would adversely affect our
operations by limiting demand for our services. We cannot determine to what
extent our operations and earnings may be affected by new legislation, new
regulations or changes in existing regulations.

     See "Business -- Government and Environmental Regulation."

LOSS OF KEY PERSONNEL MAY HAVE A MATERIAL ADVERSE IMPACT ON FRIEDE GOLDMAN
HALTER.

     Friede Goldman Halter's operations are dependent on the continued efforts
of our executive officers. Although certain of our executive officers has
entered into an employment agreement with Friede Goldman Halter, there can be no
assurance that any individual will continue in such capacity for any particular
period of time. The loss of key personnel, or the inability to hire and retain
qualified

                                       23
<PAGE>   24

employees, could have an adverse effect on our business, financial condition and
results of operations. Friede Goldman Halter does not carry key-person life
insurance on any of its employees.

COMPETITION AND EXCESS CAPACITY COULD PUT DOWNWARD PRESSURE ON FRIEDE GOLDMAN
HALTER'S PRICING AND PROFIT MARGINS.

     The shipbuilding and offshore rig construction and conversion industries
are highly competitive. During the 1990's the U.S. shipbuilding industry has
been characterized by substantial excess capacity because of the significant
decline in U.S. Navy shipbuilding spending, the difficulties experienced by U.S.
shipbuilders in competing successfully for international commercial projects
against foreign shipyards, many of which are heavily subsidized by their
governments, and the decline in the construction of vessels utilized in the
offshore energy industry. As a result of these factors, competition by U.S.
shipbuilders for domestic commercial projects has increased significantly and
has resulted in downward pressure on pricing and profit margins and may continue
to do so in the future. Recently, there was an increase in demand for vessel
construction, conversion and repair services, and this increased demand resulted
in the redeployment of previously idle shipyard capacity or other shipyards
shifting their focus to the types of products and services we currently provide.
In addition, due to the increased demand for fabrication services involving the
offshore oil and gas industry, it is possible that land or facilities with water
access to the Gulf of Mexico that were previously not used in the fabrication
business could be converted to use for this purpose. Any of these events could
increase the amount of competition experienced by Friede Goldman Halter, which
could have a material adverse effect on our revenue and profit.

     Friede Goldman Halter faces competitive pressures at every level of the
offshore rig construction, conversion, retrofitting and repair markets. We
compete in a global market for new rig construction projects against domestic,
European and Asian new rig construction firms. This market is highly competitive
because, among other things, some of our foreign competitors receive substantial
subsidies from their governments and are able to take advantage of lower labor
costs. Similarly, for larger rig conversion and retrofit projects, we face
intense competition from both domestic and foreign firms. For smaller rig
conversion, retrofit and repair projects, we compete against numerous companies
based principally on the Gulf Coast. In addition, shipyards and other companies
not previously engaged in the business can enter the market for these smaller
conversion, retrofitting and repair projects quickly and at relatively low cost.

FRIEDE GOLDMAN HALTER HAS IN PLACE A STOCKHOLDER RIGHTS PLAN AND OUR CHAIRMAN
AND CHIEF EXECUTIVE OFFICER BENEFICIALLY OWNS APPROXIMATELY 26% OF THE
OUTSTANDING COMMON STOCK OF THE COMPANY; THIS COULD DISCOURAGE OTHER COMPANIES
FROM ATTEMPTING TO ACQUIRE US.

     Friede Goldman Halter adopted its stockholder rights plan in December 1998
and shortly thereafter distributed rights to each of its stockholders. While
Friede Goldman Halter believes that the rights plan is designed to strengthen
its ability to negotiate with potential acquirors and to protect stockholders
from coercive or abusive takeover tactics, the overall effect of the rights plan
may be to delay, defer or prevent a change in control or the removal of existing
management.

     The Chairman of the board of directors and Chief Executive Officer of
Friede Goldman Halter, J. L. Holloway, beneficially owns approximately 26% of
the outstanding shares of Common Stock of Friede Goldman Halter. Mr. Holloway
has entered into a stockholder's agreement which will restrict his ability to
dispose of these shares. The size of Mr. Holloway's holdings and the
restrictions contained in the stockholder's agreement could also delay, defer or
prevent a change in control or the removal of existing management.

                                       24
<PAGE>   25

IF FRIEDE GOLDMAN HALTER DOES NOT MAINTAIN MINIMUM EMPLOYMENT LEVELS, IT MAY BE
SUBJECT TO FINANCIAL PENALTIES.

     In connection with its acquisition of the Marystown Facilities and the
construction of the FGO East Facility, Friede Goldman agreed to maintain certain
minimum levels of employment at each facility and is subject to financial
penalties if it fails to do so. Under the terms of its acquisition of the
Marystown Facilities, the Company is obligated to maintain a minimum of 1.2
million employee man-hours (including man-hours for management, labor, salaried
and hourly employees) with respect to the shipyard operations acquired by the
Company for each of the 1998, 1999 and 2000 calendar years. The Company agreed
to pay liquidated damages of C$10 million for 1998 and C$5 million in 1999 and
2000 if such minimum number of man-hours is not attained in such year. The 1.2
million minimum man-hour requirement was met in 1998. The Company was not in
compliance with the man-hour requirement for 1999. As of this report date, the
Company has not received a waiver on its non-compliance with this requirement.
The Company is discussing the matter of liquidated damages with the Province of
Newfoundland with the final decision pending. If a waiver of the penalty or
other suitable accommodations cannot be agreed upon with the Province of
Newfoundland and a liquidated damages payment is required, it will be accounted
for as an adjustment to the purchase price of the Marystown Facility.

     In addition, the County of Jackson, Mississippi has dredged the ship
channel and constructed roads and other infrastructure related to the FGO East
Facility, under an economic incentive program. However, in the event that the
Company does not maintain a minimum employment level of 400 jobs at the FGO East
Facility for each year during the primary term of its 20-year lease, the Company
could face statutory penalties under Mississippi law, which include the
repayment of the remaining balance of the $6.0 million loan incurred by the
county to finance such improvements. No payments were due in 1998 or 1999
related to this obligation.

BUSINESS AND GEOGRAPHIC SEGMENTS

     Financial information about the Company's business and geographic segments
may be found in Item 14 -- Note 16 of the Notes to Consolidated Financial
Statements.

ITEM 2. PROPERTIES

  Corporate Headquarters

     The Company's corporate headquarters are located in Gulfport, Mississippi
at the same site as the Company's Gulfport shipyard in two buildings that,
together, occupy approximately 54,600 square feet of office space.

  Offshore Segment

     The Company's Offshore segment is headquartered in Pascagoula, Mississippi.
The Offshore segment operates twelve shipyards where it performs the conversion,
retrofit, repair and modification of existing offshore drilling rigs and the
construction and equipping of new offshore drilling rigs. In addition to the
yards dedicated to the Offshore segment, facilities included in the Vessels
segment can also support the fabrication requirements of the Offshore segment.

                                       25
<PAGE>   26

     The principal shipyards dedicated to new construction within the Offshore
segment are summarized in the table below.

<TABLE>
<CAPTION>
                                                                COVERED
                                                              FABRICATION
                                                                 AREA
OFFSHORE -- NEW CONSTRUCTION                                    (SQUARE     OWN OR   EXPIRATION
PROPERTY NAME AND LOCATION                                     FOOTAGE)     LEASE       DATE
----------------------------                                  -----------   ------   ----------
<S>                                                           <C>           <C>      <C>
FGO West Facility
  Pascagoula, Mississippi...................................    196,000     Lease       2005(1)
FGO East Facility -- South Yard
  Pascagoula, Mississippi...................................    400,000     Lease       2017(2)
FGO East Facility -- North End Yard
  Pascagoula, Mississippi...................................    220,000     Own           --
TDI-Halter Orange Shipyard
  Orange, Texas.............................................    600,000     Own           --
</TABLE>

---------------

(1) The Company leases the shipyard from the Jackson County Port Authority
    pursuant to a long-term lease which expires in May 2005 with two additional
    ten-year options for renewal. In December 1996, the Company entered into a
    two-year lease for 160,000 square feet of this covered fabrication areas
    which adjacent to its current facility. The lease was extended for an
    additional 2 years in December 1998.

(2) The Company leases the FGO East Facility from Jackson County, Mississippi
    pursuant tso a long-term lease which expires in June 2017 with three
    additional extensions of ten years each.

     The principal shipyards dedicated to conversion and repair within the
Offshore segment are summarized in the table below.

<TABLE>
<CAPTION>
                                                          DRYDOCK FEATURES
                                   ---------------------------------------------------------------
                                                          MAXIMUM    MAXIMUM
                                                          LIFTING    VESSEL
OFFSHORE -- CONVERSION AND REPAIR              NUMBER    CAPACITY     WIDTH    OWN OR   EXPIRATION
PROPERTY NAME AND LOCATION          ACRES     DRYDOCKS   (TONS)(2)   (FEET)    LEASE       DATE
---------------------------------  --------   --------   ---------   -------   ------   ----------
<S>                                <C>        <C>        <C>         <C>       <C>      <C>
TDI-Halter Childers Road
  Orange, Texas(1)..............         9      --            --        --     Lease       2000
TDI-Halter North Yard
  Port Arthur, Texas(1).........        17      --            --        --     Own           --
TDI-Halter Dock Yard
  Port Arthur, Texas
       -- Ship Mode.............       100       1        64,000       122
       -- Rig Mode..............       100       1        64,000       363     Lease       2009
TDI-Halter Central Yard
  Sabine Pass, Texas(1).........        32      --            --        --     Own           --
TDI-Halter Sabine Yard
  Sabine Pass, Texas(1).........        34      --            --        --     Own           --
TDI-Halter South Yard
  Sabine Pass, Texas............        21      --            --        --     Own           --
Marystown Facilities
  Marystown, Newfoundland,
  Canada (2 properties).........    60,000       1         3,000        64     Own(3)        --
                                    meters                tonnes
</TABLE>

---------------

(1) Facility is temporarily closed until demand warrants reopening.

(2) In tons unless otherwise noted.

                                       26
<PAGE>   27

(3) The Company owns the Marystown Facilities in fee simple. The Company also
    assumed five water lot leases with the Canadian government which run through
    2015 covering the water area next to each of the Marystown Facilities.

  Vessels Segment

     The Company's Vessels segment is headquartered within the Company's
corporate headquarters in Gulfport, Mississippi. The engineering headquarters
for the Vessels segment is located one-half mile from the corporate headquarters
and contains approximately 33,600 square feet of office space, including a
separate secure space for classified work. The Vessels segment operates seven
shipyards principally dedicated to the new construction of marine vessels,
although several of these facilities also can perform work for the Offshore and
Engineered Products segments. The Vessels segment operates five shipyards
dedicated to the repair and conversion of vessels and barges.

     The principal shipyards dedicated to new construction within the Vessels
segment are summarized in the table below.

<TABLE>
<CAPTION>
                                                                COVERED
                                                              FABRICATION
                                                                 AREA
VESSELS -- NEW CONSTRUCTION                                     (SQUARE     OWN OR   EXPIRATION
PROPERTY NAME AND LOCATION                                     FOOTAGE)     LEASE       DATE
---------------------------                                   -----------   ------   ----------
<S>                                                           <C>           <C>      <C>
Equitable and Trinity Yachts Shipyards
  New Orleans, Louisiana(1).................................    225,000     Lease       2016
Halter Moss Point Shipyard
  Moss Point, Mississippi...................................    121,665     Own           --
Lockport Shipyard
  Lockport, Louisiana.......................................     97,000     Own           --
Moss Point Marine Shipyard
  Escatawpa, Mississippi....................................     75,000     Own           --
Gulfport Shipyards
  Gulfport, Mississippi.....................................    554,500     Own           --
Panama City Shipyard
  Panama City, Florida(2)...................................     35,000     Own           --
Port Bienville Shipyard
  Pearlington, Mississippi..................................     15,000     Own           --
</TABLE>

---------------

(1) In March 2000, the Company entered into a purchase agreement to sell the
    yacht division of its Vessels to a Company whose controlling stockholder is
    the former Chief Operating Officer of the Company and is currently a member
    of the Board of Directors.

(2) Facility is temporarily closed until demand warrants reopening.

                                       27
<PAGE>   28

     The principal shipyards dedicated to repair and conversion within the
Vessels segment are summarized in the table below:

<TABLE>
<CAPTION>
                                                          DRYDOCK FEATURES
                                     -----------------------------------------------------------
                                                        MAXIMUM    MAXIMUM
                                                        LIFTING    VESSEL
VESSELS -- REPAIR AND CONVERSION              NUMBER    CAPACITY    WIDTH    OWN OR   EXPIRATION
PROPERTY NAME AND LOCATION           ACRES   DRYDOCKS    (TONS)    (FEET)    LEASE       DATE
--------------------------------     -----   --------   --------   -------   ------   ----------
<S>                                  <C>     <C>        <C>        <C>       <C>      <C>
Gretna Shipyard
  Harvey, Louisiana................   30        1         1,800       55     Lease       2001
Halter Gulf Repair Shipyard
  New Orleans, Louisiana...........   59        4        22,400      120     Lease       2016
Bludworth Bond -- Houston
  Shipyard, Houston, Texas.........   11        4         2,000       65     Own           --
Bludworth Bond -- Texas City
  Shipyard, Texas City, Texas......    4        3         4,500       80     Lease       2015
Halter-Calcasieu Shipyard
  Sulphur, Louisiana...............   35        3         2,200       60     Own           --
</TABLE>

  Engineered Products Segment

     The Company's Engineered Products segment headquarters is located in St.
Paul, Minnesota in two buildings that, together, occupy 47,000 square feet. The
Engineered Products segment also operates small satellite sales offices in
Houston, Texas; Metairie, Louisiana; Slidell, Louisiana; Covington, Louisiana;
and Gulfport, Mississippi. Through the BLM Companies, it also leases office
space in Carquefou, France; Pusan, South Korea; Shanghai, China and St.
Petersburg, Russia.

     The Engineered Products segment utilizes six plants to manufacture its
products. These manufacturing plants are summarized in the table below.

<TABLE>
<CAPTION>
                                                                COVERED
                                                              FABRICATION
                                                                 AREA
                                                                (SQUARE     OWN OR   EXPIRATION
PROPERTY NAME AND LOCATION                                    FOOTAGE)(1)   LEASE       DATE
--------------------------                                    -----------   ------   ----------
<S>                                                           <C>           <C>      <C>
Gulf Coast Manufacturing Division
(2 locations)
  Slidell, Louisiana........................................    155,000     Own          --
Covington Manufacturing Division
  Covington, Louisiana......................................     46,000     Own          --
Gulfport Manufacturing Division
  Gulfport, Mississippi.....................................     30,000     Own          --
BLM Properties (2 properties)
  Carquefou and Lanveoc, France.............................    100,000
                                                                 meters      Own         --
</TABLE>

---------------

(1) In square feet unless otherwise noted.

  Other Properties

     The Company also leases office space in Jackson, Mississippi, New Orleans,
Louisiana and Houston, Texas.

ITEM 3. LEGAL PROCEEDINGS

     The Company is involved in various claims and legal actions arising in the
ordinary course of business. See Item 14 -- Notes 13 and 14 to the Consolidated
Financial Statements for more information on legal and contractual matters
involving the Company.

                                       28
<PAGE>   29

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

     On November 3, 1999, stockholders of FGI voted affirmatively on the
following matters: (i) approval of the HMG merger agreement; (ii) approval of a
proposal to increase the number of authorized directors to 11, and (iii)
approval of an amendment to the FGI 1997 equity incentive plan to: (a) increase
the number of shares available for grant; and (b) to increase the number of
options which may be granted to some executive officers of FGI and HMG pursuant
to the transactions contemplated by the merger agreement. Stockholders did not
approve an amendment to the FGI charter to make the provision relating to the
indemnification of the officers and directors of FGI as favorable as the
indemnification provided to the then current officers and directors of HMG under
the HMG charter.

                      EXECUTIVE OFFICERS OF THE REGISTRANT

     The Executive Officers of the Company are elected annually to serve for the
ensuing year or until their successors have been elected. The following table
sets forth certain information with respect to the executive officers of the
Company:

<TABLE>
<CAPTION>
NAME                                   AGE                       POSITION
----                                   ---                       --------
<S>                                    <C>    <C>
J.L. Holloway........................  55     Chairman and Chief Executive Officer
John F. Alford.......................  40     President and Chief Operating Officer
John Dane III........................  48     Vice-Chairman, Former President and Chief
                                                Operating Officer
Rick S. Rees.........................  46     Executive Vice President and Chief Financial
                                                Officer
Ronald W. Schnoor....................  46     Executive Vice President, Offshore Operations
Richard T. McCreary..................  44     Group President, Halter Marine
Richard J. Juelich...................  48     Group President, Engineered Products Group
Maureen O'Connor Sullivan............  51     Senior Vice President, General Counsel and
                                                Secretary
</TABLE>

     Set forth below are descriptions of the backgrounds of the executive
officers and directors of the Company and their principal occupations for the
past five years:

     J. L. Holloway has served as the Chairman of the Board, Chief Executive
Officer and President of the Company since April 1997. In addition, Mr. Holloway
has served as the Chairman of the Board, Chief Executive Officer and President
of HAM Marine (now Friede Goldman Offshore, Inc., "FGO") from its formation in
1982 until April 1997, and from April 1997 Mr. Holloway has been the Chairman of
the Board of FGO. Mr. Holloway serves as a Director of Delta Health Group, a
company that operates and manages health care facilities in the South and as
President of State Street Properties, Inc., a commercial real estate development
firm headquartered in Mississippi. Mr. Holloway also serves as a Director of
Bancorp South, a publicly traded company.

     John Dane III has served as Vice-Chairman of the Board of Directors since
November 3, 1999. He served as President and Chief Operating Officer from
November 3, 1999 through January 12, 2000 when he resigned his officer positions
with the Company.

     John F. Alford has served as President and Chief Operating Officer since
March 23, 2000. Prior to this, he served as Executive Vice President of the
Company since December 1997. He served as Senior Vice President and Chief
Financial Officer of the Company from May 1997 to December 1997. Mr. Alford
joined FGO in 1996. Mr. Alford began his career in banking and previously served
as a member of the Board of Directors and as Chief Operating Officer of Baton
Rouge Bank and Trust Company, and a related financial firm, for more than the
past five years.

     Rick S. Rees has served as Executive Vice President and Chief Financial
Officer since November 3, 1999. Mr. Rees joined HMG in April 1997 and was
serving as Board member,

                                       29
<PAGE>   30

Executive Vice President and the Chief Financial Officer at the time of the
merger between HMG and FGI. Mr. Rees has been involved in the marine industry
since 1975. Prior to joining the Company, Mr. Rees was President of Maritime
Holdings, Inc., the parent company of Texas Drydock, Inc., a company with
operations in the offshore rig construction, conversion and repair business
which was acquired by HMG in April 1997. From 1989 to 1996, he was President of
Maritime Capital Corporation, a marine finance company. From 1975 to 1983, he
was with Halter Marine, Inc., an antecedent of Halter Marine Group, Inc., and
served in several capacities, including Chief Financial Officer and as a
director of the Company. Mr. Rees is a certified public accountant.

     Ronald W. Schnoor has served as Executive Vice President of the Company
since November 1998. He served as President of FGO from April 1997 and as the
Vice President, Manager of Operations of since 1992. Mr. Schnoor joined FGO in
1984 and previously served as both Senior Project Engineer and as a Project
Manager.

     Richard T. McCreary has served as Group President, Halter Marine, since
March 23, 2000. Prior to this, he served as Senior Vice President,
Administration and Repair since November 3, 1999. Mr. McCreary joined HMG in
April 1997 and was serving as Senior Vice President, Administration and Repair
at the time of the merger between HMG and FGI. From April 1995 to 1997, Mr.
McCreary served as President Gulf Division, Maritrans Operating Partners. From
1990 to 1995, Mr. McCreary served as Vice President Operations, Canal Barge
Company, Inc.

     Richard J. Juelich has served as Group President, Engineered Products Group
since November 3, 1999. Mr. Juelich joined HMG in November 1997 and was serving
as Group President, Engineered Products Group at the time of the merger between
HMG and FGI. From 1995 to 1997, Mr. Juelich served as President of AmClyde
Engineered Products, which was acquired by the Company in 1997. Mr. Juelich has
served as Chief Operating Officer of AmClyde Engineered Products since 1992.

     Maureen O'Connor Sullivan has served as Senior Vice President, General
Counsel and Secretary since November 3, 1999. Ms. Sullivan joined HMG in August
1997 and was serving as Senior Vice President, General Counsel and Secretary of
HMG at the time of the merger between HMG and FGI. In private practice with the
McGlinchey Stafford law firm from 1979 to 1997, partner since 1984, specializing
in business law and complex commercial litigation. Manager of the firm's Dallas
office and member of its Management Committee from 1989-1997.

                                       30
<PAGE>   31

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

     During most of 1998, the Company's Common Stock was traded on the Nasdaq
National Market. On December 1, 1998, the Company's Common Stock began trading
on the New York Stock Exchange. At March 20, 2000, there were 2,375 stockholders
of record of the Common Stock. The Company estimates that an additional 27,075
stockholders held the Common Stock in street name as of such date. The Company's
Common Stock was first listed for quotation on the Nasdaq National Market on
July 22, 1997. The following table sets forth the high and low sales price per
share of the Common Stock, as quoted on the Nasdaq National Market through
November 30, 1998 and on the New York Stock Exchange from December 1, 1998
through December 31, 1999, for the periods indicated.

<TABLE>
<CAPTION>
                                                         1999
                                                    ---------------
QUARTER                                              HIGH     LOW
-------                                             ------   ------
<S>                                                 <C>      <C>
First.............................................  $17.44   $ 9.94
Second............................................   19.19    12.63
Third.............................................   14.00    10.13
Fourth............................................   10.75     6.50
</TABLE>

<TABLE>
<CAPTION>
                                                         1998
                                                    ---------------
QUARTER                                              HIGH     LOW
-------                                             ------   ------
<S>                                                 <C>      <C>
First.............................................  $35.50   $20.56
Second............................................   41.88    26.00
Third.............................................   30.00    10.25
Fourth............................................   18.94     9.75
</TABLE>

     The Company does not anticipate paying cash dividends for the foreseeable
future. The Company expects that it will retain all available earnings generated
by the Company's operations for the development and growth of its business. Any
future determination as to the payment of dividends will be made at the
discretion of the Board of Directors and will depend on the Company's operating
results, financial condition, capital requirements, general business condition
and other factors as the Board of Directors deems relevant.

SALES OF UNREGISTERED SECURITIES

     In December 1999, the Company issued an aggregate of 90,000 shares of its
Common Stock pursuant to a Sale and Purchase Agreement dated November 22, 1999
between FGH and a company for the purchase of a jackup barge. The issuance of
such shares was the only issuance or sale of securities by the Company during
its most recently completed calendar year which was not registered under the
Securities Act. Such issuance was conducted in reliance upon the exemption from
registration provided in Section 4(2) of the Securities Act and the rules and
regulations promulgated thereunder. Furthermore, the certificate issued
representing the Company's securities in connection with this transaction
contained a restrictive legend. The shares are listed with the New York Stock
Exchange.

                                       31
<PAGE>   32

ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected historical financial data as of the
dates and for the periods indicated. The historical financial data set forth
below are derived from the audited consolidated financial statements of the
Company and the Company's predecessor companies, F&G Ltd. and HAM Marine
(collectively, the "Predecessors"). The consolidated financial statements
include the accounts of FGH, Inc. and its wholly-owned subsidiaries, including,
among others, Friede Goldman Offshore, Inc. ("FGO"), Friede & Goldman, Ltd.
("FGL"), Friede Goldman Newfoundland Limited ("FGN"), Friede Goldman France
S.A.S. ("FGF"), and Halter Marine, Inc. ("Halter") (collectively referred to as
the "Company"). These consolidated statements include the accounts of FGN for
all periods subsequent to January 1, 1998, FGF for all periods subsequent to
February 5, 1998, Halter for all periods subsequent to November 3, 1999 and all
other subsidiaries from their dates of incorporation. All significant
intercompany accounts and transactions have been eliminated. The following data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the historical financial
statements of the Company and the related notes thereto.

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                      ----------------------------------------------------
                                         1999        1998       1997      1996      1995
                                      ----------   --------   --------   -------   -------
                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                   <C>          <C>        <C>        <C>       <C>
STATEMENT OF OPERATIONS DATA:
Contract revenue earned.............  $  479,698   $382,913   $113,172   $21,759   $19,865
Cost of revenue earned..............     474,391    293,712     75,236    15,769    13,510
                                      ----------   --------   --------   -------   -------
  Gross profit......................       5,307     89,201     37,936     5,990     6,355
Selling, general and administrative
  expenses..........................      42,475     32,365     11,963     6,673     3,862
Amortization of goodwill............       1,576        334        134        --        --
                                      ----------   --------   --------   -------   -------
  Operating income (loss)...........     (38,744)    56,502     25,839      (683)    2,493
Other income (expense):
Interest expense, net...............      (9,172)      (201)       673      (448)     (197)
Gain (loss) on asset sales..........          (8)      (374)     3,922       349     1,869
Other...............................         (43)        38        776     3,571       756
                                      ----------   --------   --------   -------   -------
  Income (loss) before income
     taxes..........................     (47,967)    55,965     31,210     2,788     4,921
Income tax expense (benefit)........     (17,141)    20,679      7,941        --        --
                                      ----------   --------   --------   -------   -------
          Net income (loss).........  $  (30,826)  $ 35,286   $ 23,269   $ 2,788   $ 4,921
                                      ==========   ========   ========   =======   =======
PRO FORMA NET INCOME:
Net income as reported above........                          $ 23,269   $ 2,788   $ 4,921
Pro forma income taxes(1)...........                            (3,980)   (1,032)   (1,821)
                                                              --------   -------   -------
          Pro forma net income......                          $ 19,289   $ 1,756   $ 3,100
                                                              ========   =======   =======
Net income (loss) per share:
  Basic.............................  $    (1.18)  $   1.46   $   1.10   $  0.15   $  0.27
  Diluted...........................       (1.18)      1.43       1.09      0.15      0.27
Pro forma net income per share:
  Basic.............................                          $   0.92   $  0.10   $  0.17
  Diluted...........................                              0.91      0.10      0.17
Weighted average shares outstanding
  Basic.............................      26,148     24,211     21,065    18,400    18,400
  Diluted...........................      26,148     24,599     21,297    18,400    18,400
</TABLE>

                                       32
<PAGE>   33

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31,
                                      ----------------------------------------------------
                                         1999        1998       1997      1996      1995
                                      ----------   --------   --------   -------   -------
                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                   <C>          <C>        <C>        <C>       <C>
STATEMENT OF CASH FLOWS DATA:
Cash provided by (used in) operating
  activities........................  $  (61,061)  $ 21,088   $ 52,122   $ 4,875   $   269
Cash used in investing activities...      (4,747)   (77,299)   (26,541)   (3,866)   (2,410)
Cash provided by (used in) financing
  activities........................      39,558     41,156     29,947      (706)    2,581
OTHER FINANCIAL DATA:
Depreciation and amortization.......  $   13,127   $  5,875   $  1,608   $   696   $   425
Capital expenditures................       7,502     60,738     26,595     2,357     2,670
EBITDA(2)...........................     (25,439)    62,155     28,464     1,092     2,919
BALANCE SHEET DATA:
Working capital.....................  $   83,819   $  5,859   $ 45,522   $ 1,104   $ 2,714
Net property, plant and equipment...     334,642    139,078     11,817     5,546     4,079
Total assets........................   1,000,892    314,560    142,555    27,582    14,980
Long-term debt......................     299,075     45,863     25,767     2,853     3,270
Stockholders' equity................     248,121     85,290     63,805     6,219     5,255
</TABLE>

---------------

(1) The pro forma provision for income taxes gives pro forma effect to the
    application of federal and state income taxes to the Company as if it had
    been a C Corporation for tax purposes for all periods presented. Prior to
    June 1997, the Company and the Predecessors operated as S Corporations for
    federal and state income tax purposes. In June 1997, the stockholders of the
    Company and the Predecessors made elections terminating the S Corporation
    status of the Company and the Predecessors. As a result, the Company became
    subject to corporate level income taxation following the termination of such
    elections.

(2) EBITDA represents operating income plus depreciation, amortization and
    non-cash compensation expense related to the issuance of stock and stock
    options to employees. EBITDA is not a measure of cash flow, operating
    results or liquidity as determined by generally accepted accounting
    principles. The Company has included information concerning EBITDA as
    supplemental disclosure because management believes that EBITDA is commonly
    accepted as providing useful information regarding a company's historical
    ability to incur and service debt. Management of the Company believes that
    factors which should be considered by investors in evaluating EBITDA
    include, but are not limited to, trends in EBITDA as compared to cash flow
    from operations, debt service requirements, and capital expenditures.
    Management of the Company believes that the trends depicted by the Company's
    historical EBITDA reflect historical fluctuations in the Company's business
    and the recent increase in the level of the Company's activities. EBITDA as
    defined and measured by the Company may not be comparable to similarly
    titled measures of other companies. Further, EBITDA should not be considered
    in isolation or as an alternative to, or more meaningful than, net income or
    cash flow provided by operations as determined in accordance with generally
    accepted accounting principles as an indicator of the Company's
    profitability or liquidity.

                                       33
<PAGE>   34

ITEM 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS

INTRODUCTION

     The Company's results of operations are affected primarily by conditions
prevailing in the offshore energy industry. In particular, the level of demand
for the Company's services is affected by the level of demand for the services
of offshore drilling contractors, including the demand for offshore supply
vessels and specific types of offshore drilling rigs having required drilling
capabilities or technical specifications. This, in turn, is dependent upon the
condition of the oil and gas industry and, in particular, the level of capital
expenditures of oil and gas companies with respect to offshore drilling
activities and the ability of oil and gas companies to access or generate
capital sufficient to fund capital expenditures for offshore exploration,
development, and production activities. These capital expenditures are
influenced by prevailing oil and natural gas prices, expectations about future
prices, the level of activity in offshore oil and gas exploration, development
and production, the cost of exploring for, producing and delivering oil and gas,
the sale and expiration dates of offshore leases in the United States and
overseas, the discovery rate of new oil and gas reserves in offshore areas,
local and international political and economic conditions, and the ability of
oil and gas companies to access or generate capital sufficient to fund capital
expenditures for offshore exploration, development and production activities.

     Over the past several years, oil and natural gas prices and the level of
offshore drilling activity have fluctuated substantially. According to Offshore
Data Services, Inc. as of March 13, 2000, the utilization rate of the worldwide
fleet of offshore mobile drilling units was 76.6%, only slightly less than the
81% utilization rate of a year ago. This level of drilling activity is generally
attributed to a number of recent industry trends, including three-dimensional
seismic mapping, directional drilling and other advances in technology that have
increased drilling success rates and efficiency and have led to the discoveries
of oil and gas in subsalt geological formations (which generally are located in
depths of 300 to 800 feet of water) and deepwater areas of the Gulf of Mexico.
In the deepwater areas where larger and more technically advanced drilling rigs
are needed, increased drilling activity resulted in increased demand for newly
constructed semi-submersible drilling rigs and for retrofitting offshore
drilling rigs.

     A significant or prolonged reduction in oil and natural gas prices or the
expectation that prices will be lower in the future would likely depress
offshore drilling and development activity which would reduce demand for the
Company's services and could result in a material adverse effect on the
Company's operating results. The business of the Company, including the types of
projects it undertakes, will also be affected by other factors affecting
offshore drilling contractors, including factors such as: (i) the condition and
drilling capabilities of the existing offshore drilling rigs operated by
offshore drilling contractors and (ii) the relative costs of building a new
offshore drilling rig with advanced capabilities versus the costs of
retrofitting or converting an existing offshore drilling rig to provide similar
capabilities.

     Low prices for crude oil and natural gas experienced during 1998 and much
of 1999 created a general decline in the demand for the Company's products.
Although the prices of these commodities have recently increased, there can be
no assurance that drilling contractors and vessel operators will proceed with
plans for new construction or modification of drilling units and or vessels. The
Company has maintained a significant contract backlog of deepwater related
projects. At December 31, 1998, the Company's backlog was approximately $364.7
million. The Company's backlog at December 31, 1999 was approximately $689.1
million, of which $353.9 million was related to contracts acquired through the
HMG merger. Over $403.6 million of total backlog at year end was related to
deepwater projects. Some new contracts included in backlog are subject to
cancellation by the customers, however, the Company has had no indication that
any of its contracts might be canceled. In February 1999, the Company entered
into a $143.2 million contract with a Brazilian company for the new build
construction of a Friede & Goldman, Ltd. designed Millennium S.A. semi-
submersible drilling rig. The contract contained a financing contingency which
was not met;

                                       34
<PAGE>   35

therefore, it is not included in the Company's backlog at December 31, 1999. The
Company does not currently anticipate that this project will result in a firm
contract.

     A significant portion of the Company's existing contracts are on a
fixed-price basis. The Company would be liable for the full amount of any cost
overruns under these fixed-price contracts. The Company generally attempts to
cover anticipated increased costs through an estimation of these costs, which is
reflected in the original price of the contract. However, revenue, cost and
gross profit realized on a fixed-price contract will often vary from the
estimated amounts because of many factors, including changes in job conditions
and variations in labor and equipment productivity over the term of the
contract. The results of operations and financial condition of the Company could
be materially adversely affected if significant contracts are underpriced or
revenue and gross profits on large projects are different from those originally
estimated.

     The construction of offshore drilling rigs involves complex design and
engineering and equipment and supply delivery coordination throughout
construction periods that may exceed two years. It is not unusual in such
circumstances to encounter design, engineering, equipment delivery schedule
changes and other factors that impact the builder's ability to complete
construction of the rig in accordance with the original contractual delivery
schedule. The Company's construction contracts generally require the customer to
compensate the Company for additional work or expenses incurred due to customer
requested change orders or failure of the customer to provide design or
engineering information or equipment, if specified in the contract for the
customer to provide these items. Under these circumstances, the Company
generally negotiates with the customer with respect to the amount of
compensation to be paid following the time at which the change order was
requested or the customer failed to provide the items required by the contract.
The Company is subject to risk that when it is unable to obtain, through
negotiation, arbitration, litigation or otherwise, adequate amounts to
compensate for the additional work or expenses incurred due to customer
requested change orders or failure by the customer to timely provide items
required to be provided by the customer. A failure to obtain adequate
compensation for these matters could require the Company to record an adjustment
to amounts of revenue and gross profit that were recognized in prior periods
under the percentage of completion accounting method. Any such adjustments, if
substantial, could have a material adverse effect on the results of operations
and financial condition of the Company.

     Additionally, many of the Company's existing contracts contain provisions
requiring the payment by the Company of liquidated damages in the event that it
fails to meet specified performance deadlines. It cannot be assured that the
Company will not be required to make payments under these liquidated damages
provisions or that the requirement to make payments will not have a material
adverse effect on the Company's operating results. In certain circumstances,
delivery delay beyond a specified period would entitle a customer to terminate
the contract and to elect various remedies, including return of the purchase
price.

     The Company's operations are subject to variations from quarter to quarter
and year to year resulting from fluctuations in demand for the Company's
services and, due to the large amounts of revenue that are typically derived
from a small quantity of projects and the timing of the receipt of awards for
new projects. In addition, the Company schedules projects based on the timing of
available capacity to perform the services requested and, to the extent that
there are delays in the arrival of a drilling rig or production unit into the
shipyard, the Company generally is not able to utilize the excess capacity
created by such delays. Although the Company may be able to offset the effect of
such delays through adjustments to the size of its skilled labor force on a
temporary basis, such delays may adversely affect the Company's results of
operations in any period in which such delays occur.

     Most of the Company's revenue is earned on a percentage-of-completion basis
based generally on the ratio of total costs incurred to the total estimated
costs. Accordingly, contract price and cost estimates are reviewed periodically
as the work progresses, and adjustments to income proportion-

                                       35
<PAGE>   36

ate to the percentage of completion are reflected in the period when such
estimates are revised. To the extent that these adjustments result in a
reduction or elimination of previously reported profits, the Company would have
to recognize a charge against current earnings, which may be significant
depending on the size of the project or the adjustment.

     In January 2000, the Company entered into a Confidential Settlement
Agreement with Ocean Rig ASA, a Norwegian company, relating to a dispute with
respect to contracts to construct two semi-submersible drilling rigs. Among
other things, the settlement with Ocean Rig allowed for an increase of $21.5
million in the contract price of each rig and revised delivery dates of October
31, 2000 and December 31, 2000 for the two rigs. The Company has adjusted
previously recognized revenues and gross profits to reflect the percentage of
completion based on the revised delivery dates and related cost estimates and
expected recoveries. The net impact of this adjustment to account for the
settled claim and related additional costs incurred and for the timing of
recognition of related revenues and expenses was a net reduction for the year
ended December 31, 1999 of approximately $37.4 million. The amount of the
adjustment was based on, among other things, the outcome of the settlement
negotiations and management's estimate of the percentage of completion of the
projects at the end of the year.

     In late March 2000, FGOT and Petrodrill reached an agreement, which is
subject to various approvals, including that of MARAD and the Boards of
Directors of each company, to amend two contracts relating to the construction
of two semi-submersible rigs (the "Amendment No. 2"). Amendment No. 2 will stay
for six months the litigation proceeding previously commenced in the United
Kingdom (the "UK action") and will dismiss the litigation previously commenced
in the United States, with prejudice, except as to FGOT's rights to pursue its
enumerated claims against Petrodrill for additional compensation in the UK
action. Under Amendment No. 2, the delivery dates for the rigs will be extended
until August 1, 2001 and November 1, 2001, respectively; Petrodrill will waive
all of its claims against FGOT accruing prior to the Amendment, including its
right to terminate the contracts for events occurring prior to Amendment No. 2;
total liquidated damages for late delivery beyond the new delivery dates will be
capped at $6.6 million for each rig; any future right of Petrodrill to terminate
each contract will accrue only if the respective rig is not delivered within 180
days of its extended delivery date, as such date may be further extended under
other contractual provisions; and FGOT will credit Petrodrill up to $2 million
per rig against any amounts awarded against Petrodrill, but only to the extent
FGOT recovers against Petrodrill. After the six month stay of the UK action,
FGOT intends to vigorously pursue its claims for additional compensation.

     Notwithstanding the Amendment, the Company intends to proceed with
construction of the rigs while pursuing any and all remedies available to it
under the contracts and applicable law. If the contract delivery dates are not
extended as provided in Amendment No. 2 for any reason, including any failure to
obtain an approval required for Amendment No. 2 to become effective, FGOT will
not be in a position to deliver the rigs on or before the pre-Amendment delivery
dates, or the date on which Petrodrill's contractual right to terminate the
contracts will accrue. Petrodrill's remedies upon termination include among
others, the right to rescind the contracts, transfer the rigs to FGOT, and
demand reimbursement for all amounts paid, including amounts paid for owner
furnished equipment. FGOT would likely not be in a position to meet such a
demand, and if such demand was successfully asserted, it could have a material
adverse effect on the Company.

     Based upon current estimates, the Company believes that it will incur
approximately $60.0 million in costs in excess of the contract prices, as
adjusted for change orders, to complete these contracts. A provision for these
excess costs has been provided in the Company's purchase accounting treatment of
assets and liabilities acquired through the merger with HMG. The balance of the
excess costs at December 31, 1999 was approximately $49.7 million and is
included in the reserve for losses on uncompleted contracts in the consolidated
balance sheets. Management expects such costs will be expended by the Company
over eighteen months beginning in April 2000. Any revisions of the estimates of
costs and claims recoveries in the next 12 months should be

                                       36
<PAGE>   37

recorded as an adjustment to goodwill. The funding of these excess costs could
have a significant impact on the Company's liquidity. See "Liquidity and Capital
Resources."

     See Item 14 -- Note 14 of the Notes to the Consolidated Financial
Statements for more information relating to these contractual disputes.

RESULTS OF OPERATIONS

     The consolidated financial statements include the accounts of FGH, Inc. and
its wholly-owned subsidiaries, including, among others, Friede Goldman Offshore,
Inc. ("FGO"), Friede & Goldman, Ltd. ("FGL"), Friede Goldman Newfoundland
Limited ("FGN"), Friede Goldman France S.A.S. ("FGF"), and Halter Marine,
Inc.("Halter")(collectively referred to as the "Company"). These consolidated
statements include the accounts of FGN for all periods subsequent to January 1,
1998, FGF for all periods subsequent to February 5, 1998, HMG for all periods
subsequent to November 3, 1999 and all other subsidiaries from their dates of
incorporation. All significant intercompany accounts and transactions have been
eliminated.

  Comparison of the Years Ended December 31, 1999 and 1998

     During the year ended December 31, 1999, the Company generated revenue of
$479.7 million, an increase of 25.3%, compared to the $382.9 million generated
for the year ended December 31, 1998. Of this increase, approximately $109.8
million was attributable to businesses acquired through the HMG merger. Revenue
for the Offshore segment increased by $68.8 million or 20.7% in 1999. This
increase was primarily caused by (1) revenues of approximately $61.8 million
generated by offshore entities acquired in the HMG merger, and (2) approximately
$90.0 million attributable to the ongoing construction of two semi-submersible
drilling rigs, offset by (3) an $83.2 million decline in revenue primarily
related to the completion and outfitting of seven conversions in 1998 and a
portion of 1999 which were not replaced in 1999 due to a decrease in demand for
conversion projects. Also contributing to the Company's overall growth in
revenue in 1999 were $38.9 million in revenues generated by the Vessels segment
acquired through the HMG merger. Revenue for the Engineered Products segment
decreased $11.6 million or 22.4% in 1999 as result of the completion of projects
which were not replaced due to a decrease in demand. Revenues in this segment
include $9.1 million generated by the Engineered Products Group acquired in the
HMG merger.

     Cost of revenue was $474.4 million for the year ended December 31, 1999
compared to $293.7 million for the year ended December 31, 1998. Gross profit
decreased from $89.2 million or 23.3% in 1998 to $5.3 million or 1.1% in 1999.
Gross profit for the Offshore segment decreased from 23.4% in 1998 to a negative
2.0% in 1999. This decrease was primarily related to a shift in the mix of the
segment's business to new build completion of semi-submersible drilling rigs,
from the higher margin, business of repair, conversion and retrofitting of
drilling rigs. The Company recorded a gross loss on two contracts in the amount
of $37.4 million, including a provision for future losses of $16.5 million. In
addition, a third contract for the completion of a semi-submersible rig
experienced minimal gross profit. These decreases were offset by an $8.9 million
increase in gross profit generated by offshore operations acquired in the HMG
merger. Gross profit for the newly acquired Vessels segment was $5.9 million or
15.3%. Gross profit for the Engineered Products segment decreased from 23.0% in
1998 to 18.7% in 1999 primarily as result of the lower volume of revenue
recognized by the segment in 1999 compared to 1998.

     Selling, general and administrative expenses ("SG&A expenses") were $42.5
million for the year ended December 31, 1999 compared to $32.4 million for the
year ended December 31, 1998. The increase in SG&A expenses primarily reflects
the inclusion of SG&A expenses of HMG for two months as well as an increase in
sales and administrative workforce and facilities due to overall growth of the
Company's business. Legal fees also increased from 1998 to 1999.

                                       37
<PAGE>   38

     Amortization of goodwill increased $1.3 million from $0.3 million for the
year ended December 31, 1998 to $1.6 million for the year ended December 31,
1999 primarily as a result of the HMG merger.

     Operating income decreased by $95.2 million from $56.5 million for the year
ended December 31, 1998 to an operating loss of $38.7 million for the year ended
December 31, 1999 primarily as a result of increased revenue and decreased gross
profit discussed in the preceding paragraphs.

     Net interest expense (interest expense less interest income) increased to
$9.2 million for the year ended December 31, 1999 from $0.2 million for the year
ended December 31, 1998, primarily as a result of: (1) interest and fees
associated with increased borrowings by the Company prior to the merger; (2)
interest expense in the amount of $1.6 million related to accretion of the $70.3
million discount recorded to reflect the fair market value of the $185.0 million
4 1/2% Convertible Subordinated Notes assumed in connection with the HMG merger;
(3) additional interest expense as a result of the $210.9 in debt assumed by the
Company in connection with the HMG merger; and (4) increased usage and
amortization of fees associated with the New Credit Facility (See Management's
Discussion and Analysis -- "Liquidity and Capital Resources").

     The change in other income (expense) was primarily attributable to
miscellaneous items, none of which are individually material.

     The Company had an income tax benefit of $17.1 million in 1999 compared to
income tax expense of $20.7 million in 1998 reflecting the Company's pretax loss
of $48.0 million in 1999 compared to pretax income of $56.0 million in 1998.

  Comparison of the Years Ended December 31, 1998 and 1997

     During the year ended December 31, 1998, the Company generated revenue of
$382.9 million, an increase of 238%, compared to the $113.2 million generated
for the year ended December 31, 1997. This increase was caused by (1) an
increase in demand for conversion and retrofit services related to deep water
offshore drilling rigs, (2) revenues of approximately $71.0 million attributable
to the completion and outfitting of an existing semisubmersible drilling rig
hull, (3) approximately $62.2 million of revenues attributable to the new
construction of semi-submersible drilling rigs, and (4) revenues of
approximately $113.9 million generated by the Company's Marystown Facility and
French operations.

     Cost of revenue was $293.7 million for the year ended December 31, 1998
compared to $75.2 million for the year ended December 31, 1997, resulting in an
increase in gross profit from $37.9 million for the year ended December 31, 1997
to $89.2 million in the year ended December 31, 1998. The decrease in gross
profit as a percentage of revenues can be explained as follows: (1) the new
build construction of semisubmersible offshore drilling rigs generally results
in lower gross margin percentages than those generated from repair and retrofit
work, (2) the company earned smaller margin percentages on contracts assumed
upon the acquisition of the Marystown Facility, and (3) margin percentages
earned on equipment sales from the Company's French operations, while typically
higher than margins earned on new build construction are generally less than
those earned from repair and retrofit work. Management expects that gross
margins, as a percentage of revenues, may trend lower as a more significant
portion of the Company's total revenue is derived from the new construction of
offshore drilling rigs and from sales of equipment. Such lower gross margin
percentages result from a higher dollar volume of lower margin material and
subcontract costs included in cost of revenue, and from a greater portion of the
total project being performed on a fixed price basis. Gross margins on repair
and retrofit projects also vary based on, among other things, the size of the
project undertaken.

     Selling, general and administrative expenses ("SG&A expenses") were $32.4
million in the year ended December 31, 1998 compared to $12.0 million for the
year ended December 31, 1997. The increase in SG&A expenses reflects an increase
in sales and administrative workforce and

                                       38
<PAGE>   39

facilities due to overall growth of the Company's business, the additional
administrative costs associated with international activities and costs
associated with being a publicly held corporation.

     Operating income increased by $30.7 million from the year ended December
31, 1997 to $56.5 million for the year ended December 31, 1998 primarily as a
result of increased revenue and gross profit discussed in the preceding
paragraphs.

     Net interest expense (interest expense less interest income) declined to
$0.2 million for the year ended December 31, 1998 from $0.6 million for the year
ended December 31, 1997, primarily as a result of increased interest expense
attributable to borrowings related to FGO East and equipment additions in the
existing FGO West yard.

     The change in other income (expense) is primarily attributable to
miscellaneous items, none of which are individually material.

     The provision for income taxes for the year ended December 31, 1998
reflects a composite income tax rate of approximately 37% including foreign
taxes of approximately $2.9 million. The actual and proforma provision for
income taxes for the year ended December 31, 1997, reflects a combined Federal
and State tax rate of 38%. The decline in the overall rate for the year ended
December 31, 1998 is the result of available state income tax credits related to
increased employment levels at the Company's Pascagoula, Mississippi locations.

LIQUIDITY AND CAPITAL RESOURCES

     Historically, the Company has financed its business activities through
funds generated from operations, a credit facility secured by accounts
receivable and long-term borrowings secured by assets acquired with proceeds
from such borrowings. Net cash provided by (used in) operations was ($61.1)
million and $21.1 million for the year ended December 31, 1999 and 1998,
respectively. The primary reason for the change in cash flows from operating
activities in 1999 was the Company's net loss of $30.8 million, an increase in
net contract costs of $33.0 million, and a decrease in accounts payable of $37.0
million.

     During the year ended December 31, 1999, the Company incurred approximately
$7.5 million in capital expenditures compared to $60.7 million during 1998 when
the Company was completing its FGO East Facility. In addition, in February 1998,
approximately $25.0 million was expended for the acquisition of the Company's
French subsidiary. Capital expenditures were funded in 1999 primarily from the
Company's cash balances, and borrowings under a credit facility. The 1998
capital expenditures and acquisition costs were funded from operating cash flow,
borrowings under its credit facility, the issuance of $24.8 million in bonds
guaranteed by the United States Maritime Administration ("MARAD"), the issuance
of $18.0 million of Mississippi Business Finance Corporation Taxable Industrial
Development Revenue Bonds (the "MBFC Bonds"), and $8.0 million in equipment
financing. The Company anticipates that its level of capital expenditures during
2000 will not exceed $10.0 million.

     During 1998, the Board of Directors authorized a stock repurchase plan
under which the Company could repurchase shares of its common stock in open
market transactions with an aggregate fair value of up to $30.0 million. Through
December 31, 1998, the Company had repurchased 1,188,900 shares of its Common
Stock for an aggregate of approximately $15.5 million. The Company utilized a
$15.0 million short-term credit facility provided by an investment banking firm
to finance a portion of the purchases. No amounts were outstanding under that
arrangement as of December 31, 1998. During 1999 the Company's Board of
Directors discontinued the share repurchase program, and no additional purchases
were made during the year.

     At December 31, 1998, the Company had invested approximately $12.8 million
in an unconsolidated subsidiary ("Ilion LLC") in which the Company currently
owns a 50% equity interest. The Company's ownership interest in Ilion LLC is
expected to be reduced to 30%. Ilion LLC owns a hull for a semi-submersible
drilling rig that requires substantial completion and outfitting. The Company
                                       39
<PAGE>   40

and the other member of Ilion LLC (who is also one of the Company's largest
customers) are considering various options for formal arrangements related to
the hull, including financing of the completion, securing a contract for
utilization or sale of the rig, or other options. The Company's investment in
Ilion LLC was financed through cash flow from operations. Other than the initial
purchase of the drilling rig hull, Ilion LLC has had no significant activity as
of December 31, 1998. The Company's investment in Ilion LLC is accounted for
using the equity method.

     In March 1997, FGO entered into a credit facility (the "Credit Facility")
that provided for borrowings of up to $10.0 million, subject to a borrowing base
limitation equal to 80% of eligible receivables. The Credit Facility was secured
by contract-related receivables. During 1998, the borrowing capacity under the
Credit Facility was increased to $25.0 million and was extended until March 31,
1999. During 1999, the Company extended the maturity of its Credit Facility and
entered into a supplemental bank credit facility (the "Supplemental Facility")
to provide for an additional $20 million in borrowings. Borrowings under the
Credit Facility and the Supplemental Facility were secured by the pledge of
substantially all of the Company's domestic assets not otherwise encumbered.
Borrowings under the Credit Facility and the Supplemental Facility were to
mature on the earlier of November 26, 1999, or the closing of the HMG merger.

     In connection with the merger with HMG, on November 3, 1999, the Company
entered into a new secured bank revolving and letter of credit facility ("the
New Credit Facility") that replaced the Credit Facility. Under the terms of the
New Credit Facility, the Company may borrow up to $120 million under a senior
secured revolving credit facility. In addition, the New Credit Facility provides
a $44.2 million senior secured letter of credit facility. The New Credit
Facility has a three-year term and is secured by substantially all of the
Company's otherwise unencumbered assets, all of the Company's domestic
subsidiaries and 67% of the stock of its foreign subsidiaries. The interest rate
ranges from 1.375% to 2.75% over the London Inter Bank Offered Rate ("LIBOR"),
or the base rate (as defined), at the Company's choice. Under the New Credit
Facility, the Company is obligated to pay certain fees, including an annual
commitment fee in an amount of .50% of the unused portion of the commitment.
Amounts outstanding under the New Credit Facility may not exceed an amount based
on specified percentages of the Company's accounts receivable, inventory and net
contract related investments. At December 31, 1999, the Company had $106.7
million in cash advances under the credit agreement with $4.2 million available
under the New Credit Facility. Average usage since inception of the New Credit
Facility has been $96.4 million, resulting in an average availability of $13.9
million over the same period.

     The New Credit Facility requires the Company to comply with certain
financial covenants, including limitations on additional borrowings and capital
expenditures, certain debt coverage ratios, minimum net worth and other
customary requirements. At December 31, 1999, the Company was not in compliance
with the leverage ratio, the minimum fixed charge coverage ratio and the minimum
net worth requirement. On March 28, 2000, the Company obtained a waiver of
noncompliance with these requirements and an amendment to the New Credit
Facility that among other things, amends the leverage ratio, the fixed charge
coverage ratio, and minimum net worth requirement, and requires the commitment
amount under the New Credit Facility to be reduced by 75% of the net proceeds of
asset sales. The amendment changes the interest rate to the lender's base rate
plus 2.00% per annum until the Company completes certain of its contracts. It is
not anticipated that the Company will complete these contracts until the fourth
quarter of 2001. In connection with the amendment, the Company is obligated to
pay certain fees, including an annual commitment fee in an amount of 1.00% of
the unused portion of the commitment.

     The Company believes that cash generated from operations, including the
collection of recoverable income taxes, ($38.7 million at December 31, 1999),
the settlement of certain recoverable contract claims, and funds available under
the New Credit Facility will be sufficient to fund its requirements for working
capital (including contract losses), capital expenditures, and other capital
needs for at least the next 12 months and to remain in compliance with the new
loan covenants. However, additional debt or equity financing or asset sales may
be required if the
                                       40
<PAGE>   41

Company's estimated costs on the Ocean Rig contracts and/or the Petrodrill
contracts are materially higher than those utilized in preparing the financial
statements at December 31,1999 or if the Company's level of business activity
picks up considerably and the Company is unable to negotiate contract terms that
provide for contract funding as costs are incurred. Although the Company
believes that, under such circumstances, it would be able to obtain additional
funding from these sources, there can be no assurance that funding from these
sources will be available to the Company for these purposes or, if available,
will be on terms satisfactory to the Company.

YEAR 2000 ("Y2K")

     Year 2000 issues arose from the fact that many software applications,
hardware and equipment and embedded chip systems identify dates using only the
last two digits of the year. These products may not have been able to
distinguish between dates in the Year 2000 and dates in the year 1900.

     In prior periods, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
critical information technology and non-information technology systems and
believes those systems successfully responded to the Year 2000 date change.
Expenses incurred by the Company in association with the overall Year 2000
efforts were insignificant. The Company is not aware of any material problems
resulting from Year 2000 issues, either with products, internal systems, or the
products and services of third parties. The Company will continue to monitor its
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

     In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. Given the Company's historically
minimal use of these types of instruments, the Company does not expect a
material impact on its statements from adoption of SFAS 133.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company is exposed to interest rate risk due to changes in interest
rates, primarily in the United States. The Company's policy is to manage
interest rates through the use of a combination of fixed and floating rate debt.
The Company currently does not use any derivative financial instruments to
manage its exposure to interest rate risk.

                                       41
<PAGE>   42

     The table below provides information about the Company's future maturities
of principal for outstanding debt instruments and fair value at December 31,
1999. All instruments described are non-trading instruments ($ in thousands).

<TABLE>
<CAPTION>
                                                                         THERE-      FAIR
                        2000      2001      2002      2003      2004      AFTER     VALUE
                       -------   ------   --------   ------   --------   -------   --------
<S>                    <C>       <C>      <C>        <C>      <C>        <C>       <C>
Long-term debt,
  including current
  portion
  Fixed rate.........  $13,645   $6,285   $  4,831   $4,765   $192,166   $52,977   $192,437
  Average interest
     rate............     5.10%    5.16%      5.12%    5.09%      5.06%     6.79%
  Variable rate......                     $106,708                                 $106,708
  Average interest
     rate............                        LIBOR
                                              plus
                                             1.375%
                                          to 2.750%
</TABLE>

FOREIGN CURRENCY RISKS

     Although the majority of the Company's transactions are in U.S. dollars,
two of the Company's subsidiaries conduct some of their operations in various
foreign currencies. The Company currently does not use any off balance sheet
hedging instruments to manage its risks associated with its operating activities
conducted in foreign currencies unless that particular operation enters into a
contract in a foreign currency which is different that the local currency of the
particular operation. In limited circumstances and when considered appropriate,
the Company will utilize forward exchange contracts to hedge the anticipated
purchases and/or sales. The Company has historically used these instruments
primarily in the manufacturing and selling of certain marine deck equipment. The
Company attempts to minimize its exposure to foreign currency fluctuations by
matching its revenues and expenses in the same currency for its contracts. As of
December 31, 1999, the Company does not have any outstanding forward exchange
contracts.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The information required by this Item 8 is contained in a separate section
of this report. See Consolidated Financial Statements in Item 14 of this report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     Prior to the merger with HMG, FGI had historically engaged Arthur Andersen
LLP, ("AA") as its certifying accountant while HMG had historically engaged
Ernst and Young LLP ("E&Y"). With the merger, a process was established to
select between AA and E&Y as the certifying accountant for the merged entity.
Selection of E&Y as the certifying accountant was recommended to the FGH Audit
Committee on December 1, 1999. The Audit Committee approved the selection on
December 14, 1999 and so reported to the FGH Board of Directors at which time AA
was dismissed.

     The reports of AA on the financial statements of FGI for the past two
fiscal years contained no adverse opinion or disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope, or accounting principles.

     In connection with its audits for the two most recent fiscal years and
through December 13, 1999 there have been no disagreements with AA on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of AA would have caused them to make reference thereto in their
reports on the financial statements for such years. During the two most recent
fiscal years and through Decem-

                                       42
<PAGE>   43

ber 13, 1999 there have been no reportable events with regard to changes in or
disagreements with accountants (as defined in Regulation S-K, Item 304(a)(1)(v))
other than the information reported above.

                                    PART III

ITEM 10. DIRECTOR AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this Item 10 is incorporated by reference to
the Company's definitive Proxy Statement (the "Proxy Statement") to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended, within 120 days after the end of
the fiscal year covered by this report. See also "Executive Officers of the
Registrant" included in Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item 11 is incorporated by reference to
the Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item 12 is incorporated by reference to
the Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item 13 is incorporated by reference to
the Proxy Statement.

                                       43
<PAGE>   44

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a)(1) Financial Statements

     The Consolidated Financial Statements listed by the Registrant on the
accompanying Index to Consolidated Financial Statements are filed as part of
this Annual Report. (See page F-1).

     (a)(2) Financial Statement Schedules

     The required information is included in the Consolidated Financial
Statements or Notes thereto.

     (a)(3) Exhibits

     EXHIBITS

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER                                 DESCRIPTION
       -------                                 -----------
<C>                    <S>
          2.1          -- Agreement and Plan of Merger, dated as of June 1, 1999
                          between Friede Goldman International Inc. and Halter
                          Marine Group, Inc. (incorporated by reference to Exhibit
                          2.1 to Friede Goldman International Inc.'s Registration
                          Statement on Form S-4 (Registration No. 333-87853) filed
                          with the SEC on September 27, 1999).
          2.2          -- Amendment No. 1, dated September 14, 1999, to Agreement
                          and Plan of Merger between Friede Goldman International
                          Inc. and Halter Marine Group, Inc. (incorporated by
                          reference to Exhibit 2.2 to Friede Goldman International
                          Inc.'s Registration Statement on Form S-4 (Registration
                          No. 333-87853) filed with the SEC on September 27, 1999).
          3.1          -- Articles of Incorporation of Friede Goldman Mississippi,
                          Inc.,as amended. (incorporate by reference to Exhibit 3.1
                          to Friede Goldman International Inc.'s Annual Report on
                          Form 10-K for the fiscal year ended December 31, 1998).
          3.2          -- Amended and Restated Bylaws of Friede Goldman Halter,
                          Inc. (incorporated by reference to Exhibit 3.1 to Friede
                          Goldman Halter, Inc.'s Current Report on Form 8-K filed
                          with the SEC on November 9, 1999).
          4.1          -- Specimen Stock Certificate. (incorporated by reference to
                          Exhibit 3 to Friede Goldman International Inc.'s
                          Registration Statement on Form 8-A (File No. 001-14627)
                          filed with the SEC on November 18, 1998).
          4.2          -- Stockholder's Agreement by and between Friede Goldman
                          International Inc. and J. L. Holloway, dated as of June
                          1, 1999. (incorporated by reference to Exhibit 4.1 to
                          Friede Goldman International Inc.'s Registration
                          Statement on Form S-4 (Registration No. 333-87853) filed
                          with the SEC on September 27, 1999).
          4.3          -- Registration Rights Agreement among Friede Goldman
                          International Inc., J. L. Holloway, Carl M. Crawford,
                          Ronald W. Schnoor, James A. Lowe, III and John F. Alford.
                          (incorporated by reference to Exhibit 4.3 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-4 (Registration No. 333-87853) filed with the SEC
                          on September 27, 1999).
</TABLE>

                                       44
<PAGE>   45

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER                                 DESCRIPTION
       -------                                 -----------
<C>                    <S>
          4.4          -- Amendment No. 1 to Registration Rights Agreement among
                          Friede Goldman International Inc., J. L. Holloway, Carl
                          M. Crawford, Ronald W. Schnoor, James A. Lowe, III, John
                          F. Alford, Holloway Partners, L.P., Carl Crawford
                          Children's Trust and Bodin Children's Trust.
                          (incorporated by reference to Exhibit 4.4 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-4 (Registration No. 333-87853) filed with the SEC
                          on September 27, 1999).
          4.5          -- Indenture dated September 15, 1997 between the Halter
                          Marine Group, Inc. and the United States Trust Company of
                          Texas, N.A., as Trustee for Halter Marine Group Inc.'s
                          4 1/2% Convertible Subordinated Notes due 2004.
                          (incorporated by reference to Exhibit 4.1 to Halter
                          Marine Group Inc.'s Registration Statement on Form S-3
                          (Registration No. 333-38491) filed with the SEC on
                          October 22, 1997).
          4.6          -- First Supplemental Indenture, dated as of November 2,
                          1999 and effective as of November 3, 1999, by and among
                          Friede Goldman International Inc., Halter Marine Group,
                          Inc. and U.S. Trust Company of Texas, N.A., as Trustee
                          for the 4 1/2% Convertible Subordinated Notes due 2004.
                          (incorporated by reference to Exhibit 4.1 to Friede
                          Goldman Halter, Inc.'s Current Report on Form 8-K filed
                          with the SEC on November 9, 1999).
          4.7          -- Registration Rights Agreement dated September 15, 1997,
                          among the Company and Donaldson, Lufkin & Jenrette
                          Securities Corporation and Merrill Lynch, Pierce, Fenner
                          & Smith Incorporated. (incorporated by reference to
                          Exhibit 4.2 to Halter Marine Group Inc.'s Registration
                          Statement on Form S-3 (Registration No. 333-38491) filed
                          with the SEC on October 22, 1997).
          4.8          -- Rights Agreement, dated December 7, 1998, between the
                          Company and American Stock Transfer & Trust Company, as
                          Rights Agent. (incorporated by reference to Exhibit 1 to
                          Friede Goldman International Inc.'s Registration
                          Statement on Form 8-A (File No. 001-14627) filed with the
                          SEC on January 12, 1999).
          4.9          -- First Amendment to Rights Agreement, dated as of October
                          18, 1999, between the Company and American Stock Transfer
                          & Trust Company, as Rights Agent. (incorporated by
                          reference to Exhibit 4.4 to Friede Goldman International
                          Inc.'s Registration Statement on Form 8-A/A (File No.
                          001-14627) filed with the SEC on October 20, 1999).
         10.1          -- Credit Agreement, dated as of November 3, 1999, among
                          Friede Goldman Halter, Inc., Wells Fargo Bank (Texas),
                          National Association, as administrative agent and
                          co-arranger, Banc One Capital Markets, Inc., as
                          co-arranger and syndication agent, and the lenders party
                          thereto. (incorporated by reference to Exhibit 10.1 to
                          Friede Goldman Halter, Inc.'s Current Report on Form 8-K
                          filed with the SEC on November 9, 1999).
        *10.2          -- Amendment No. 1, dated December 1999, to Credit
                          Agreement, among Friede Goldman Halter, Inc. and Wells
                          Fargo Bank (Texas) National Association, as
                          administrative agent and co-arranger, Banc One Capital
                          Markets, Inc., as co-arranger and syndication agent, and
                          the lenders party thereto.
</TABLE>

                                       45
<PAGE>   46

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER                                 DESCRIPTION
       -------                                 -----------
<C>                    <S>
        *10.3          -- Form of Amendment No. 2, dated March 30, 2000 to Credit
                          Agreement, among Friede Goldman Halter, Inc. and Wells
                          Fargo Bank (Texas) National Association, as
                          administrative agent and co-arranger, Banc One Capital
                          Markets, Inc., as co-arranger and syndication agent, and
                          the lenders party thereto.
        *10.4          -- Employment Agreement, dated June 1, 1999 and effective as
                          of November 3, 1999, between Friede Goldman International
                          Inc. and J. L. Holloway.
        *10.5          -- Employment Agreement, dated June 1, 1999 and effective as
                          of November 3, 1999, between Friede Goldman International
                          Inc. and John F. Alford.
        *10.6          -- Employment Agreement, dated June 1, 1999 and effective as
                          of November 3, 1999, between Friede Goldman International
                          Inc. and Rick S. Rees.
        *10.7          -- Employment Agreement, dated June 1, 1999 and effective as
                          of November 3, 1999, between Friede Goldman International
                          Inc. and Ronald W. Schnoor.
         10.8          -- Friede Goldman Halter, Inc. Amended and Restated 1997
                          Equity Incentive Plan. (incorporated by reference to
                          Exhibit 99.1 to Friede Goldman Halter, Inc.'s
                          Registration Statement on Form S-8 (Registration No.
                          333-92051) filed with the SEC on December 3, 1999).
         10.9          -- Amendment No. 1 to Friede Goldman Halter, Inc. Amended
                          and Restated 1997 Equity Incentive Plan. (incorporated by
                          reference to Exhibit 99.2 to Friede Goldman Halter,
                          Inc.'s Registration Statement on Form S-8 (Registration
                          No. 333-92051) filed with the SEC on December 3, 1999).
         10.10         -- Business Purchase Agreement, dated November 22, 1996, by
                          and among J. L. Holloway Holdings, Inc., Friede &
                          Goldman, Ltd. and Jerome L. Goldman. (incorporated by
                          reference to Exhibit 10.19 to the Friede Goldman
                          International Inc.'s Registration Statement on Form S-1
                          (Registration No. 333-27599) filed with the SEC on May
                          22, 1997).
         10.11         -- Amendment to Business Purchase Agreement, dated December
                          3, 1996, by and among Friede & Goldman, Ltd. (f/k/a J. L.
                          Holloway Holdings, Inc.), J. L. Goldman Associates, Inc.
                          (f/k/a Friede & Goldman, Ltd.) and Jerome L. Goldman.
                          (incorporated by reference to Exhibit 10.20 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-1 (Registration No. 333-27599) filed with the SEC
                          on May 22, 1997).
         10.12         -- Second Amendment to Business Purchase Agreement, dated
                          May 19, 1997, by and among Friede & Goldman, Ltd., J. L.
                          Goldman Associates, Inc. and Jerome L. Goldman.
                          (incorporated by reference to Exhibit 10.21 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-1 (Registration No. 333-27599) filed with the SEC
                          on May 22, 1997).
         10.13         -- Third Amendment to Business Purchase Agreement, dated
                          June 13, 1997, by and among Friede & Goldman, Ltd., J. L.
                          Goldman Associates, Inc. and Jerome L. Goldman.
                          (incorporated by reference to Exhibit 10.22 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-1 (Registration No. 333-27599) filed with the SEC
                          on May 22, 1997).
</TABLE>

                                       46
<PAGE>   47

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER                                 DESCRIPTION
       -------                                 -----------
<C>                    <S>
         10.14         -- Stock Purchase Agreement, dated January 1, 1998, by and
                          among Marystown Shipyard Limited, Newfoundland Ocean
                          Enterprises Ltd., Friede Goldman Canada, Inc., Friede
                          Goldman International Inc. and Friede Goldman Marystown,
                          Ltd. (incorporated by reference to Exhibit 99.2 to the
                          Friede Goldman International Inc.'s Current Report on
                          Form 8-K filed with the SEC on January 16, 1998).
         10.15         -- Aircraft Dry Lease, dated as of December 1, 1998, by and
                          between Equipment Management Systems, LLC, lessor, and
                          Friede Goldman International Inc., lessee. (incorporated
                          by reference to Exhibit 10.21 to Friede Goldman
                          International Inc.'s Annual Report on Form 10-K for the
                          fiscal year ended December 31, 1998).
         16.1          -- Letter from Arthur Andersen, dated December 21, 1999,
                          addressed to the SEC (incorporated by reference to
                          Exhibit 16.1 to Friede Goldman Halter, Inc.'s Current
                          Report on Form 8-K filed with the SEC on December 21,
                          1999).
        *21.1          -- Subsidiaries of Friede Goldman Halter, Inc.
        *23.1          -- Consent of Ernst & Young LLP.
        *23.2          -- Consent of Arthur Andersen LLP.
        *27.1          -- Financial Data Schedule
</TABLE>

---------------

* Filed herewith.

     (b) Reports on Form 8-K

     The Company filed Current Reports on Form 8-K on the following dates:

        October 26, 1999
        November 4, 1999
        November 9, 1999
        December 21, 1999

                                       47
<PAGE>   48

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Friede Goldman Halter, Inc.

     We have audited the accompanying consolidated balance sheet of Friede
Goldman Halter, Inc. and Subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

     We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Friede Goldman
Halter, Inc. and Subsidiaries at December 31, 1999, and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.

                                                               ERNST & YOUNG LLP

New Orleans, Louisiana
March 28, 2000

                                       48
<PAGE>   49

                         REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Friede Goldman Halter, Inc.

     We have audited the accompanying consolidated balance sheets of Friede
Goldman Halter, Inc. (formerly Friede Goldman International, Inc.), a
Mississippi corporation, and its subsidiaries, (the "Company") as of December
31, 1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the each of the years in the two year period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

     In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Friede Goldman
Halter, Inc. and its subsidiaries as of December 31, 1998 and the results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.

                                            ARTHUR ANDERSEN LLP

New Orleans, Louisiana
February 9, 1999

                                       49
<PAGE>   50

                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                 1999        1998
                                                              ----------   --------
<S>                                                           <C>          <C>
                                      ASSETS
Current assets:
  Cash and cash equivalents.................................  $   15,124   $ 42,796
  Accounts receivable.......................................     143,037     52,956
  Income tax receivable.....................................      38,657         --
  Inventories...............................................      45,261     34,192
  Costs and estimated earnings in excess of billings on
     uncompleted contracts..................................     143,769     14,398
  Prepaid expenses and other................................      17,048      2,536
  Deferred income tax asset.................................      45,403      2,246
                                                              ----------   --------
          Total current assets..............................     448,299    149,124
                                                              ----------   --------
Investment in unconsolidated subsidiary.....................      13,035     12,825
Property, plant and equipment, net of accumulated
  depreciation..............................................     334,642    139,078
Goodwill, net of accumulated amortization...................     195,137     10,834
Other assets................................................       9,779      2,699
                                                              ----------   --------
                                                              $1,000,892   $314,560
                                                              ==========   ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Short-term debt, including current portion of long-term
     debt...................................................  $   13,645   $ 16,129
  Accounts payable..........................................     115,918     62,968
  Accrued liabilities.......................................     117,966     18,640
  Reserve for losses on uncompleted contracts...............      66,226         --
  Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................      50,725     45,528
                                                              ----------   --------
          Total current liabilities.........................     364,480    143,265
Deferred income tax liability...............................      56,190      6,794
Long-term debt, less current portion........................     299,075     45,863
                                                              ----------   --------
          Total liabilities.................................     719,745    195,922
                                                              ----------   --------
Deferred government subsidy, net of accumulated
  amortization..............................................      33,026     33,348
Stockholders' equity:
  Preferred stock; $0.01 par value; 5,000,000 shares
     authorized; no shares issued and outstanding...........          --         --
  Common stock, $0.01 par value; 125,000,000 shares;
     authorized 39,972,844 and 24,535,168 issued and
     outstanding at December 31, 1999 and December 31, 1998,
     respectively...........................................         400        245
  Additional paid-in capital................................     230,166     50,928
  Retained earnings.........................................      18,520     49,346
  Treasury stock at cost, 1,188,900 shares at December 31,
     1998...................................................          --    (15,827)
  Accumulated other comprehensive income (loss).............        (965)       598
                                                              ----------   --------
          Total stockholders' equity........................     248,121     85,290
                                                              ----------   --------
          Total liabilities and stockholders' equity........  $1,000,892   $314,560
                                                              ==========   ========
</TABLE>

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

                                       50
<PAGE>   51

                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                            FOR THE YEARS ENDED DECEMBER 31,
                                                            ---------------------------------
                                                              1999        1998        1997
                                                            ---------   ---------   ---------
<S>                                                         <C>         <C>         <C>
Contract revenue earned...................................  $479,698    $382,913    $113,172
Cost of revenue earned....................................   474,391     293,712      75,236
                                                            --------    --------    --------
          Gross profit....................................     5,307      89,201      37,936
Selling, general and administrative expenses..............    42,475      32,365      11,963
Amortization of goodwill..................................     1,576         334         134
                                                            --------    --------    --------
          Operating income (loss).........................   (38,744)     56,502      25,839
                                                            --------    --------    --------
Other income(expense):
  Interest expense, net...................................    (9,172)       (201)        673
  Gain (loss) on sale or distribution of assets...........        (8)       (374)      3,922
  Other...................................................       (43)         38         776
                                                            --------    --------    --------
          Total other income (expense)....................    (9,223)       (537)      5,371
                                                            --------    --------    --------
  Income (loss) before income taxes.......................   (47,967)     55,965      31,210
Provision for income taxes expense (benefit)..............   (17,141)     20,679       7,941
                                                            --------    --------    --------
          Net income (loss)...............................  $(30,826)   $ 35,286    $ 23,269
                                                            ========    ========    ========
Pro forma net income:
  Net income..............................................                          $ 23,269
  Pro forma income tax expense............................                             3,980
                                                                                    --------
  Pro forma net income....................................                          $ 19,289
                                                                                    ========
Net income (loss) per share:
  Basic...................................................  $  (1.18)   $   1.46    $   1.10
                                                            ========    ========    ========
  Diluted.................................................  $  (1.18)   $   1.43    $   1.09
                                                            ========    ========    ========
Pro forma net income per share:
  Basic...................................................                          $   0.92
                                                                                    ========
  Diluted.................................................                          $   0.91
                                                                                    ========
Weighted average shares outstanding:
  Basic...................................................    26,148      24,211      21,065
  Diluted.................................................    26,148      24,599      21,297
</TABLE>

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

                                       51
<PAGE>   52

                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        ACCUMULATED
                                   COMMON STOCK     ADDITIONAL                             OTHER
                                 ----------------    PAID-IN     RETAINED   TREASURY   COMPREHENSIVE
                                 NUMBER    AMOUNT    CAPITAL     EARNINGS    STOCK     INCOME (LOSS)    TOTAL
                                 -------   ------   ----------   --------   --------   -------------   --------
<S>                              <C>       <C>      <C>          <C>        <C>        <C>             <C>
Balance, December 31, 1996.....       1     $  5     $  2,056    $ 2,549    $     --      $ 1,609      $  6,219
Comprehensive income:
  Net income...................      --       --           --     23,269          --           --        23,269
  Other comprehensive income:
    Unrealized loss on
      marketable securities....      --       --           --         --          --         (704)         (704)
                                                                                                       --------
Total comprehensive income.....      --       --           --         --          --           --        22,565
Stock options granted to
  employees as compensation....      --       --          475         --          --           --           475
Distribution to stockholders...      --       --           --    (11,758)         --         (905)      (12,663)
Exchange of stock in connection
  with reorganization..........   9,199       87          (87)        --          --           --            --
Sale of stock in public
  offering.....................  3,003..      30       46,637         --          --           --        46,667
Stock options granted..........      --       --          542         --          --           --           542
Stock split....................  12,202      122         (122)        --          --           --            --
                                 -------    ----     --------    --------   --------      -------      --------
Balance, December 31, 1997.....  24,405      244       49,501     14,060          --           --        63,805
Comprehensive income:
  Net income...................      --       --           --     35,286          --           --        35,286
    Other comprehensive income:
    Net change in foreign
      currency translation
      adjustment...............      --       --           --         --          --          598           598
                                                                                                       --------
Total comprehensive income.....                                                                          35,884
Stock options granted to
  employees as compensation....      --       --          316         --          --           --           316
Stock options exercised........     119        1          772         --          --           --           773
Sale of stock..................      11       --          339         --          --           --           339
Purchase of treasury stock.....      --       --           --         --     (15,827)          --       (15,827)
                                 -------    ----     --------    --------   --------      -------      --------
Balance, December 31, 1998.....  24,535      245       50,928     49,346     (15,827)         598        85,290
Comprehensive income:
  Net income (loss)............      --       --           --    (30,826)         --           --       (30,826)
  Other comprehensive income
    (loss):
    Net change in foreign
      currency translation
      adjustment...............      --       --           --         --          --       (1,563)       (1,563)
                                                                                                       --------
Total comprehensive income
  (loss).......................                                                                         (32,389)
Stock options granted..........      --       --          178         --          --           --           178
Stock options exercised........      86        1          901         --          --           --           902
Stock issuances................      90        1          848         --          --           --           849
Stock issuance -- HMG Merger...  16,450      164      193,127         --          --           --       193,291
Retirement of treasury stock...  (1,188)     (11)     (15,816)        --      15,827           --            --
                                 -------    ----     --------    --------   --------      -------      --------
Balance, December 31, 1999.....  39,973     $400     $230,166    $18,520    $     --      $  (965)     $248,121
                                 =======    ====     ========    ========   ========      =======      ========
</TABLE>

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

                                       52
<PAGE>   53

                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  1999         1998       1997
                                                              ------------   --------   --------
<S>                                                           <C>            <C>        <C>
Cash flows from operating activities:
  Net income/(loss).........................................    $(30,826)    $ 35,286   $ 23,269
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization...........................      13,127        5,875      1,608
    Provision for loss on uncompleted contracts.............      16,508           --         --
    Compensation expense related to stock or stock options
      issued to employees...................................         178          316      1,017
    (Gain) loss on sale of assets...........................           8          374     (3,922)
    Deferred income taxes...................................       6,536          704        683
    Net (increase) decrease in billings in excess of costs
      and estimated earnings on uncompleted contracts.......     (21,494)      (7,499)    33,510
    Net increase (decrease) in costs and estimated earnings
      in excess of billings on uncompleted contracts........       8,375      (14,111)        --
    Changes in operating assets and liabilities:
      Decrease in restricted certificates of deposit........          --           --      4,652
      (Increase) decrease in receivables....................      35,823      (19,153)   (15,699)
      Increase in income tax receivable.....................     (38,657)          --         --
      (Increase) decrease in inventories....................       3,984      (23,210)    (4,638)
      (Increase) decrease in other assets...................      (7,822)       2,384        (55)
      Increase (decrease) in accounts payable and accrued
        liabilities.........................................     (46,801)      40,122     11,697
                                                                --------     --------   --------
        Net cash provided by (used in) operating
          activities........................................     (61,061)      21,088     52,122
                                                                --------     --------   --------
Investing activities:
  Capital expenditures for plant and equipment..............      (7,502)     (60,738)   (26,595)
  Acquisition of French subsidiary..........................          --      (25,285)        --
  Cash acquired upon acquisition of French subsidiary.......          --       20,581         --
  Cash acquired in Halter Marine merger.....................       2,501           --         --
  Proceeds from sale of property, plant and equipment.......         463           59        423
  Investment in unconsolidated subsidiary...................        (209)     (11,916)      (908)
  Payments received on notes receivable or sales type
    lease...................................................          --           --        539
                                                                --------     --------   --------
        Net cash used in investing activities...............      (4,747)     (77,299)   (26,541)
                                                                --------     --------   --------
Financing activities:
  Proceeds from stock offering..............................          --           --     46,668
  Proceeds from sale and issuance of stock..................         849          339         --
  Proceeds from exercise of stock options...................         902          773         --
  Net borrowings (repayments) under line of credit..........      36,615        9,328     (1,501)
  Proceeds from borrowings under debt facilities............      13,177       39,828        701
  Release of restricted escrowed funds......................          --       24,817         --
  Purchase of treasury stock................................          --      (15,828)        --
  Principal payments on debt................................     (11,985)     (18,101)    (7,898)
  Distributions to stockholders.............................          --           --     (6,673)
  Payments of financing charges for Title XII debt..........          --           --     (1,350)
                                                                --------     --------   --------
        Net cash provided by financing activities...........      39,558       41,156     29,947
                                                                --------     --------   --------
  Effect of exchange rate changes on cash...................      (1,422)         813         --
                                                                --------     --------   --------
  Net increase (decrease) in cash and cash equivalents......     (27,672)     (14,242)    55,528
  Cash and cash equivalents at beginning of year............      42,796       57,038      1,510
                                                                --------     --------   --------
  Cash and cash equivalents at end of year..................    $ 15,124     $ 42,796   $ 57,038
                                                                ========     ========   ========
Supplemental disclosures:
  Cash paid during the period for interest..................    $  4,667     $  1,105   $  1,256
  Cash paid during the period for income taxes..............    $ 13,059     $ 19,072   $  4,750
  Non-cash distributions of property to stockholders........    $     --     $     --   $  1,641
  Assumption of note payable by stockholder.................    $     --     $     --   $    198
  Proceeds from borrowings under Title XI held in escrow....    $     --     $     --   $ 24,817
  Distribution of marketable securities to stockholder to
    satisfy note payable....................................    $     --     $     --   $  1,400
  Distribution of marketable securities to stockholder......    $     --     $     --   $  6,391
  Assumption of margin account debt by stockholder..........    $     --     $     --   $  2,749
Non-cash investing activities:
  Acquisitions:
    Fair value of assets acquired...........................    $495,868     $102,728   $     --
                                                                ========     ========   ========
    Fair value of liabilities assumed.......................    $490,322     $ 48,699   $     --
                                                                ========     ========   ========
</TABLE>

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

                                       53
<PAGE>   54

                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION

  General

     On November 3, 1999, a merger was consummated between Friede Goldman
International, Inc. ("FGI") and Halter Marine Group, Inc. ("HMG") with FGI
remaining as the surviving corporation. Effective with the merger, the corporate
name was changed to Friede Goldman Halter, Inc. ("FGH"). FGH is incorporated
under the laws of the State of Mississippi. The consolidated financial
statements include the accounts of FGH, Inc. and its wholly-owned subsidiaries,
including, among others, Friede Goldman Offshore, Inc. ("FGO"), Friede &
Goldman, Ltd. ("FGL"), Friede Goldman Newfoundland Limited ("FGN"), Friede
Goldman France S.A.S. ("FGF"), and Halter Marine, Inc.("Halter")(collectively
referred to as the "Company"). These consolidated statements include the
accounts of FGN for all periods subsequent to January 1, 1998, FGF for all
periods subsequent to February 5, 1998, HMG for all periods subsequent to
November 3, 1999 and all other subsidiaries from their dates of incorporation.
All significant intercompany accounts and transactions have been eliminated.

  Reorganization and Initial Public Offering

     The Company was originally incorporated under the laws of the State of
Delaware in February 1997. In anticipation of the Company's initial public
offering of its common stock, the stockholders of two predecessor companies, HAM
Marine, Inc. ("HAM") and FGL, contributed all of their ownership in HAM and FGL
to the Company in exchange for shares of common stock in the Company; and HAM
and FGL became wholly-owned subsidiaries of the Company (the "Reorganization").
Because HAM and FGL were owned in substantially identical proportions, the
number of shares of common stock of the Company received by each of the
stockholders of HAM and FGL in the Reorganization was based on each
stockholder's percentage of ownership of HAM shares. The Reorganization was
accounted for as a reorganization of entities under common control.

     The Company's certificate of incorporation established authority to issue
1,000 shares of $0.01 par value preferred stock and 2,000 shares of $0.01 par
value common stock. Preferred stock may be issued in one or more series and in
such amounts as may be determined by the Company's board of directors. The
voting powers, designations, preferences and relative, participating, optional
or other special rights, if any, and the qualifications, limitations or
restrictions, if any, of each preferred stock issue shall be fixed by resolution
of the board of directors providing for the issue. All shares of common stock of
the Company shall be identical, and, except as otherwise provided in a
resolution of the board of directors with respect to preferred stock, the
holders of common stock shall exclusively possess all voting power with each
share of common stock having one vote.

     In May 1997, in conjunction with the Company's initial public offering of
its common stock, the Company authorized an increase in the amount of authorized
shares to 5,000,000 shares of $0.01 par value preferred stock and 25,000,000
shares of $0.01 par value common stock. Effective prior to the public offering,
the Company issued, pursuant to a stock exchange agreement, 18,400,000 shares
(as adjusted for the 2-for-1 stock split discussed below) of the Company's
common stock to the stockholders of HAM and FGL as described above. Therefore,
for the historical per share and pro forma per share data included in the
statements of operations, the weighted average number of common shares
outstanding includes 18,400,000 shares for all periods presented.

     In July 1997, the Company completed an initial public offering (the
"Offering") of its common stock. In connection with the Offering, the Company
sold 3,002,521 (6,005,042 after the 2 for 1

                                       54
<PAGE>   55
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

stock split discussed below) shares of its common stock for net proceeds of
approximately $46.6 million. The Company has utilized the proceeds to fund the
expansion of its facilities and equipment, complete the acquisition of FGF, and
for working capital.

  Stock Split and Increase in Authorized Shares

     In September 1997, the Company declared a 2 for 1 stock split, effective
October 16, 1997 for all stockholders of record as of October 1, 1997. Unless
otherwise indicated, all references to number of shares and to per share
information in the financial statements and notes have been adjusted to reflect
the stock split on a retroactive basis.

     In January 1998, in connection with a special meeting of the stockholders
of the Company, the number of authorized shares of common stock of the Company
was increased to 125,000,000 shares.

     The Company adopted a stockholder rights plan on December 4, 1998, designed
to assure that the Company's stockholders receive free and equal treatment in
the event of a takeover of the Company and to guard against partial tender
offers, squeeze-outs, open market accumulations, and other abusive tactics to
gain control without paying all stockholders a fair price. The rights plan was
not adopted in response to any specific takeover proposal. Under the rights
plan, the Company's shareholders were issued a Preferred Stock Purchase Right on
each share of the Company's common stock. Each right entitles its holder to
purchase one one-thousandth of a share of a new series of Junior Preferred
Stock, par value, $0.01 per share for $75 per share. The Purchase Right grant
was made on December 21, 1998, to stockholders of record at that date. The
rights will expire on February 26, 2006.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Construction Contracts

     The Company's revenue is earned on the percentage-of-completion method.
Under the percentage of completion method used in its Offshore and Engineered
Products segments, substantially all of the revenues from construction contracts
are measured based upon the percentage that incurred costs to date, excluding
the costs of any purchased but uninstalled materials, bear to total estimated
costs. Accordingly, contract price and cost estimates are reviewed periodically
as the work progresses, and adjustments proportionate to the percentage of
completion are reflected in the accounting period in which the facts that
require such adjustments become known. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
identified. Other changes, including those arising from contract penalty
provisions and final contract settlements, are recognized in the period in which
the revisions are determined. To the extent that these adjustments result in a
reduction or elimination of previously reported profits, the Company would
report such a change by recognizing a charge against current earnings, which
might be significant depending on the size of the project or the adjustment.
Cost of revenue includes costs associated with the fabrication process and can
be further broken down between direct costs (such as direct labor costs and raw
materials) allocated to specific projects and indirect costs (such as
supervisory labor, utilities, supplies, equipment costs, and depreciation) that
are associated with production but are not directly related to a specific
project. Selling, general and administrative costs are charged to expense as
incurred.

     Under the percentage of completion method used in its Vessels segment,
revenues from construction contracts are measured by the percentage of labor
hours incurred to date to estimated

                                       55
<PAGE>   56
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

total labor hours for each contract. Management considers expended labor hours
to be the best available measure of progress on its vessels contracts.

     The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenues recognized.

  Research and Development

     FGL performs new design work on rigs for subsequent licensing. The costs of
developing designs that are not performed pursuant to a customer's contract are
charged to cost of revenue as incurred. Such charges amounted to $0.8 million,
$1.2 million and $0.9 million for the years ended December 31, 1999, 1998 and
1997.

  Cash Equivalents

     The Company considers all short-term cash investments with an original
maturity of less than three months to be cash equivalents.

  Inventories

     Inventories, which consist primarily of steel and other marine vessel
components, are valued at the lower of cost or market. Inventory cost is
determined principally on the specific identification method. Market is
replacement cost or net realizable value. At December 31, 1999 and 1998, the
Company's inventory included $10.9 million and $6.1 million of costs it incurred
related to the manufacture or purchase of certain jackup rig components.
Management of the Company believes that contracts for new construction,
modification or repairs will be secured that will utilize these components. No
further commitments for these components have been made as of December 31, 1999.

  Goodwill

     Goodwill is recognized for the excess of the purchase price over the fair
value of identifiable net assets acquired. Realization of goodwill is
periodically assessed by management based on the expected future profitability
and undiscounted cash flows of acquired companies and their overall contribution
to the operation of the Company.

     The Company recorded goodwill of $187.7 million related to the HMG merger
in 1999 and $10.1 million related to the acquisition of FGF in 1998. Goodwill is
being amortized over a 25 year period. The related amortization expense was $1.6
million and $0.3 million for the years ended December 31, 1999 and 1998,
respectively.

  Other Assets

     Other assets includes $6.9 million of debt issuance costs. The debt
issuance costs relate to $185.0 million of 4 1/2% Convertible Subordinated
Notes, $30.0 million of Taxable Revenue Bonds and the New Credit Facility. Other
assets also includes $1.2 million of deferred financing costs associated with
the Title XI debt. These debt issuance costs are being amortized over the life
of the related debt. Accumulated amortization of debt issuance costs was $0.5
million and $0.1 million at December 31, 1999 and 1998, respectively.

                                       56
<PAGE>   57
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Stock-Based Compensation

     The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of the grant over the
amount an employee must pay to acquire the stock. See Note 10 for stock option
information.

  Long-Lived Assets

     The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including goodwill, in accordance with Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS 121). SFAS
121 requires impairment losses to be recorded on long-lived assets used in
operations, including goodwill, when indicators of impairment are present and
the undiscounted cash flows estimated to be generated by those assets are less
than the assets' carrying amounts. In that event, a loss is recognized based on
the amount by which the carrying amount exceeds the fair market value of the
long-lived asset. Loss on long-lived assets to be disposed of is determined in a
similar manner, except that fair market values are reduced for the cost of
disposal.

  Segment Information

     Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131) establishes
standards for public companies relating to the reporting of financial and
descriptive information about operating segments in financial statements. SFAS
131 requires that financial information be reported on the same basis that is
reported internally for evaluating segment performance and allocating revenue to
segments. See Note 16 for segment information.

  Accounting for Income Taxes

     Subsequent to the termination of its S corporation status for income tax
purposes (See Note 6), the Company has followed the asset and liability method
of accounting for deferred income taxes prescribed by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes (SFAS 109)." Under
this method, deferred tax assets and liabilities are recorded for temporary
differences that occur between the financial reporting and tax bases of assets
and liabilities based on enacted tax rates and laws that will be in effect when
the differences are expected to reverse.

  Use of Estimates

     These financial statements have been prepared in conformity with generally
accepted accounting principles. Such preparation requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities as of the dates
of the balance sheets and the reported amounts of revenues and expenses for the
years presented. Actual results could differ materially from those estimates.
Areas requiring significant estimates to be made by management include the
application of the percentage-of-completion accounting method; recoverability of
inventory, equipment, and goodwill; depreciation and amortization; income taxes;
and accruals for certain estimated liabilities, including loss contingencies.

                                       57
<PAGE>   58
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Fair Value of Financial Instruments

     The carrying amount of the Company's financial instruments at December 31,
1999 and 1998, including cash and investment in unconsolidated subsidiary
approximates fair value. See Note 9 regarding the carrying value of long-term
debt.

  Net Income Per Share

     Basic net income (loss) per share is calculated based on the weighted
average number of shares of common stock outstanding for the periods presented.
Diluted net income (loss) per share is based on the weighted average number of
shares of common stock outstanding for the periods, including potential dilutive
common shares which reflect the dilutive effect of the Company's stock options.
See Note 17 for a reconciliation of net income (loss) per share.

  Foreign Currency Translation

     The financial statements of subsidiaries outside the United States, FGN and
FGF (see Note 3), are measured using the local currency as the functional
currency. Assets and liabilities of these subsidiaries are translated at the
rates of exchange at the balance sheet date. The resulting translation
adjustments are included as a separate component of stockholders' equity. Income
and expense items are translated at average monthly rates of exchange during the
period.

  Treasury Stock

     During 1998, the Company's Board of Directors authorized a stock repurchase
plan. Through December 31, 1998, 1,188,900 shares of the Company's Common Stock
had been repurchased for an aggregate consideration of approximately $15.8
million. Funds used to accomplish the Common Stock repurchase were provided from
operating cash flow and borrowings under a short-term credit facility provided
by an investment banking firm. All such borrowings were repaid in November 1998.
All shares of treasury stock were retired during February 1999. Management of
the Company has no plans for the purchase of additional treasury shares.

  Reclassifications

     Certain reclassifications have been made in the prior period financial
statements to conform to the classifications used in the current year.

  Certain Risks and Uncertainties

     Low prices for crude oil and natural gas experienced during 1998 and much
of 1999, created a general decline in the demand for the Company's products.
Although the prices of these commodities have recently increased, there is no
assurance that drilling contractors and vessels operators will proceed with
plans for new construction or modification of drilling units or vessels.

     In addition, most of the Company's revenue is earned on a percentage of
completion basis. Many of the Company's projects are sophisticated and complex
and estimating total costs at completion during early stages of construction
involves many variables that may change during the course of construction,
including labor productivity and increases in the cost of materials and labor.
Accordingly, cost estimates are reviewed periodically as work progresses, and
adjustments to income proportionate to the percentage of completion are
reflected in the period in which the estimates are revised. To the extent that
adjustments result in a reduction or elimination of previously reported profits,
the Company would have to recognize a charge against current

                                       58
<PAGE>   59
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

earnings, which may be significant depending upon the size of the project or the
adjustment (Also see Notes 13 and 14).

  Recently Issued Accounting Pronouncements

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS 133 is required to be
adopted in fiscal years beginning after June 15, 2000. Given the Company's
historically minimal use of these types of instruments, the Company does not
expect a material impact on its statements from adoption of SFAS 133.

3. MERGERS AND ACQUISITIONS

  Merger with Halter Marine Group, Inc.

     On November 3, 1999, a merger was consummated between FGI and HMG (See Note
1). As set forth in the merger agreement, stockholders of HMG received 0.57 of a
share of the Company's common stock in exchange for each share of HMG, Inc.
common stock. A total of 16,450,292 shares was issued for a total value of
approximately $193.3 million. The merger is being accounted for as a purchase
business combination and the operating activities of HMG have been included in
the accompanying financial statements for periods subsequent to November 3,
1999. The net assets acquired have been recorded at their fair values and, at
the acquisition date, included adjustments to increase fixed assets by $37.6
million, to record certain contract reserves (See Note 14) and a deferred credit
reflecting the fair value of the construction contracts that were in progress at
the date of acquisition in the amount of $36.2 million, and to decrease
long-term debt by $70.3 million. As a result of the merger, approximately $187.7
million was allocated to goodwill. The goodwill is being amortized over 25
years.

  Acquisition of Friede Goldman France S.A.S.

     Effective February 5, 1998, the Company, through its wholly-owned
subsidiary, FGF, a French entity, acquired all of the issued and outstanding
shares of a French holding company and its French subsidiaries, for a cash
payment of approximately $25.0 million. The purchase price has been allocated to
land, building and machinery in the amount of $11.8 million, goodwill of $10.1
million (amortized over 25 years), and other assets net of liabilities in the
amount of $1.7 million.

  Acquisition of Friede Goldman Newfoundland

     On January 1, 1998, the Company purchased, through its wholly owned
subsidiary, FGN, the assets of Newfoundland Ocean Enterprises Ltd. of Marystown,
Newfoundland ("Marystown"), a steel fabrication and marine construction concern
with operations similar to those of the Company. The acquisition was effected
pursuant to a Share Purchase Agreement, dated January 1, 1998 (the "Share
Purchase Agreement"). Under the terms of the Share Purchase Agreement, the
Company paid a purchase price of C$1 (one dollar). However, the Share Purchase
Agreement also provides

                                       59
<PAGE>   60
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

that, among other things, the Company must (i) maintain a minimum of 1.2 million
man-hours (management, labor, salaried and hourly) for each of the 1998, 1999
and 2000 calendar years, (ii) undertake certain capital improvements at the
acquired shipyards and (iii) pay to the sellers fifty percent (50%) of net after
tax profit of Marystown for the twelve-month period ending March 31, 1998. The
Share Purchase Agreement provides that the Company will pay to the Seller
liquidated damages of C$10 million (approximately $7 million) in 1998 and C$5
million (approximately $3 million) in 1999 and 2000 in any of such years in
which the minimum number of man-hours described above is not attained. The
minimum man-hour requirement for 1998 was met. The Company was not in compliance
with the man-hour requirement for 1999. As of this report date, the Company had
not received a waiver on its non-compliance with this requirement and it is not
yet certain as to whether or not the Company will be able to obtain a waiver of
the liquidated damages payment as described above. If a liquidated damages
payment is required, it will be accounted for as an adjustment to the purchase
price of the Marystown Facility. Pursuant to the provisions of the Share
Purchase Agreement, the Company has expended $5.6 million for capital
improvements of the shipyard facilities. The Sellers' share of net income for
the twelve months ended March 31, 1998, was not material. The net assets
acquired have been recorded at their fair market values and, at the acquisition
date, included $47.7 million in fixed assets, $1.8 million in net working
capital, a deferred credit recorded to reflect the fair value of the
construction contracts that were in progress at the date of the acquisition in
the amount of $10.7 million, along with $1.6 million in deferred taxes related
to these items at the acquisition date. The difference between the fair value of
the acquired net assets and the C$1 consideration was recorded as a deferred
government subsidy and is being amortized over the lives of the assets acquired,
which is approximately 17 years. Accumulated amortization of the deferred
subsidy was $4.6 million and $2.3 million as of December 31, 1999 and 1998,
respectively. Amortization of the subsidy is recorded in the statement of
operations as a reduction to cost of revenue and represents a reduction in
depreciation and amortization in the statement of cash flows for the twelve
months ended December 31, 1999 and 1998.

     The following summarized income statement data reflects the impact that the
acquisitions of FGF, FGN and the merger with HMG would have had on the Company's
results of operations had the transactions taken place as of the beginning of
the periods presented:

<TABLE>
<CAPTION>
                                                  PRO FORMA RESULTS FOR THE YEARS ENDED
                                                               DECEMBER 31
                                                 ----------------------------------------
                                                     1999           1998          1997
                                                 ------------   ------------   ----------
                                                 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                              <C>            <C>            <C>
Revenue........................................   $1,216,571     $1,335,676     $809,918
Operating income (loss)........................   $  (24,352)    $   74,841     $ 76,739
Net income (loss)..............................   $  (26,088)    $   47,755     $ 51,583
Net income (loss) per common share -- basic....   $    (0.66)    $     1.17     $   1.38
Net income (loss) per common share -- diluted..   $    (0.65)    $     1.16     $   1.37
</TABLE>

4. MARKETABLE SECURITIES

     During 1997, the Company distributed all marketable securities to
stockholders in conjunction with the Reorganization and realized a gain of $3.9
million. The cost basis of securities distributed was calculated using the
specific identification method.

5. SIGNIFICANT CUSTOMERS

     The nature of the conversion and modification projects undertaken by the
Company can result in an individual contract comprising a large percentage of a
fiscal year's contract revenue. Similarly, relatively few companies own offshore
rigs. As a result, contracts performed for an individual

                                       60
<PAGE>   61
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

customer may comprise a significant portion of a particular year's contract
revenue. During the year ended December 31, 1999, the largest single customer
accounted for 30% of total revenue. A second and third customer accounted for
22% and 10% of revenue, respectively. During the year ended December 31, 1998,
the largest single customer accounted for 32% of total revenue. A second and
third customer accounted for 19% and 15% of revenue, respectively. During the
year ended December 31, 1997, the largest single customer accounted for 53% of
total revenue. A second customer accounted for 17% of total revenue. All revenue
derived from these customers was recognized in the Company's Offshore segment.

6. INCOME TAXES

     Prior to June 15, 1997, certain of the Company's predecessor entities were
taxed as S Corporations for federal and state income tax purposes, whereby the
stockholders were liable for individual federal and state income taxes on their
allocated portions of each entity's taxable income. On June 15, 1997, before the
closing of the public offering, the stockholders elected to terminate this
status, and the Company became subject to federal and state income taxes.

     The election resulted in the establishment of a net deferred tax liability
calculated at applicable federal and state income tax rates resulting primarily
from temporary differences arising from differences in depreciation rates for
tax and financial reporting purposes, timing of gain recognition related to a
sales-type lease or leases and unrealized appreciation on marketable securities.
The initial recordation of a net deferred tax liability by the Company resulted
in a provision for income taxes of $0.8 million.

     All income before provision for income taxes for the year ended December
31, 1997 was domestic. Income (loss) before income taxes for the years ended
December 31, 1999 and 1998 was comprised of the following:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------    -------
                                                                (IN THOUSANDS)
<S>                                                           <C>         <C>
Domestic....................................................  $(51,573)   $46,903
Foreign.....................................................     3,606      9,062
                                                              --------    -------
          Total.............................................  $(47,967)   $55,965
                                                              ========    =======
</TABLE>

                                       61
<PAGE>   62
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Income tax expense (benefit) included in the statement of operations for
the years ended December 31, 1999, 1998 and 1997 is as follows:

<TABLE>
<CAPTION>
                                                                DECEMBER 31,
                                                         ---------------------------
                                                           1999      1998      1997
                                                         --------   -------   ------
                                                               (IN THOUSANDS)
<S>                                                      <C>        <C>       <C>
Current:
  Domestic.............................................  $(24,360)  $17,448   $7,258
  Foreign..............................................       683     2,526       --
                                                         --------   -------   ------
                                                          (23,677)   19,974    7,258
                                                         --------   -------   ------
Deferred:
  Domestic-attributable to activity subsequent to June
     15, 1997..........................................     5,716       922     (117)
  Domestic-attributable to activity prior to June 15,
     1997..............................................        --        --      800
  Foreign..............................................       820      (217)      --
                                                         --------   -------   ------
                                                            6,536       705      683
                                                         --------   -------   ------
          Total........................................  $(17,141)  $20,679   $7,941
                                                         ========   =======   ======
</TABLE>

     Income tax expense (benefit) for the years ended December 31, 1999, 1998
and 1997 differs from the amount computed by applying the statutory federal
income tax rate to income (loss) before income taxes as a result of the
following:

<TABLE>
<CAPTION>
                                                        DECEMBER 31,
                                 -----------------------------------------------------------
                                       1999                  1998                 1997
                                 -----------------     ----------------     ----------------
                                             % OF                 % OF                 % OF
                                            PRETAX               PRETAX               PRETAX
                                   TAX      INCOME       TAX     INCOME       TAX     INCOME
                                 --------   ------     -------   ------     -------   ------
                                                       (IN THOUSANDS)
<S>                              <C>        <C>        <C>       <C>        <C>       <C>
Federal income tax expense
  (benefit) computed on income
  (loss) before taxes..........  $(16,788)  (35.0)%    $19,587    35.0%     $10,924    35.0%
Amortization of goodwill.......       612     1.3          117     0.2           47     0.2
Decrease in tax resulting from
  income earned as an S
  Corporation..................        --      --           --      --       (3,700)  (11.9)
Deferred income tax liability
  recorded upon termination of
  S-Corporation election.......        --      --           --      --          800     2.6
Taxes on foreign source
  income.......................        --      --          127     0.2           --      --
Domestic tax credits...........        --      --         (350)   (0.6)          --      --
State income tax...............    (1,678)   (3.5)       1,551     2.8          658     2.1
Non-taxable distribution of
  marketable securities........        --      --           --      --         (890)   (2.9)
Other..........................       713     1.4         (353)   (0.7)         102     0.3
                                 --------   -----      -------    ----      -------   -----
Income tax expense(benefit)....  $(17,141)  (35.8)%    $20,679    36.9%     $ 7,941    25.4%
                                 ========   =====      =======    ====      =======   =====
</TABLE>

                                       62
<PAGE>   63
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Temporary differences between the financial statement carrying amounts and
the tax bases of assets and liabilities give rise to the following deferred
income taxes at December 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                       DECEMBER 31,
                                                   -----------------------------------------------------
                                                             1999                        1998
                                                   -------------------------   -------------------------
                                                                    NON-                        NON-
                                                     CURRENT       CURRENT       CURRENT       CURRENT
                                                      ASSET         ASSET         ASSET         ASSET
                                                   (LIABILITY)   (LIABILITY)   (LIABILITY)   (LIABILITY)
                                                   -----------   -----------   -----------   -----------
                                                                      (IN THOUSANDS)
<S>                                                <C>           <C>           <C>           <C>
Fixed assets.....................................    $    --      $(49,192)      $   --       $(19,854)
Deferred government subsidy......................         --        11,871           --         12,839
Stock based compensation.........................         --            --           --            162
Gain on sale of assets...........................         --            --           --           (233)
Foreign tax credit...............................         --         2,490           --            900
Accounts receivable valuation....................         --            --         (109)            --
Accrued liabilities..............................      7,242         2,985          862             --
Contract reserves................................     26,939            --           --             --
Fair value adjustment for contracts in progress
  at acquisition.................................     11,222            --        1,665             --
Other............................................         --           128         (172)            92
Debt discount....................................         --       (26,925)          --             --
NOL carryforward.................................         --         4,758           --             --
Valuation allowance..............................         --        (2,305)          --           (700)
                                                     -------      --------       ------       --------
Deferred income tax asset (liability)............    $45,403      $(56,190)      $2,246       $ (6,794)
                                                     =======      ========       ======       ========
</TABLE>

     At December 31, 1999, the Company had net operating loss carryforwards of
$7.9 million and $4.9 million available to offset future U.S. and Canadian
taxable income, respectively. The U.S. operating loss carryforwards expire in
2014 and the Canadian operating loss carryforwards expire in 2007.

     The valuation allowance was established for the deferred tax asset related
to foreign tax credits. Companies may use foreign tax credits to offset the
United States income tax due on income earned from foreign sources. However, the
credit is limited by the total income on the United States income tax return as
well as by the ratio of foreign source income in each statutory category total
income. Excess foreign tax credits may be carried back two years and forward
five years.

     The Company has evaluated the need for an additional valuation allowance
for deferred tax assets other than those for foreign source income. Based on the
weight of the available evidence, the Company has determined that it is more
likely than not that all such assets will be realized.

     As an S Corporation, the tax attributes of the Company's predecessors
flowed to the stockholders and, accordingly, no provision for income taxes is
included in the results of operations for the Company prior to June 15, 1997.
The pro forma provision for income taxes is the result of the application of a
combined federal and state rate of 37% to income before income taxes for periods
prior to June 15, 1997.

7. INVESTMENT IN UNCONSOLIDATED SUBSIDIARY

     At December 31, 1999 and 1998, the Company had invested approximately $13.0
and $12.8 million, respectively, in an unconsolidated subsidiary ("Ilion LLC")
in which the Company currently owns a 50% equity interest. The Company's
ownership interest in Ilion LLC may be reduced to 30%

                                       63
<PAGE>   64
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

if the other member (who is also a significant customer of the Company) of the
LLC exercises its option to convert a note receivable from Ilion LLC into equity
interest. Ilion LLC owns a hull for a semi-submersible drilling rig that
requires substantial completion and outfitting. The Company and the other member
of Ilion LLC are considering various options for formal arrangements related to
the hull, including financing of its completion, securing a contract for
utilization or sale of the rig, or other options. Other than the initial
purchase of the drilling rig hull, Ilion LLC had no significant activity as of
December 31, 1999. The Company's investment in Ilion LLC is accounted for using
the equity method.

8. PROPERTY, PLANT AND EQUIPMENT

     Property, plant and equipment is stated at cost less accumulated
depreciation. Ordinary maintenance and repairs that do not extend the physical
or economic lives of the assets are charged to expense as incurred. Depreciation
is computed on the straight-line basis over the estimated useful lives of the
assets.

     Useful lives utilized in the depreciation of fixed assets for each class of
property, plant and equipment are as follows:

<TABLE>
<CAPTION>
CLASS                                                     LIFE
-----                                                 -------------
<S>                                                   <C>
                                                           15 -- 40
Buildings and dock facilities.......................          years
                                                           10 -- 40
Leasehold improvements..............................          years
Machinery and equipment.............................  3 -- 20 years
Other...............................................   3 -- 7 years
</TABLE>

     A summary of property, plant, and equipment and construction in progress
follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
Land........................................................  $ 32,447   $  4,879
Buildings and improvements..................................   155,260     72,841
Machinery and equipment.....................................   165,619     72,555
Construction in progress....................................     4,985        970
                                                              --------   --------
          Total property, plant and equipment...............   358,311    151,245
Less accumulated depreciation...............................    23,669     12,167
                                                              --------   --------
          Total property, plant and equipment, net..........  $334,642   $139,078
                                                              ========   ========
</TABLE>

     Depreciation expense was $11.6 million, $7.9 million, and $1.5 million for
the years ended December 31, 1999, 1998 and 1997, respectively.

     Effective January 1, 1998, the Company revised its estimate of the useful
lives of certain machinery and equipment (primarily cranes and dry docks), and
dock facilities (bulkheads, foundations, etc.). The useful lives of the
machinery and equipment were extended from an average of 9 years to 20 years and
the useful lives of the dock facilities were increased from an average of 18
years to 40 years. These changes were made to more accurately reflect the
estimated periods during which such assets will remain in service.

     Substantially all of the assets of the Company have been pledged as
collateral under various debt arrangements entered into by the Company. (See
Note 9).

                                       64
<PAGE>   65
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     During 1998 and 1997, the Company had capitalized interest of approximately
$1.3 million and $0.1 million, related to construction of the FGO East Facility.
There was no interest capitalized during 1999.

9. DEBT

     A summary of short and long-term debt follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              ------------------
                                                                1999      1998
                                                              --------   -------
<S>                                                           <C>        <C>
Borrowings under 1999 Credit Facility.......................  $106,708   $    --
Borrowings under 1998 Credit Facility.......................        --     9,328
Convertible Subordinated Notes bearing interest at 4 1/2%,
  principal due at maturity in September 2004, unsecured
  (less discount of $68,658)................................   116,342        --
Taxable revenue bonds bearing interest at 6.39%, principal
  due at maturity in December 2013, secured by letter of
  credit....................................................    30,000
Notes payable to financial institutions and others bearing
  interest at rates ranging from 5.7% to 12.0%, payable in
  monthly installments, maturing at dates ranging from
  January 1999 to March 2005 and secured by equipment, a
  lease and real property...................................    11,090     1,978
Bonds payable to MARAD bearing interest at 6.35% maturing
  June 2013 payable in semi-annual installments commencing
  July 1, 1999, secured by equipment........................    23,163    24,817
Bonds payable, bearing interest at 7.99% payable in monthly
  installments commencing January 1999, maturing December
  2008, secured by equipment................................    16,880    18,000
Capital lease obligations bearing interest at rates ranging
  from 4.7% to 10.0%, maturing at dates ranging from
  February 2000 through November 2004.......................     4,037     1,369
Note payable, bearing interest at 7.05% payable in quarterly
  installments commencing April 1998, maturing March 2002,
  secured by equipment......................................     4,500     6,500
                                                              --------   -------
          Total.............................................   312,720    61,992
Less: Short-term debt and current portion of long-term
  debt......................................................    13,645    16,129
                                                              --------   -------
          Long term debt less current portion...............  $299,075   $45,863
                                                              ========   =======
</TABLE>

  1999 Credit Facility

     In connection with the merger with HMG, on November 3, 1999, the Company
entered into a new secured bank revolving and letter of credit facility ("the
New Credit Facility") that replaced the Credit Facility. Under the terms of the
New Credit Facility, the Company may borrow up to $120 million under a senior
secured revolving credit facility. In addition, the New Credit Facility provides
a $44.2 million senior secured letter of credit facility. The New Credit
Facility has a three-year term and is secured by substantially all of the
Company's otherwise unencumbered assets, all of the Company's domestic
subsidiaries and 67% of the stock of its foreign subsidiaries. The interest rate
ranges from 1.375% to 2.75% over the London Inter Bank Offered Rate ("LIBOR")or
the base rate (as defined), at the Company's choice. Under the New Credit
Facility, the Company is obligated to pay certain fees, including an annual
commitment fee in an amount of 0.50% of the

                                       65
<PAGE>   66
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

unused portion of the commitment. Amounts outstanding under the New Credit
Facility may not exceed an amount based on specified percentages of the
Company's accounts receivable, inventory and net contract related investments.
At December 31, 1999, the Company had $106.7 million in cash advances under the
credit agreement with $4.2 million available under the New Credit Facility.
Average usage since inception of the New Credit Facility has been $96.4 million,
resulting in an average availability of $13.9 million over the same period.

     The New Credit Facility requires the Company to comply with certain
financial covenants, including limitations on additional borrowings and capital
expenditures, certain debt coverage ratios, minimum net worth and other
customary requirements. At December 31, 1999, the Company was not in compliance
with the leverage ratio, the minimum fixed charge coverage ratio and the minimum
net worth requirement. On March 28, 2000 the Company obtained a waiver of
noncompliance with these requirements and an amendment to the New Credit
Facility that, among other things, amend the leverage ratio, the fixed charge
coverage ratio, and minimum net worth requirement, and requires the commitment
amount under the New Credit Facility to be reduced by 75% of the net proceeds of
asset sales. The amendment changes the interest rate to the lender's base rate
plus 2.00% per annum until the Company completes certain of its contracts. It is
not anticipated that the Company will complete these contracts until the fourth
quarter of 2001. In connection with the amendment, the Company is obligated to
pay certain fees, including an annual commitment fee in an amount of 1.00% of
the unused portion of the commitment.

  1998 Credit Facility

     In 1997, HAM entered into a credit facility (the "Credit Facility") with a
bank that provided for accounts receivable and contract related inventory based
borrowings of up to $20 million at prime plus  1/2% through March 20, 1998.
These borrowings were secured by accounts receivable and personal guarantees of
certain stockholders of the Company. The Credit Facility expired in 1998 and was
extended until May 3, 1999, and the borrowing capacity was increased to $25
million at prime plus  1/2% (8.13% at December 31, 1998). A balance of $9.3
million was outstanding at December 31, 1998, and an additional $9.6 million was
available. In August 1999, the Company entered into a supplemental bank credit
facility to provide an additional $20 million in borrowing capacity.

  Convertible Subordinated Notes

     In conjunction with the HMG merger, the Company assumed, through a
Supplemental Indenture, an aggregate principal amount of $185.0 million of
4 1/2% Convertible Subordinated Notes (the "Notes"). The Notes, originally
issued on September 15, 1997, mature on September 15, 2004. The Notes were
issued under an Indenture Agreement (the "Indenture") that provides that the
Notes are convertible at the option of the holder into shares of common stock of
the Company at a conversion rate of $55.26 per share, subject to adjustment for
certain events (as defined in the Indenture). As a result of purchase accounting
adjustments related to the merger, the recorded book value of the Notes was
adjusted to reflect fair market value on the date of the merger. Accordingly, a
discount of $70.3 million was recorded. For the year ended December 31, 1999,
accretion of this discount amounted to $1.6 million, which resulted in an
effective interest rate of 15.79% on the Notes, and is included in interest
expense.

     Interest on the Notes is payable semiannually, in arrears, on March 15 and
September 15 of each year, with principal due at maturity.

     The Notes are redeemable, in whole or in part, at the option of the
Company, at any time on or after September 15, 2000, at the redemption prices
(expressed as percentages of the principal

                                       66
<PAGE>   67
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amount) set forth below, plus accrued and unpaid interest and liquidated
damages, if any, to, but excluding, the redemption date.

<TABLE>
<CAPTION>
YEAR                                                       PERCENTAGE
----                                                       ----------
<S>                                                        <C>
2000.....................................................    102.57%
2001.....................................................    101.93
2002.....................................................    101.28
2003.....................................................    100.64
2004.....................................................    100.00
</TABLE>

     Holders of the Notes may, at their option, require that the Company
repurchase all or a portion of the Notes upon the occurrence of a "change of
control" (as defined in the Indenture) at a cash price equal to 100% of the
principal amount, together with accrued and unpaid interest and liquidated
damages, if any, to the date of purchase.

     The fair value of the Company's 4 1/2% convertible subordinated notes as of
December 31, 1999 was $111.0 million. The fair value of the Company's remaining
long-term debt approximates its recorded value.

  Taxable Revenue Bonds, Series 1998

     In conjunction with the HMG merger, the Company assumed an aggregate
principal amount of $30 million of Mississippi Business Finance Corporation
Taxable Revenue Bonds, Series 1998 (the "Bonds"). The Bonds, originally issued
on January 1, 1998, mature on December 31, 2013. Interest on the bonds is
payable semiannually, in arrears, on June 30 and December 31 of each year, at an
annual interest rate of 6.39%. Principal is due at maturity.

     The Bonds are subject to mandatory sinking fund redemption requirements of
$3 million annually. These payments, together with accrued interest to the date
of redemption and without premium or penalty, are due on December 31 of each
year commencing December 31, 2004 and continuing through December 31, 2013. The
Company has the option to redeem the Bonds, in whole at any time, or in part on
any payment date, in the inverse order of their maturities at an amount equal to
the principal amount together with accrued interest through the redemption date.

  Other Debt

     In December 1997, the Company issued bonds under Title XI that are
guaranteed by MARAD to partially finance construction of the Company's FGO East
Facility. The bonds bear interest at a rate of 6.35% and are payable over 15
years in semi-annual installments. The financing agreement includes several
restrictive financial and non-financial covenants, the violation of which would
carry monetary penalties. The Company was not in compliance with all such
covenants as of December 31, 1999 but had received waivers of such covenants.

     In 1998, the Company borrowed $8.0 million from GE Capital Corporation for
the financing of the purchase of certain equipment used in the Company's
Pascagoula, Mississippi facilities. The loan, which is secured by the purchased
equipment, bears interest at 7.05% and is repayable in quarterly installments of
$0.5 million plus interest through 2002.

     In December 1998, the Company issued $18.0 million of 7.99% taxable revenue
bonds through the Mississippi Business Finance Corporation to finance the
purchase of equipment used primarily at the FGO East Facility. The Bonds are
repayable in monthly installments of approximately

                                       67
<PAGE>   68
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$0.2 million, including interest for 10 years. The Bonds are secured by the
purchased equipment. The Company received certain state sales, use and state
income tax incentives related to the bonds.

     A summary of debt maturities including the discount on the Convertible
Subordinated Notes over the next five years follows:

<TABLE>
<CAPTION>
               YEAR ENDING DECEMBER 31,                      AMOUNT
               ------------------------                      ------
                                                         (IN THOUSANDS)
<S>                                                      <C>
2000...................................................     $ 13,645
2001...................................................        6,285
2002...................................................      111,539
2003...................................................        4,765
2004...................................................      192,166
</TABLE>

10. EMPLOYEE BENEFIT PLANS

  Pension Plan

     In conjunction with the HMG merger, the Company assumed a liability related
to an employee pension plan. The plan was frozen effective March 31, 1998. The
plan provides income and death benefits for eligible employees who were members
of the plan at the time of curtailment. The Company's policy is to fund
retirement costs accrued but only to the extent such amounts are deductible for
income tax purposes. Plan assets include cash, short-term debt securities, and
other investments. Benefits are based on years of credited service and
compensation.

     The Company has adopted Statement of Financial Accounting Standard No. 132,
"Employer's Disclosures about Pension and Other Postretirement Benefits," which
revises the required disclosures about pension and other postretirement benefit
plans. The changes in benefit obligations and plan assets during the period from
November 3, 1999 through December 31, 1999 were not material. The following
table summarizes the funded status of the pension plan at December 31, 1999 (in
thousands):

<TABLE>
<S>                                                           <C>
Benefit obligation at end of year...........................  $8,306
                                                              ======
Fair value of plan assets at end of year....................  $9,793
                                                              ======
Funded status of the plan...................................  $1,487
Unrecognized net actuarial loss.............................    (133)
                                                              ------
Prepaid benefit cost........................................  $1,354
                                                              ======
Assumptions used in actuarial calculations were as follows:
Weighted average assumptions:
  Discount rate.............................................   7.75%
  Expected return on plan assets............................   9.00%
  Rate of compensation increase.............................   4.75%
</TABLE>

  401(k) Plan

     The Company has a contributory 401(k) plan in which employees of the
Company may participate. Under the plan, eligible employees are allowed to make
voluntary pretax contributions which are matched, up to certain limits, by the
Company. Employer contributions to the plan were $1.5 million, $0.7 million, and
$0.1 million during the years ended December 31, 1999, 1998 and 1997,
respectively.

                                       68
<PAGE>   69
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Incentive Compensation Plan

     The Company has an Incentive Compensation Plan (the Plan) under which both
qualified and non-qualified options, and restricted stock and other forms of
incentive compensation may be granted. As of December 31,1999, approximately
5,982,000 shares of common stock are reserved for issuance under the Plan. The
Plan is administered by a committee of the Board, which selects persons eligible
to receive options and determines the number of shares subject to each option,
the vesting schedule, the exercise price and the duration of the option. The
exercise price of any option granted under the Plan cannot be less than 100% of
the fair market value on the date of grant and its duration cannot exceed 10
years.

     Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," (SFAS 123), allows companies to record expense based
on the fair value of stock-based compensation upon issuance or elect to remain
under the current Accounting Principles Board Opinion No. 25 ("APB 25") method
whereby no compensation cost is recognized upon grant if certain requirements
are met. The Company accounts for its stock-based compensation under APB 25.
However, pro forma disclosures as if the Company adopted the cost recognition
requirements under SFAS 123 are presented below.

     If the compensation cost for the Company's 1999, 1998, and 1997 grants for
stock-based compensation plans had been determined consistent with SFAS 123, the
Company's net income (loss) per common share for the years ended December 31,
1999, 1998 and 1997 would have approximated the pro forma amounts below.

<TABLE>
<CAPTION>
                                      1999                  1998                  1997
                               -------------------   -------------------   -------------------
                                  AS                    AS                    AS
                               REPORTED   PROFORMA   REPORTED   PROFORMA   REPORTED   PROFORMA
                               --------   --------   --------   --------   --------   --------
                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                            <C>        <C>        <C>        <C>        <C>        <C>
Net income (loss)............  $(30,826)  $(34,558)  $35,286    $29,974    $23,269    $19,731
Net income (loss) per common
  share:
  Basic......................  $  (1.18)  $  (1.32)  $  1.46    $  1.23    $  1.10    $  0.94
  Diluted....................  $  (1.18)  $  (1.32)  $  1.43    $  1.22    $  1.09    $  0.93
</TABLE>

     The weighted average grant date fair value of options granted during the
year ended December 31, 1999 was $7.90. The fair value of options was estimated
using the Black-Scholes option-pricing model with the following assumptions: (a)
dividend yield of 0%; (b) expected volatility of 90.7%; (c) risk-free interest
rate ranging from 6.60% to 6.71%; and (d) average expected life of 7 years.

     The fair value of options was estimated using the Black-Scholes
option-pricing model with the following assumptions: (a) dividend yield of 0%;
(b) expected volatility of 95.6%; (c) risk-free interest rate ranging from 5.2%
to 5.88%; and (d) expected life of 10 years.

     Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing model does not necessarily provide a reliable
single measure of the fair value of its employee stock options.

                                       69
<PAGE>   70
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     A summary of the Company's stock options as of December 31, 1999, 1998 and
1997 and changes during the years then ended is presented below:

<TABLE>
<CAPTION>
                                        1999                 1998                1997
                                 ------------------   ------------------   ----------------
                                              WGT.                 WGT.               WGT.
                                  NUMBER      AVG.     NUMBER      AVG.     NUMBER    AVG.
                                    OF       EXER.       OF       EXER.       OF      EXER.
                                  OPTIONS    PRICE     OPTIONS    PRICE    OPTIONS    PRICE
                                 ---------   ------   ---------   ------   --------   -----
<S>                              <C>         <C>      <C>         <C>      <C>        <C>
Outstanding at beginning of
  year.........................  1,054,110   $13.44     937,950   $ 7.08         --   $  --
Granted........................  3,914,500     9.65     355,053    25.02    937,950    7.08
Forfeited......................     (5,333)   10.66    (119,698)   10.31         --      --
Exercised......................    (82,384)    7.35    (119,195)    3.60         --      --
                                 ---------            ---------            --------
Outstanding at end of year.....  4,880,893   $10.45   1,054,110   $13.44    937,950   $7.08
                                 =========   ======   =========   ======   ========   =====
Options exercisable at year
  and..........................  1,552,478   $10.36     195,225   $ 8.14     76,820   $1.20
Options vesting in future
  years........................  3,328,415    10.49     858,885    14.65    861,130    6.63
                                 ---------            ---------            --------
Options outstanding at year
  end..........................  4,880,893   $10.45   1,054,110   $13.44    937,950   $7.08
                                 =========   ======   =========   ======   ========   =====
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 1999.

<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                                     -------------------------------------   ----------------------
                                                     WEIGHTED
                                                     AVERAGE      WEIGHTED                 WEIGHTED
                                                    REMAINING     AVERAGE                  AVERAGE
RANGE OF                               NUMBER      CONTRACTUAL    EXERCISE     NUMBER      EXERCISE
EXERCISE PRICES                      OUTSTANDING   LIFE (YEARS)    PRICE     EXERCISABLE    PRICE
---------------                      -----------   ------------   --------   -----------   --------
<S>                                  <C>           <C>            <C>        <C>           <C>
$ 0.50 ...........................       87,000        7.5        $ 0.500        34,800    $ 0.500
  2.50............................       20,000        7.0          2.500         8,000      2.500
  8.75............................      575,000        9.5          8.750            --      5.750
  8.50............................      516,341        7.5          8.500       342,627      8.500
  9.625...........................    3,000,000        9.5          9.625     1,050,000      9.625
 11.375...........................      339,500        9.0         11.375            --     11.375
 15.188-19.75.....................      103,000        8.8         15.321        34,333     15.321
 27.625-46.50.....................      240,052        8.5         29.790        82,718     30.239
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 1998.

<TABLE>
<CAPTION>
                                              OPTIONS OUTSTANDING             OPTIONS EXERCISABLE
                                     -------------------------------------   ----------------------
                                                     WEIGHTED
                                                     AVERAGE      WEIGHTED                 WEIGHTED
                                                    REMAINING     AVERAGE                  AVERAGE
RANGE OF                               NUMBER      CONTRACTUAL    EXERCISE     NUMBER      EXERCISE
EXERCISE PRICES                      OUTSTANDING   LIFE (YEARS)    PRICE     EXERCISABLE    PRICE
---------------                      -----------   ------------   --------   -----------   --------
<S>                                  <C>           <C>            <C>        <C>           <C>
$ 0.500............................     99,200         8.5        $ 0.500       17,600     $ 0.500
  2.500............................     20,000         8.0          2.500        4,000       2.500
  8.500............................    591,758         8.5          8.500      170,958       8.500
 15.00-24.99.......................    103,000         9.6         15.321           --          --
 24.00-46.50.......................    240,152         9.5         29.790        2,667      43.670
</TABLE>

                                       70
<PAGE>   71
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In February 1997, HAM agreed to grant an employee fully vested shares of
common stock of HAM equal to approximately 0.418% of the common shares then
outstanding (76,820 shares) and granted that employee options to purchase an
equal amount of additional shares at $1.20 per share that were to vest ratably
on January 1, 1999, 2000 and 2001, subject to forfeiture if the employee
terminates employment. The options expire if unexercised by December 31, 2006.
Pursuant to the terms of the option agreements, all of the options outstanding
became fully vested subsequent to the initial public offering because of a
change in ownership of the Company. Accordingly, HAM charged $0.8 million to
selling, general and administrative expenses in the year ended December 31,
1997.

     In July, August, and December 1997 and in February 1998, respectively, the
Company issued 202,000, 9,000, 27,130, and 15,038 stock options to certain
employees. The option price for these issues ranged from $0.50 to $17.00, which
was less than their fair market value at the date of grant, and vested over
terms ranging from 3 to 5 years. Such differences in the option price and the
per share fair market value represent non-cash compensation to the individuals
receiving the options, which is measured at the date of the stock option's
grant, and is amortized and included in selling, general, and administrative
expenses over the respective vesting terms of the options in accordance with APB
25. Future expense to be recognized with respect to these options amounted to
$0.4 million at December 31, 1999. Compensation expenses related to these stock
options of $0.2 million, $0.3 million and $0.6 million was recognized in 1999,
1998 and 1997, respectively. Total non-cash compensation expense for the years
ended December 31, 1999, 1998 and 1997 was $0.2 million, $0.3 million and $1.0
million, respectively.

     All of the shares issued to employees in connection with the agreements
described above were exchanged for shares of the Company in connection with the
Reorganization. In addition, any options to purchase shares of HAM outstanding
at the time of the Reorganization were exchanged for options to purchase shares
of the Company, with the number of shares and option price being changed based
on the share exchange ratio used in the Reorganization.

11. LEASES

     The Company leases certain land, drydocks, and machinery and equipment
under noncancelable operating leases which expire at various dates through the
year 2017.

     Future minimum lease payments for long-term lease arrangements are as
follows:

<TABLE>
<CAPTION>
               YEAR ENDING DECEMBER 31,                     AMOUNT
               ------------------------                     ------
                                                        (IN THOUSANDS)
<S>                                                     <C>
2000..................................................     $ 4,347
2001..................................................       3,785
2002..................................................       3,648
2003..................................................       3,602
2004..................................................       3,493
Thereafter............................................      13,417
</TABLE>

     Lease expense on long-term lease arrangements was $1.8 million, $1.3
million and $2.3 million for the years ended December 31, 1999, 1998, and 1997,
respectively. The Company enters into short-term lease arrangements for
equipment needed to fulfill the requirements of specific jobs. Any payments owed
or committed under these lease arrangements as of December 31, 1999 are not
included as part of total minimum lease payments. Rent expense for these
arrangements was $5.2 million, $5.8 million and $3.1 million for the fiscal
years ended December 31, 1999, 1998 and 1997, respectively.

                                       71
<PAGE>   72
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. RELATED PARTY TRANSACTIONS

  Transactions with Stockholders

     During 1997, HAM distributed certain assets to its stockholders. Assets
distributed included real estate previously held for investment with an
estimated market value of $1.1 million and a carrying value of approximately
$0.3 million, along with related debt of $0.2 million and an airplane with an
estimated market value of $0.6 million and a carrying value of approximately
$0.5 million. The difference between the estimated fair market value and the
carrying value of the distributed assets has been recognized as a gain in the
statement of operations for the year ended December 31, 1997.

     Between March 31 and June 30, 1997, one of the Company's predecessors made
cash distributions to its stockholders of approximately $1.4 million, primarily
to provide the stockholders with cash to meet income tax obligations on earnings
of such predecessors prior to 1997. In addition, in contemplation of the
proposed initial public offering, one of the predecessors distributed to its
stockholders marketable securities with a fair value of approximately $4.8
million, together with related margin account debt of approximately $2.7
million. Further, one of the predecessors distributed approximately $4.5 million
to its stockholders representing the stockholders' estimated income tax
obligations on the earnings of the predecessors during 1997 through the date of
termination of its S Corporation status.

     During 1999 and 1998, the Company maintained cash deposits in a single
financial institution on whose Board of Directors the Company's President and
Chief Executive Officer is a member. Deposits in this bank were in the amount of
$0.1 million and $19.7 million as of December 31, 1999 and 1998, respectively.

     The Company is obligated to make payments pursuant to an aircraft lease
agreement with Equipment Management Systems, a company owned primarily by the
Company's President and Chief Executive Officer. Under previous leases, the
Company paid $50,000 per month during January 1997 through October 1998 and also
paid operating expenses of the aircraft. The monthly lease payment was increased
to $65,000 for November 1998 and pursuant to a new lease executed in December
1998, the payment increased to $85,000 per month. Lease payments for the first
quarter of 2000 were suspended but the Company continues to pay operating
expenses.

13. LITIGATION SETTLEMENTS AND CONTINGENCIES

  Liberty Mutual

     On September 18, 1998, Liberty Mutual and Employers Insurance of Wausau
(the "Insurers") filed suit against a subsidiary of the Company, FGO (formerly
HAM Marine, Inc.), two contract labor providers, Petra Contractors, Inc., KT
Contractors, Inc., and fifty unnamed individuals in an action styled Liberty
Mutual Insurance Company and Employers Insurance of Wausau v. HAM Marine, Inc.,
et al. (in the United States District Court for the Southern District of
Mississippi, Jackson Division, Case No. 3:98cv6111LOS). Insurers allege that the
contract labor providers were alter egos of FGO established to obtain workers'
compensation insurance at lower rates than FGO could have obtained in its own
name. The Insurers seek actual damages of $2.3 million and punitive damages of
$4.5 million. On October 1, 1999, the Insurers were allowed to amend their
complaint to add certain former officers and directors of FGO and other third
party individuals and entities which the Insurers allege were involved in the
action which is the subject of the complaint.

                                       72
<PAGE>   73
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

  Hyundai

     On January 11, 1999, FGO was served with a summons by Hyundai Heavy
Industries Co. Limited ("Hyundai") in an action styled Hyundai Heavy Industries
Co. Limited v. Ocean Rig ASA and HAM Marine, Inc. (in the High Court of Justice,
Queen's Bench Division, Commercial Court, 1009 Folio No. 67). Hyundai alleges
that FGO tortuously interfered with Hyundai's contract (the "Hyundai Contract")
with Ocean Rig ASA ("Ocean Rig") to complete one oil and gas drilling rig for
$149.9 million. The Hyundai Contract was signed on October 22, 1997, but was
subject to approval by the Ocean Rig Board of Directors on December 18, 1997.
The contract contained a "no shop" clause prohibiting Ocean Rig from negotiating
with any other party for the work on this one vessel while the contract was in
effect. After the Hyundai Contract was signed, but before it was considered by
the Ocean Rig Board of Directors, FGO actively pursued a contract from Ocean Rig
for the completion of three other drilling vessels. Ultimately, the Ocean Rig
Board of Directors did not approve the Hyundai Contract and, thereafter, FGO
received a contract to complete two drilling vessels for Ocean Rig and an option
to complete two more. Hyundai alleges that FGO tortuously interfered with the
Hyundai Contract in order to obtain a contract from Ocean Rig for the completion
of the first drilling vessel. FGO denies all of Hyundai's allegations and is
vigorously defending the action. The total potential exposure to FGO is
approximately $15 million or 10 percent of the Hyundai Contract.

  Economic Incentive Program

     In connection with the construction of the FGO East Facility, the County of
Jackson, Mississippi, agreed to dredge the ship channel and build roads and
other infrastructure under an economic incentive program. The terms of the
economic incentive program require that the Company maintain a minimum
employment level of 400 jobs through the FGO East Facility during the primary
term of the FGO East Facility's 20-year lease. If the Company fails to maintain
the minimum employment level, the Company could be required to pay the remaining
balance of the $6 million loan incurred by the county to finance such
improvements.

  General Exposure to Industry Conditions

     The nature of the Company's activities relating to the conversion, retrofit
and repair of drilling rigs subjects its property and employees, along with the
property and employees of its customers and others, to hazards which can cause
personal injury or damage or destruction of property. Although the Company
maintains such insurance protection as it considers economically prudent, there
can be no assurance that any such insurance will be sufficient or effective
under all circumstances or against all hazards to which the Company may be
subject. In particular, due to the cost of errors and omissions policies related
to the design of drilling rigs and production units, the Company does not carry
insurance covering claims for personal injury, loss of life or property damage
relating to such design activity. A successful claim for which the Company is
not fully insured could have a material adverse effect on the Company's
financial position and results of operations.

     The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's financial position or results of operations.

                                       73
<PAGE>   74
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

14. CONTRACTUAL MATTERS

  Ocean Rig

     In December 1997 and June 1998, the Company entered into contracts to
construct two semi-submersible drilling rigs for Ocean Rig ASA, a Norwegian
company. The Company commenced construction of one rig in June 1998 and the
other in January 1999. In late July and early August 1999, Friede Goldman
initiated discussions with Ocean Rig with respect to anticipated delays in the
completion and delivery of the two rigs from the original delivery dates of
August 26, 1999 and November 23, 1999. The Company asserted that Ocean Rig was
responsible for the delays and certain cost increases due to Ocean Rig-initiated
design changes and late delivery by Ocean Rig of information and equipment
required to be provided to the Company by Ocean Rig pursuant to the terms of the
construction contracts.

     Friede Goldman entered into negotiations with Ocean Rig in early August
1999 for the purpose of seeking compensation from Ocean Rig for additional costs
and delay damages resulting from the Ocean Rig-initiated design changes and late
deliveries of information and equipment. In connection with these negotiations,
Ocean Rig denied responsibility for causing the delivery delays and indicated
that it would seek delay damages from Friede Goldman in the event that the
delivery dates were not met.

     On August 16, 1999, the Company and Ocean Rig entered into an agreement
providing for new delivery dates of March 31, 2000 and June 30, 2000 for the two
rigs. As part of this agreement, Ocean Rig agreed to make all payments when due
and as construction milestones are met in accordance with the two contracts. The
agreement also required both parties to submit supporting documentation relating
to their respective claims and required the parties to meet to negotiate a
resolution of their dispute. A resolution between the parties was not reached
and fast track arbitration with respect to the claims was initiated by Ocean Rig
in London, England on September 3, 1999. The Company asserted an arbitration
claim in excess of $75.0 million seeking compensation for additional costs and
delay damages relating to the construction of the two rigs.

     Ocean Rig sought liquidated damages and damages at large for delay of up to
$28.0 million. The dispute between the Company and Ocean Rig was settled
pursuant to the terms and conditions of a Confidential Settlement Agreement
dated January 18, 2000. Among other things, the settlement with Ocean Rig
provided for an increase of $21.5 million in the contract price of each rig and
revised delivery dates of October 2000 and December 2000 for the two rigs; and
total liquidated damages for late delivery beyond the new delivery dates of up
to $7.5 million for each rig.

     The Company has adjusted previously recognized revenues and gross profits
to reflect the percentage of completion based on the revised delivery dates and
related cost estimates and expected recoveries. The net impact of this
adjustment to account for the settled claim and related additional costs
incurred and for the timing of recognition of related revenues and expenses was
a net reduction for the year ended December 31, 1999 of approximately $37.4
million. The amount of the adjustment was based on, among other things, the
outcome of the settlement negotiations and management's estimate of the
percentage of completion of the projects at the end of the year.

  Petrodrill

     In April 1998, TDI-Halter, L.P., now Friede Goldman Offshore Texas, L.P.
("FGOT"), a subsidiary of the Company, entered into contracts to construct two
semi-submersible drilling rigs for Petrodrill IV Ltd. and Petrodrill V, Ltd.
("Petrodrill") with the combined contract value of $168.0 million (the
"Contracts"). FGOT provided certain bonds issued by Fireman's Fund guaranteeing
FGOT's performance under the Contracts. After FGOT commenced construction of the
two rigs,

                                       74
<PAGE>   75
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

FGOT began to experience delays in the production schedule and increased costs
due, in whole or part, to delays caused by Petrodrill and by certain
subcontractors nominated for FGOT's use by Petrodrill, and by FGOT's performing
as the lead yard as opposed to a follow-on yard as anticipated by the parties.

     In April 1999, and in connection with a transaction whereby the Federal
Maritime Administration ("MARAD") agreed to finance the Petrodrill rigs, FGOT
and Petrodrill entered into an amendment to the Contracts that provided, among
other things, for extensions to the delivery dates of approximately six months
for each rig. Thereafter, production delays continued. Under the Contracts, FGOT
is entitled to extensions of the delivery dates for permissible delay as defined
in the Contracts ("Permissible Delay") and for delays caused by Petrodrill
breaches of contract. FGOT notified Petrodrill that, as a result of such delays,
it was entitled to additional extension of the delivery dates and to additional
compensation. Petrodrill refused to acknowledge FGOT's right to extension of the
delivery dates. Petrodrill was also advised that the rigs could not be completed
by their respective existing delivery dates.

     Due to Petrodrill's refusal to grant extensions to the delivery dates FGOT
notified Petrodrill in January 2000 that it was mitigating its and Petrodrill's
damages by deferring certain fabrication efforts until engineering work could be
completed so that construction could go forward in an efficient manner. FGOT
also notified Petrodrill that it believed it was entitled to additional monetary
compensation from Petrodrill as a result of delay, disruption, inefficiencies
and other direct and indirect costs caused by, among other things, delays by
Petrodrill and its nominated subcontractors and by FGOT being required to
perform as the lead yard.

     On January 13, 2000, Petrodrill filed suit against the Company and FGO, in
state court in Houston, Texas asserting, among other things, that the Company
and FGO had tortiously interfered with FGOT's Contracts with Petrodrill, seeking
injunctive relief and damages. On January 19, 2000, the case was removed to the
federal district court in Houston (the "US litigation"). On January 27, 2000,
the Company filed a counterclaim and FGOT filed a complaint against Petrodrill
in the US litigation asserting breach of contract, and seeking monetary damages,
reformation of contract and declaratory relief.

     On January 27, 2000, Petrodrill filed an action against FGOT in the court
in London, England, (the "UK action") seeking essentially the same relief on
different theories as it had in the US litigation. In March, the court in London
dismissed Petrodrill's application for interim relief that FGOT was not entitled
to cease construction work; confirmed that the proper jurisdiction and forum for
the disputes was the court in London; and ordered a stay of the US litigation.
As directed by the UK court, FGOT filed a counterclaim seeking monetary damages
in an amount of at least $68.5 million, and extension of the delivery dates
under various legal theories.

     In late March 2000, FGOT and Petrodrill reached an agreement, which is
subject to various approvals, including that of MARAD and the Boards of
Directors of each Company, to further amend the Contracts (the "Amendment No.
2"). Amendment No. 2 will stay the UK action for six months and dismiss the US
litigation, with prejudice except as to FGOT's rights to pursue its enumerated
claims against Petrodrill for additional compensation in the UK action. Under
the Amendment, the delivery dates for the rigs will be extended until August 1,
2001 and November 1, 2001, respectively; Petrodrill will waive all of its claims
against FGOT accruing prior to the Amendment, including its right to terminate
the Contracts for events occurring prior to the Amendment; total liquidated
damages for late delivery beyond the new delivery dates will be capped at $6.6
million for each rig; any future right of Petrodrill to terminate each Contract
will accrue only if the respective rig is not delivered within 180 days of its
extended delivery date, as such date may be further extended under other
contractual provisions; and FGOT will credit Petrodrill up to $2 million per rig
against any
                                       75
<PAGE>   76
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

amounts awarded against Petrodrill, but only to the extent FGOT recovers against
Petrodrill. After the six-month stay of the UK action, FGOT intends to
vigorously pursue its claims for additional compensation.

     Notwithstanding the Amendment, the Company intends to proceed with
construction of the rigs while pursuing any and all remedies available to it
under the Contracts and applicable law. If the contract delivery dates are not
extended as provided in Amendment No. 2 for any reason, including any failure to
obtain an approval required for Amendment No. 2 to become effective, FGOT will
not be in a position to deliver the rigs on or before the pre-Amendment delivery
dates, or the date on which Petrodrill's contractual right to terminate the
Contracts will accrue. Petrodrill's remedies upon termination include among
others, the right to rescind the Contracts, transfer the rigs to FGOT, and
demand reimbursement for all amounts paid, including amounts paid for owner
furnished equipment. FGOT would likely not be in a position to meet such a
demand, and if such demand was successfully asserted, it could have a material
adverse effect on the Company.

     Based upon current estimates, the Company believes that it will incur
approximately $60 million in costs in excess of the contract prices as adjusted
for change orders, to complete the contracts. A provision for these excess costs
has been provided in the Company's purchase accounting treatment of assets and
liabilities acquired through the merger with HMG. The funding of these costs
could have a significant impact on the Company's liquidity. The balance of the
excess costs at December 31, 1999 was approximately $49.7 million and is
included in the reserve for losses on uncompleted contracts in the consolidated
balance sheets. Management expects such costs will be expended by the Company
over eighteen months beginning in April 2000.

15. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

     The Company's contracts in progress at December 31, 1999 and 1998, consist
of the following components:

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              -----------------------
                                                                  1999         1998
                                                              ------------   --------
                                                                  (IN THOUSANDS)
<S>                                                           <C>            <C>
Costs incurred on uncompleted contracts.....................   $1,758,484    $220,727
Estimated earnings..........................................       35,095      51,605
                                                               ----------    --------
                                                                1,793,579     272,332
Less billings to date.......................................    1,766,761     303,462
                                                               ----------    --------
                                                               $   26,818    $(31,130)
                                                               ==========    ========
Included in the following balance sheet captions:
  Costs and estimated earnings in excess of billings on
     uncompleted contracts..................................   $  143,769    $ 14,398
  Billings in excess of costs and estimated earnings on
     uncompleted contracts..................................       50,725      45,528
  Reserve for losses on uncompleted contracts...............       66,226          --
                                                               ----------    --------
                                                               $   26,818    $(31,130)
                                                               ==========    ========
</TABLE>

16. BUSINESS SEGMENTS

     As a result of the merger with HMG, the Company classifies its business
into three segments: Vessels, Offshore, and Engineered Products. Operations
within the Vessels segment include the new construction and repair of a wide
variety of vessels for the government, offshore energy and

                                       76
<PAGE>   77
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

commercial markets. Products in this segment include offshore support vessels
and offshore double hull tank barges for energy markets; offshore and inland tug
boats, ocean-going barges and oil spill recovery vessels for commercial markets;
and, oceanographic survey and research ships, high-speed patrol boats and
ferries for government markets. Operations within the Offshore segment include
the new construction, conversion and repair of mobile offshore drilling rigs and
production platforms. Operations within the Engineered Products segment include
the design, manufacture and marketing of cranes, mooring systems, derricks, and
other marine deck equipment. The Company evaluates the performance of its
segments based upon income before interest and income taxes as these expenses
are not allocated to the segments. Accounting policies are the same as those
described in Note 2, "Basis of Presentation and Significant Accounting
Policies."

     Selected information as to the operations of the Company by segment is set
forth below.

<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31, 1999
                       ------------------------------------------------------------------------
                                             ENGINEERED
                       VESSELS    OFFSHORE    PRODUCTS    CORPORATE   ELIMINATIONS     TOTAL
                       --------   --------   ----------   ---------   ------------   ----------
                                                    (IN THOUSANDS)
<S>                    <C>        <C>        <C>          <C>         <C>            <C>
Revenues.............  $ 38,920   $400,520    $40,258     $     --     $      --     $  479,698
Cost of revenue......    32,971    408,684     32,736           --            --        474,391
Operating income
  (loss).............     4,225    (24,634)        10      (18,345)           --        (38,744)
Capital
  expenditures.......       401      6,527        310          264            --          7,502
Total assets.........   256,803    318,561     82,626      483,190      (140,288)     1,000,892
</TABLE>

<TABLE>
<CAPTION>
                                                    YEAR ENDED DECEMBER 31, 1998
                                     -----------------------------------------------------------
                                                ENGINEERED
                                     OFFSHORE    PRODUCTS    CORPORATE   ELIMINATIONS    TOTAL
                                     --------   ----------   ---------   ------------   --------
                                                           (IN THOUSANDS)
<S>                                  <C>        <C>          <C>         <C>            <C>
Revenue............................  $331,753    $51,906     $     --      $   (746)    $382,913
Cost of revenue....................   254,226     39,986           --          (500)     293,712
Operating income (loss)............    64,316      3,899      (11,464)         (249)      56,502
Capital expenditures...............    58,675      1,005        1,058            --       60,738
Total assets.......................   256,315     69,126       81,473       (92,354)     314,560
</TABLE>

     The Company's revenue attributable to the country of domicile and to
foreign countries based on the location of the customer is as follows:

<TABLE>
<CAPTION>
                                                                 DECEMBER 31,
                                                              -------------------
                                                                1999       1998
                                                              --------   --------
                                                                (IN THOUSANDS)
<S>                                                           <C>        <C>
United States...............................................  $245,341   $233,389
Norway......................................................   151,775     62,254
Bahamas.....................................................    23,695         --
Canada......................................................    17,547     35,362
France......................................................    12,679     12,262
Other.......................................................    28,661     39,646
                                                              --------   --------
                                                              $479,698   $382,913
                                                              ========   ========
</TABLE>

     At December 31, 1999, the Company had $64.2 million in long-lived assets
which were held in foreign countries with amounts of $46.2 million and $18.0
million in Canada and France, respectively. Included in the long-lived assets
held in France in 1999 are $8.3 million in net intangible

                                       77
<PAGE>   78
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

assets. At December 31, 1998, the Company had $69.3 million in long-lived assets
which were held in foreign countries with amounts of $46.6 million and $22.7
million in Canada and France, respectively. Included in the long lived assets
held in France in 1998 are $9.9 million in net intangible assets.

17. RECONCILIATION OF NET INCOME (LOSS) PER SHARE

     The following table sets forth the computation of basic and diluted net
income (loss) per share:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                                                        ----------------------------
                                                          1999      1998      1997
                                                        --------   -------   -------
                                                           (IN THOUSANDS, EXCEPT
                                                              PER SHARE DATA)
<S>                                                     <C>        <C>       <C>
Numerator:
  Net income (loss)...................................  $(30,826)  $35,286   $23,269
                                                        ========   =======   =======
  Numerator for net income (loss) per share,
     diluted..........................................  $(30,826)  $35,286   $23,269
                                                        ========   =======   =======
Denominator:
  Denominator for net income (loss) per share-weighted
     average shares outstanding.......................    26,148    24,211    21,065
  Effect of dilutive securities:
     Stock options....................................        --       388       232
                                                        --------   -------   -------
  Denominator for net income (loss) per share,
     diluted..........................................    26,148    24,599    21,297
                                                        ========   =======   =======
Net Income (loss) per share...........................  $  (1.18)  $  1.46   $  1.10
                                                        ========   =======   =======
Net Income (loss) per share, diluted..................  $  (1.18)  $  1.43   $  1.09
                                                        ========   =======   =======
</TABLE>

18. UNAUDITED QUARTERLY FINANCIAL DATA

<TABLE>
<CAPTION>
                                                              QUARTER ENDED
                                             ------------------------------------------------
                                             MARCH 31   JUNE 30    SEPTEMBER 30   DECEMBER 31
                                             --------   --------   ------------   -----------
                                                              (IN THOUSANDS)
<S>                                          <C>        <C>        <C>            <C>
1999
Contract revenue...........................  $145,156   $133,488     $51,699       $149,355
Gross profit (loss)........................    25,923     20,092      (4,433)       (36,275)
Operating income (loss)....................    16,009     12,253     (11,533)       (55,473)
Income (loss) before taxes.................    15,211     11,300     (12,953)       (61,525)
Net income (loss)..........................    10,007      8,028      (8,528)       (40,333)
Net income (loss) per share
  Basic....................................      0.43       0.34       (0.36)         (1.39)
  Diluted..................................      0.43       0.34       (0.36)         (1.39)
</TABLE>

     The effect on net income per share, diluted, would be anti-dilutive if the
stock options and the conversion of the 4 1/2% Convertible Subordinated Notes
had been assumed in the computation. See Notes 9 and 10.

                                       78
<PAGE>   79
                  FRIEDE GOLDMAN HALTER, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                                                QUARTER ENDED
                                               -----------------------------------------------
                                               MARCH 31   JUNE 30   SEPTEMBER 30   DECEMBER 31
                                               --------   -------   ------------   -----------
                                                               (IN THOUSANDS)
<S>                                            <C>        <C>       <C>            <C>
1998
Contract revenue.............................  $68,751    $88,597     $92,669       $132,896
Gross profit.................................   18,622     20,904      21,918         27,757
Operating income.............................   11,003     12,699      14,236         18,564
Income before taxes..........................   11,152     12,644      14,068         18,101
Net income...................................    6,738      7,647       8,977         11,924
Net income per share
  Basic......................................     0.28       0.31        0.37           0.51
  Diluted....................................     0.27       0.31        0.37           0.51
</TABLE>

     Results of operations for the third and fourth quarters of 1999 include a
downward adjustment in revenues and gross profits as a result of a change in
estimate to complete two new build semi-submersible drilling rigs.

     During the fourth quarter of 1998, the Company finalized the accounting for
the acquisition of FGN and completed the determination of the fair value of the
construction contracts that were in progress at the date of acquisition. The
determination resulted in the Company's recognizing revenue and net income and
basic income per share of approximately $2.2 million and $1.5 million and $0.06
per share, respectively, in the quarter ended December 31, 1998, that were more
properly attributable to the first three quarters of 1998.

     Effective January 1, 1998, the Company adopted a 13-week quarterly
reporting period by which the fiscal year is divided into four 13-week periods
ending on the last Sunday in each period. The fiscal year-end continued to be
December 31. Accordingly, for calendar year 1998, quarterly periods ended on
April 5, July 5, October 4, and December 31. This change in reporting periods
was made to allow the close of interim financial reporting periods to coincide
with the close of direct labor reporting periods. Effective January 1, 1999, the
Company adopted a policy whereby calendar quarters (March 31, June 30, and
September 30) will be used for interim reporting purposes. This change was made
to provide more direct comparability with other publicly traded entities.

19. SUBSEQUENT EVENT

     In March 2000, the Company entered into a purchase agreement to sell the
Yacht division of its Vessels segment to a company whose controlling shareholder
is the former Chief Operating Officer of the Company, and currently a member of
the Company's Board of Directors. Also see Notes 9, 13 and 14.

                                       79
<PAGE>   80

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 2000.

                                            FRIEDE GOLDMAN HALTER, INC.

                                                   /s/ J. L. HOLLOWAY
                                            ------------------------------------
                                                       J. L. Holloway
                                            Chairman and Chief Executive Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf of the registrant
and in the capacities indicated on March 30, 2000.

<TABLE>
<CAPTION>
SIGNATURE -------------------------------------------  TITLE ----------------------------------------
<C>                                                    <S>

                 /s/ J. L. HOLLOWAY                    Chairman of the Board and Chief Executive
-----------------------------------------------------    Officer (Principal Executive Officer)
                   J. L. Holloway

                  /s/ RICK S. REES                     Executive Vice President and Chief Financial
-----------------------------------------------------    Officer (Principal Financial Officer and
                    Rick S. Rees                         Principal Accounting Officer)

                  /s/ ALAN A. BAKER                    Director
-----------------------------------------------------
                    Alan A. Baker

                 /s/ T. JAY COLLINS                    Director
-----------------------------------------------------
                   T. Jay Collins

               /s/ ANGUS R. COOPER II                  Director
-----------------------------------------------------
                 Angus R. Cooper II

                  /s/ BARRY J. GALT                    Director
-----------------------------------------------------
                    Barry J. Galt

                /s/ JEROME L. GOLDMAN                  Director
-----------------------------------------------------
                  Jerome L. Goldman

                  /s/ GARY L. KOTT                     Director
-----------------------------------------------------
                    Gary L. Kott
</TABLE>

                                       80
<PAGE>   81

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER                                 DESCRIPTION
       -------                                 -----------
<C>                    <S>
          2.1          -- Agreement and Plan of Merger, dated as of June 1, 1999
                          between Friede Goldman International Inc. and Halter
                          Marine Group, Inc. (incorporated by reference to Exhibit
                          2.1 to Friede Goldman International Inc.'s Registration
                          Statement on Form S-4 (Registration No. 333-87853) filed
                          with the SEC on September 27, 1999).
          2.2          -- Amendment No. 1, dated September 14, 1999, to Agreement
                          and Plan of Merger between Friede Goldman International
                          Inc. and Halter Marine Group, Inc. (incorporated by
                          reference to Exhibit 2.2 to Friede Goldman International
                          Inc.'s Registration Statement on Form S-4 (Registration
                          No. 333-87853) filed with the SEC on September 27, 1999).
          3.1          -- Articles of Incorporation of Friede Goldman Mississippi,
                          Inc.,as amended. (incorporate by reference to Exhibit 3.1
                          to Friede Goldman International Inc.'s Annual Report on
                          Form 10-K for the fiscal year ended December 31, 1998).
          3.2          -- Amended and Restated Bylaws of Friede Goldman Halter,
                          Inc. (incorporated by reference to Exhibit 3.1 to Friede
                          Goldman Halter, Inc.'s Current Report on Form 8-K filed
                          with the SEC on November 9, 1999).
          4.1          -- Specimen Stock Certificate. (incorporated by reference to
                          Exhibit 3 to Friede Goldman International Inc.'s
                          Registration Statement on Form 8-A (File No. 001-14627)
                          filed with the SEC on November 18, 1998).
          4.2          -- Stockholder's Agreement by and between Friede Goldman
                          International Inc. and J. L. Holloway, dated as of June
                          1, 1999. (incorporated by reference to Exhibit 4.1 to
                          Friede Goldman International Inc.'s Registration
                          Statement on Form S-4 (Registration No. 333-87853) filed
                          with the SEC on September 27, 1999).
          4.3          -- Registration Rights Agreement among Friede Goldman
                          International Inc., J. L. Holloway, Carl M. Crawford,
                          Ronald W. Schnoor, James A. Lowe, III and John F. Alford.
                          (incorporated by reference to Exhibit 4.3 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-4 (Registration No. 333-87853) filed with the SEC
                          on September 27, 1999).
          4.4          -- Amendment No. 1 to Registration Rights Agreement among
                          Friede Goldman International Inc., J. L. Holloway, Carl
                          M. Crawford, Ronald W. Schnoor, James A. Lowe, III, John
                          F. Alford, Holloway Partners, L.P., Carl Crawford
                          Children's Trust and Bodin Children's Trust.
                          (incorporated by reference to Exhibit 4.4 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-4 (Registration No. 333-87853) filed with the SEC
                          on September 27, 1999).
          4.5          -- Indenture dated September 15, 1997 between the Halter
                          Marine Group, Inc. and the United States Trust Company of
                          Texas, N.A., as Trustee for Halter Marine Group Inc.'s
                          4 1/2% Convertible Subordinated Notes due 2004.
                          (incorporated by reference to Exhibit 4.1 to Halter
                          Marine Group Inc.'s Registration Statement on Form S-3
                          (Registration No. 333-38491) filed with the SEC on
                          October 22, 1997).
</TABLE>
<PAGE>   82

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER                                 DESCRIPTION
       -------                                 -----------
<C>                    <S>
          4.6          -- First Supplemental Indenture, dated as of November 2,
                          1999 and effective as of November 3, 1999, by and among
                          Friede Goldman International Inc., Halter Marine Group,
                          Inc. and U.S. Trust Company of Texas, N.A., as Trustee
                          for the 4 1/2% Convertible Subordinated Notes due 2004.
                          (incorporated by reference to Exhibit 4.1 to Friede
                          Goldman Halter, Inc.'s Current Report on Form 8-K filed
                          with the SEC on November 9, 1999).
          4.7          -- Registration Rights Agreement dated September 15, 1997,
                          among the Company and Donaldson, Lufkin & Jenrette
                          Securities Corporation and Merrill Lynch, Pierce, Fenner
                          & Smith Incorporated. (incorporated by reference to
                          Exhibit 4.2 to Halter Marine Group Inc.'s Registration
                          Statement on Form S-3 (Registration No. 333-38491) filed
                          with the SEC on October 22, 1997).
          4.8          -- Rights Agreement, dated December 7, 1998, between the
                          Company and American Stock Transfer & Trust Company, as
                          Rights Agent. (incorporated by reference to Exhibit 1 to
                          Friede Goldman International Inc.'s Registration
                          Statement on Form 8-A (File No. 001-14627) filed with the
                          SEC on January 12, 1999).
          4.9          -- First Amendment to Rights Agreement, dated as of October
                          18, 1999, between the Company and American Stock Transfer
                          & Trust Company, as Rights Agent. (incorporated by
                          reference to Exhibit 4.4 to Friede Goldman International
                          Inc.'s Registration Statement on Form 8-A/A (File No.
                          001-14627) filed with the SEC on October 20, 1999).
         10.1          -- Credit Agreement, dated as of November 3, 1999, among
                          Friede Goldman Halter, Inc., Wells Fargo Bank (Texas),
                          National Association, as administrative agent and
                          co-arranger, Banc One Capital Markets, Inc., as
                          co-arranger and syndication agent, and the lenders party
                          thereto. (incorporated by reference to Exhibit 10.1 to
                          Friede Goldman Halter, Inc.'s Current Report on Form 8-K
                          filed with the SEC on November 9, 1999).
        *10.2          -- Amendment No. 1, dated December 1999, to Credit
                          Agreement, among Friede Goldman Halter, Inc. and Wells
                          Fargo Bank (Texas) National Association, as
                          administrative agent and co-arranger, Banc One Capital
                          Markets, Inc., as co-arranger and syndication agent, and
                          the lenders party thereto.
        *10.3          -- Form of Amendment No. 2, dated March 30, 2000 to Credit
                          Agreement, among Friede Goldman Halter, Inc. and Wells
                          Fargo Bank (Texas) National Association, as
                          administrative agent and co-arranger, Banc One Capital
                          Markets, Inc., as co-arranger and syndication agent, and
                          the lenders party thereto.
        *10.4          -- Employment Agreement, dated June 1, 1999 and effective as
                          of November 3, 1999, between Friede Goldman International
                          Inc. and J. L. Holloway.
        *10.5          -- Employment Agreement, dated June 1, 1999 and effective as
                          of November 3, 1999, between Friede Goldman International
                          Inc. and John F. Alford.
        *10.6          -- Employment Agreement, dated June 1, 1999 and effective as
                          of November 3, 1999, between Friede Goldman International
                          Inc. and Rick S. Rees.
</TABLE>
<PAGE>   83

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER                                 DESCRIPTION
       -------                                 -----------
<C>                    <S>
        *10.7          -- Employment Agreement, dated June 1, 1999 and effective as
                          of November 3, 1999, between Friede Goldman International
                          Inc. and Ronald W. Schnoor.
         10.8          -- Friede Goldman Halter, Inc. Amended and Restated 1997
                          Equity Incentive Plan. (incorporated by reference to
                          Exhibit 99.1 to Friede Goldman Halter, Inc.'s
                          Registration Statement on Form S-8 (Registration No.
                          333-92051) filed with the SEC on December 3, 1999).
         10.9          -- Amendment No. 1 to Friede Goldman Halter, Inc. Amended
                          and Restated 1997 Equity Incentive Plan. (incorporated by
                          reference to Exhibit 99.2 to Friede Goldman Halter,
                          Inc.'s Registration Statement on Form S-8 (Registration
                          No. 333-92051) filed with the SEC on December 3, 1999).
         10.10         -- Business Purchase Agreement, dated November 22, 1996, by
                          and among J. L. Holloway Holdings, Inc., Friede &
                          Goldman, Ltd. and Jerome L. Goldman. (incorporated by
                          reference to Exhibit 10.19 to the Friede Goldman
                          International Inc.'s Registration Statement on Form S-1
                          (Registration No. 333-27599) filed with the SEC on May
                          22, 1997).
         10.11         -- Amendment to Business Purchase Agreement, dated December
                          3, 1996, by and among Friede & Goldman, Ltd. (f/k/a J. L.
                          Holloway Holdings, Inc.), J. L. Goldman Associates, Inc.
                          (f/k/a Friede & Goldman, Ltd.) and Jerome L. Goldman.
                          (incorporated by reference to Exhibit 10.20 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-1 (Registration No. 333-27599) filed with the SEC
                          on May 22, 1997).
         10.12         -- Second Amendment to Business Purchase Agreement, dated
                          May 19, 1997, by and among Friede & Goldman, Ltd., J. L.
                          Goldman Associates, Inc. and Jerome L. Goldman.
                          (incorporated by reference to Exhibit 10.21 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-1 (Registration No. 333-27599) filed with the SEC
                          on May 22, 1997).
         10.13         -- Third Amendment to Business Purchase Agreement, dated
                          June 13, 1997, by and among Friede & Goldman, Ltd., J. L.
                          Goldman Associates, Inc. and Jerome L. Goldman.
                          (incorporated by reference to Exhibit 10.22 to Friede
                          Goldman International Inc.'s Registration Statement on
                          Form S-1 (Registration No. 333-27599) filed with the SEC
                          on May 22, 1997).
         10.14         -- Stock Purchase Agreement, dated January 1, 1998, by and
                          among Marystown Shipyard Limited, Newfoundland Ocean
                          Enterprises Ltd., Friede Goldman Canada, Inc., Friede
                          Goldman International Inc. and Friede Goldman Marystown,
                          Ltd. (incorporated by reference to Exhibit 99.2 to the
                          Friede Goldman International Inc.'s Current Report on
                          Form 8-K filed with the SEC on January 16, 1998).
         10.15         -- Aircraft Dry Lease, dated as of December 1, 1998, by and
                          between Equipment Management Systems, LLC, lessor, and
                          Friede Goldman International Inc., lessee. (incorporated
                          by reference to Exhibit 10.21 to Friede Goldman
                          International Inc.'s Annual Report on Form 10-K for the
                          fiscal year ended December 31, 1998).
         16.1          -- Letter from Arthur Andersen, dated December 21, 1999,
                          addressed to the SEC (incorporated by reference to
                          Exhibit 16.1 to Friede Goldman Halter, Inc.'s Current
                          Report on Form 8-K filed with the SEC on December 21,
                          1999).
        *21.1          -- Subsidiaries of Friede Goldman Halter, Inc.
</TABLE>
<PAGE>   84

<TABLE>
<CAPTION>
       EXHIBIT
        NUMBER                                 DESCRIPTION
       -------                                 -----------
<C>                    <S>
        *23.1          -- Consent of Ernst & Young LLP.
        *23.2          -- Consent of Arthur Andersen LLP.
        *27.1          -- Financial Data Schedule
</TABLE>

---------------

* Filed herewith.