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                                 UNITED STATES
                      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 March 31, 1999

[_]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 33-6967

                           HALTER MARINE GROUP, INC.
            (Exact name of registrant as specified in its charter)

              Delaware                                 75-2656828
   (State or other jurisdiction of          (IRS Employer Identification No.)
   incorporation or organization)


                                                          39503
    13085 Seaway Road, Gulfport,                        (Zip Code)
             Mississippi
   (Address of principal executive
              offices)

      Registrant's telephone number, including area code: (228) 896-0029

          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

<TABLE>
<CAPTION>
                                  Name of each exchange
       Title of each class         on which registered
       -------------------       -----------------------
   <S>                           <C>
   Common Stock, $.01 par value  American Stock Exchange
</TABLE>

          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 Exchange Act during the
past 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 is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definite proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_]

  The aggregate market value of the Common Shares held by nonaffiliates of the
Registrant as of June 21, 1999 was approximately $184,000,000 based on the
closing price per share as reported by the American Stock Exchange.

          Common Shares outstanding as of June 21, 1999: 28,856,661.

  Portions of the Proxy Statement with respect to the 1999 Annual Meeting of
                       Shareholders are incorporated by
        reference in Part III, Items 10, 11, 12 and 13 of this report.

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                                    PART I

Items 1 and 2: Business

General

  Halter Marine Group, Inc. and Subsidiaries (collectively with its
subsidiaries, the "Company") is a provider of design, construction,
conversion, and repair services of vessels, offshore drilling rigs, and
engineered products servicing the offshore energy, government and commercial
markets. The Company, which conducts its operations in three business segments
(Vessels, Rigs, and Engineered Products), meets its customer requirements
through multiple production facilities and a current workforce of more than
7,200 skilled craftsmen, engineers and administrative personnel.

  Halter Marine Group, Inc. is a Delaware corporation incorporated on June 24,
1996 to serve as the parent of a new consolidated group. The Company formerly
conducted the business of construction, repair and conversion of primarily
ocean-going vessels for the government and commercial markets as a division of
Trinity Industries, Inc. ("Trinity"). On September 26, 1996, the Company
completed an initial public offering of 18.7% of its stock. On March 31, 1997,
Trinity distributed all of the remaining stock of the Company to its
stockholders.

Overview of Operations

 Vessels

  The Company is the fourth largest shipbuilder, and the largest builder of
small to medium-sized ocean-going vessels in the United States. The Company,
which has built more than 2,600 vessels in the past 40 years, specializes in
the new construction of vessels under 400 feet in length for the offshore
energy, government and commercial markets. The Company's Vessels segment has
eight shipyards available for dedication to the new construction of marine
vessels, although several of the Company's vessel facilities also perform work
for the Rigs and Engineered Products segments. All of the Company's new vessel
construction yards are strategically located along the Gulf Coast in Florida,
Mississippi, and Louisiana. The Company's multiple shipyards employ advanced
manufacturing techniques, including modular construction and zone outfitting
methods, and provide the Company with significant flexibility and efficiency
in manufacturing a wide variety of vessels. The Company believes that these
factors, together with its large and experienced engineering team and
workforce, position it to be a versatile and cost efficient domestic
shipbuilder.

  The Company is also a provider of repair and conversion services for small
to medium-sized ocean-going vessels and barges that service the offshore
energy and commercial markets. The Company has available six shipyards along
the Gulf Coast from Louisiana to Texas for the repair and conversion of
vessels and barges.

 Rigs

  As a result of the acquisition of Texas Drydock, Inc. ("TDI"), which was
completed in May 1997 (the "TDI Acquisition"), the Company became a leading
industry participant in the new construction, conversion and repair of mobile
offshore drilling rigs and production platforms for the offshore energy
industry. The Company has six shipyards in southeast Texas available for
repair and conversion work on jackup, submersible and semi-submersible
drilling rigs and production units. The Company operates yards in Orange,
Texas and Pascagoula, Mississippi that are principally utilized in the
construction of new offshore rigs. In addition to the yards dedicated to the
Rigs segment, facilities in the Vessels segment also support the fabrication
requirements of the Rigs segment.

 Engineered Products

  The Company entered the engineered products market during fiscal 1998 with
the acquisitions of AmClyde Engineered Products, Inc., Fritz Culver, Inc.,
Utility Steel Fabrication, Inc., and McElroy Machine & Manufacturing Co., Inc.
These companies, which now comprise the Engineered Products Group, design,
manufacture and market cranes, derricks, hoists, windlasses, jacks, linear
winches, fairleads, capstans, tuggers,

                                       2
<PAGE>

locking devices, turret bearings, control systems, winches and other related
products used in the marine and offshore construction industries. The
companies comprising the Engineered Products Group have an international
reputation as designers and builders of the world's largest cranes, mooring
systems, and towing winches.

Business Strategy

  The Company's business strategy is to position itself as a cost-efficient
marine manufacturer, making it a low-cost provider of a wide variety of
products to diversified global markets. The Company has taken steps to
increase the number of products and services it offers to the offshore energy
industry through internal growth, acquisitions, and international expansion
and it plans to continue to provide products and services for government and
commercial customers. The Company intends to consider, in the future, business
opportunities that it believes promote this business strategy.

Recent Developments--Proposed Merger

  On June 1, 1999, the Company and Friede Goldman International Inc., a
Mississippi corporation ("Friede Goldman"), entered into an Agreement and Plan
of Merger (the "Merger Agreement"). Friede Goldman provides new construction,
conversion, retrofit and repair services for offshore drilling rigs, including
jackups, submersibles, semi-submersibles and drillships.

  Pursuant to the terms of the Merger Agreement, the Company will merge with
and into Friede Goldman (the "Merger") and upon consummation of the Merger,
Friede Goldman will be the surviving corporation. As of the effective date of
the Merger, each outstanding share of common stock, par value $0.01 per share,
of the Company, other than shares held in the Company's treasury or owned by
Friede Goldman or any wholly owned subsidiary of Friede Goldman, will be
converted into the right to receive 0.4614 shares of common stock, par value
$0.01 per share, of Friede Goldman ("Friede Goldman Common Stock").

  Consummation of the Merger is subject to various conditions, including the
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the approval of the Merger
by the stockholders of the Company and of Friede Goldman.

Acquisitions

  Since its separation from Trinity, the Company has acquired, through either
stock or asset purchases, 10 companies including the acquisition of Trinity
Marine Orange, Inc. in May 1998. The aggregate purchase price for acquisitions
was approximately $167 million, of which approximately $124 million was paid
in cash and the balance in approximately 1,135,000 shares of the Company's
common stock. These acquisitions are described below.

 TDI Acquisition

  During the first quarter of fiscal 1998, the Company acquired TDI, a
provider of new construction, conversion and repair services for mobile
offshore drilling rigs and production platforms for the offshore energy
industry.

  In connection with the TDI Acquisition, the Company entered into various
consulting agreements and employment agreements with certain officers of TDI.
Rick S. Rees and Don O. Covington became executive officers of the Company.
See "Management--Directors and Executive Officers."

 McDermott Acquisitions

  In June 1997, the Company acquired from McDermott International, Inc.
("McDermott") two shipyard properties near the Company's existing Gulfport,
Mississippi facility, now operated as part of the Gulfport

                                       3
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facility, which are used to build components for various vessels. In July
1997, the Company acquired from McDermott a third shipyard in Sabine Pass,
Texas which is now dedicated to the conversion and repair of mobile offshore
rigs.

 Bludworth Bond Acquisition

  In August 1997, the Company acquired all of the outstanding stock of
Bludworth Bond Shipyard, Inc. ("Bludworth Bond"), which owns and operates two
Texas shipyards specializing in drydock and dockside repair and conversion of
vessels and barges. The Company believes that the acquisition of Bludworth
Bond has enhanced the Company's presence in the vessel repair and conversion
market.

 Engineered Products Group Acquisitions

  In October and December 1997, the Company acquired four companies that
formed the basis for its Engineered Products Group: AmClyde Engineered
Products, Inc. of St. Paul, Minnesota; Utility Steel Fabrication, Inc. of
Slidell, Louisiana; Fritz Culver, Inc. of Covington, Louisiana; and McElroy
Machine & Manufacturing Co., Inc. of Gulfport, Mississippi. These companies,
which now comprise the Engineered Products Group, design, manufacture and
market cranes, derricks, hoists, windlasses, jacks, linear winches, fairleads,
capstans, tuggers, locking devices, turret bearings, control systems, winches
and other related products used in the marine and offshore construction
industries.

 Calcasieu Shipyard Acquisition

  In February 1998, the Company acquired all of the outstanding stock of three
companies comprising the operations of Calcasieu Shipyard ("Calcasieu") of
Sulphur, Louisiana. Calcasieu is a full-service shipyard providing vessel
repair and conversion services, vessel gas freeing and cleaning services, and
specialized new construction.

 Trinity Marine Orange, Inc. Acquisition

  On May 29, 1998, the Company acquired all of the outstanding common stock of
Trinity Marine Orange, Inc. ("Orange") of Orange, Texas. Orange is an 88-acre
facility on the deep water Sabine River channel. The facility is being used in
the new construction of mobile offshore drilling and production units as well
as to fabricate components for rigs under construction at other Company
shipyards.

Products and Markets

  The Company specializes in the new construction, repair, and conversion of a
wide variety of vessels, rigs and engineered products for government, energy,
commercial and other markets as described below. See Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" for further information regarding offshore vessels, mobile
offshore rigs, and engineered products. See Part II, Item 8, "Financial
Statements and Supplementary Data," Note 8 for additional financial
information regarding the Company's business segments.

 Vessels

  The Company's Vessels segment builds small to medium-sized ocean-going
vessels for a wide variety of customers including offshore energy service
companies (including offshore support vessels (OSV's) and double hull fuel
barges), domestic and foreign governments (including oceanographic research
and survey ships, high speed patrol boats and ferries), and other commercial
enterprises (including tug boats, tow boats, and offshore barges). In
addition, the Company builds luxury megayachts under the name "Trinity
Yachts."

  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.

                                       4
<PAGE>

  Revenue from the Vessels segment amounted to $516 million in fiscal 1999,
and at March 31, 1999 the Company's vessel backlog was $315 million or 48% of
total backlog.

 Rigs

  The Company's Rigs segment engages in the new construction of mobile
offshore drilling rigs including jack-up, semi-submersible and drill barges.
The Rigs segment also performs conversion and repair of mobile offshore rigs
including conversion of jackup drilling rigs from a slot design to a
cantilever design, lengthening legs on jackup drilling rigs, conversion of
jackup drilling rigs into production units, conversion of submersible rigs
into deepwater semi-submersible rigs and conversion of early generation semi-
submersible rigs to provide the enhanced capabilities associated with later
generation semi-submersible rigs.

  Revenue from the Rigs segment was $356 million in fiscal 1999, and at March
31, 1999 the Company's rig backlog was $268 million or 41% of total backlog.

 Engineered Products

  The Company's Engineered Products segment designs, manufactures and markets
cranes, derricks, hoists, windlasses, jacks, linear winches, fairleads,
capstans, tuggers, locking devices, turret bearings, control systems, winches
and other related products used in the marine and offshore construction
industries. Brand names include American, AmClyde, Clyde, Wiley, Lucker,
Sauerman, Unit Mariner, J & B, McElroy, Fritz Culver, and Hepburn.

  Revenue from the Engineered Products segment was $127 million in fiscal
1999, and at March 31, 1999, the Company's engineered products backlog was $73
million or 11% of total backlog.

Operations

  The Company has conducted new construction operations for vessels and rigs
at 10 shipyards located along the Gulf Coast. The Company strategically
allocates its projects to its yards as required by market conditions and its
level of backlog. During fiscal 1999, the Company reallocated production to
certain shipyards enabling it to temporarily close certain of its yards in
Texas and Florida. The Company's new construction 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 has 12 shipyards
available for conducting its vessel and rig repair and conversion operations.
These shipyards have available 18 dedicated drydocks. The Company's multiple
shipyards, combined with its large engineering team, provide significant
flexibility and efficiency in the new construction, repair and conversion of a
wide variety of vessels and rigs. The Company believes that these factors,
together with its skilled and experienced workforce, make it one of the most
versatile and cost-efficient domestic shipbuilders. In addition to its
domestic operations, the Company's operations include four international joint
ventures in Argentina, China, Italy, and the Philippines.

  The Company's shipyards are well-maintained facilities. The Company spent
approximately $45 million on capital improvements for its existing shipyard
facilities during fiscal 1999, and has budgeted approximately $20 million for
capital improvements (excluding acquisitions) for these facilities during
fiscal 2000.

  The Company's Engineered Products Group conducts its operations at six
office facilities and four manufacturing facilities.

Engineering

  Engineering is a key component of the products and services offered by the
Company. The Company maintains a large marine engineering department which has
been instrumental in helping it maintain its reputation

                                       5
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as a technical leader in the engineering and design of vessels and engineered
products. The Company's engineering department consists of approximately 294
employees, 85 of whom are engineers or naval architects. In addition, the
Company has an arrangement with Zentech Consulting Engineers, a firm in which
the Company owns a minority interest, under which Zentech provides consulting
services in construction, conversion and repair of mobile offshore rigs. On
occasion, the Company subcontracts to other engineering firms some of its
engineering requirements.

Materials and Supplies

  The principal materials used by the Company in its shipbuilding, conversion
and repair, and engineered products businesses are standard steel shapes,
steel plate and paint. Other materials used in large quantities include
aluminum, steel pipe, electrical cable and fittings. The Company also
purchases component parts such as propulsion systems, boilers, generators and
other equipment. All of these materials and parts are currently available in
adequate supply from domestic and foreign sources. The Company's Equitable,
Gulfport and Orange shipyards are located on rail lines and typically obtain
materials and supplies by rail, truck or barge. The remainder of the Company's
shipyards ordinarily obtain materials and supplies by truck. The Company seeks
to obtain favorable pricing and payment terms for its purchases by
coordinating purchases among all of its shipyards 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. Management believes that the Company will continue to be able to
obtain steel at relatively favorable prices.

  In addition to the above materials, the Company's Engineered Products Group
uses machined steel castings, hydraulic cylinders and electrical control
systems that are available on an international basis. The worldwide sourcing
of these materials minimizes the reliance on any one geographic region.

Sales and Marketing

  The Company's marketing efforts for its Vessels segment are coordinated at
the Company's headquarters in Gulfport, Mississippi. The Company coordinates
the efforts of its Rigs segment from a sales office in Houston, Texas. The
Engineered Products segment conducts its sales efforts from St. Paul,
Minnesota with satellite offices in Houston, Texas; Metairie, Louisiana;
Slidell, Louisiana; Covington, Louisiana; and Gulfport, Mississippi. The
Company's sales and marketing forces consist of approximately 54 employees.
The Company has contractual arrangements in certain countries to assist it
with its international marketing efforts.

Competition

  The Company faces substantial competition in all of its business segments.
In the Vessels segment, the Company offers a wide range of products and the
number and identity of competitors on particular projects vary greatly,
depending upon the type of vessel and size of project. There are at least ten
domestic shipyards that compete with the Company for domestic shipbuilding
contracts. In pursuing international contracts, the Company also competes with
many foreign shipyards, some of which are subsidized by their governments.

  The number of competitors in the Company's Rigs segment varies greatly
depending upon market conditions as well as the size, type and location of the
project. In the new rig construction and rig conversion businesses, the
Company competes in a global market with companies principally based in the
United States, Europe and Asia. The Company has identified numerous companies
that are currently building or have built new drilling rigs, and have
performed or are currently performing major conversion jobs. Some of the
Company's foreign competitors are subsidized by their governments.

  The Company's Engineered Products segment competes primarily with at least
five domestic and four foreign manufacturers in the market for offshore marine
cranes, and with three domestic and two foreign companies in shipyard gantry
cranes. The competition for mooring systems and deck equipment includes
approximately five domestic and eight foreign suppliers. In addition, there
are several other companies, both domestic and foreign, which occasionally
compete in the engineered products market.

                                       6
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Contract Structure and Pricing

  The Company's contracts are generally obtained through a competitive bid
process. Most of the contracts for new construction entered into by the
Company, whether commercial or governmental, are fixed-price contracts under
which the Company retains all cost savings on completed contracts but is also
liable for the full amount of all cost overruns. A limited number of the
Company's contracts with the U.S. Navy are fixed-price incentive contracts,
which provide for sharing between the government and the Company of cost
savings and cost overruns based primarily on a specified formula that compares
the contract target cost with actual cost. In addition, such fixed-price
incentive contracts generally provide for payment of escalation of costs based
on published indices relating to the shipbuilding industry. Although all cost
savings are shared under fixed-price incentive contracts, costs overruns in
excess of a specified amount must be borne entirely by the Company. Under
government regulations, certain costs, including certain financing costs,
portions of research and development costs and certain marketing expenses, are
not allowable costs under fixed-price incentive contracts.

  Contracts with the U.S. Navy are subject to termination by the government
either for its convenience or upon default by the Company. If the termination
is for the government's convenience, the contracts provide for payment upon
termination for items delivered to and accepted by the government, payment of
the Company's costs incurred plus the costs of settling and paying claims by
terminated subcontractors, other settlement expenses and a reasonable profit.
The Company's commercial contracts generally provide for cancellation in the
event of default by the Company. Certain of the Company's commercial contracts
also provide for cancellation in the event of the Company's failure to deliver
the product within a specified time frame, whether or not a default has
occurred.

  The Company's contracts for repair and conversion services include both
fixed price and time and materials contracts. Time and materials contracts
include an amount based on the Company's costs for labor and materials plus a
specified profit percentage.

Insurance

  The Company's activities involve the fabrication and refurbishment of large
steel structures, the operation of cranes and other heavy machinery and other
operating hazards that can cause personal injury or loss of life, severe
damage to and destruction of property and equipment and suspension of
operations. The Company maintains insurance against such hazards as it
considers economically prudent. The Company also maintains general liability
and product liability insurance in amounts it deems appropriate for the
Company's business.

  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.

Employees

  As of March 31, 1999, the Company had a total workforce of 7,296 employees,
of whom 1,318 were salaried and 5,978 were employed on an hourly basis. None
of the Company's employees is represented by any collective bargaining unit.
Total workforce at March 31, 1998 included contract labor of approximately
1,288.

Regulation

 Environmental Regulation

  The Company is subject to extensive and changing environmental laws,
including laws and regulations that relate to air and water quality, impose
limitations on the discharge of pollutants into the environment and establish
standards for the treatment, storage and disposal of toxic and hazardous
wastes. Stringent fines and penalties may be imposed for non-compliance with
these environmental laws. Additionally, these laws require the acquisition of
permits or other governmental authorizations before undertaking certain
activities, limit or prohibit other activities because of protected areas or
species and impose substantial liabilities for pollution

                                       7
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related to Company operations or properties. The Company's operations are
potentially affected by the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"). CERCLA (also
known as the "Superfund" law) imposes liability (without regard to fault) on
certain categories of persons for particular costs related to releases of
hazardous substances at a facility into the environment that causes natural
resource damages. Because the Company and previous owners and operators have
conducted industrial operations at some of the Company's properties for many
years, various materials from these operations might have been disposed of at
such properties. This could result in obligations under environmental laws,
such as requirements to remediate environmental impacts. In addition, the
Company performs tank cleaning and gas-freeing operations at its Gretna and
Calcasieu facilities that involve removal of residual fumes from vapor spaces
in barges. There are risks associated with the operation, including possible
explosion and emission of hazardous substances to the environment. The Company
has taken actions deemed by it to be appropriate to minimize these risks.

  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.

 Health and Safety Matters

  Laws and regulations, including the federal Occupational Safety and Health
Act, relating to worker health and workplace safety govern the Company's
facilities and operations. 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.

 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 cargos 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

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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
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.

Forward-Looking Statements and Factors Affecting Future Performance

  All statements (other than statements of historical fact) contained in the
Company's Annual Report, including the President's Letter to Stockholders and
in this Form 10-K, including statements in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" concerning the
Company's financial position and liquidity; results of operations; prospects
for commercial or government contracts; ability to take advantage of new
vessel construction and conversion opportunities; labor supply and costs;
selling, general and administrative costs; and other matters, are forward-
looking statements. Forward-looking statements in this document generally are
accompanied by words such as "anticipate," "believe," "estimate" or "expect"
or similar words or phrases. 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 correct. Certain of
the factors that could cause the Company's results to differ materially from
the results discussed in such forward-looking statements are discussed below.
All forward-looking statements in this document are expressly qualified in
their entirety by the cautionary statements in this paragraph, and by the
following discussion.

 Competition

  The shipbuilding and offshore rig new 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 and the difficulties experienced by
the U.S. shipbuilders in competing successfully for domestic and international
commercial projects against foreign shipyards, many of which are heavily
subsidized by their governments. Similarly, the rig industry is extremely
competitive and the Company also must compete for domestic and international
projects against foreign shipyards, many of which are heavily subsidized by
their governments. As a result of these factors, competition for domestic and
international commercial projects has increased significantly, particularly in
light of market conditions which

                                       9
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have decreased the number of available projects in the short term. Such
increased competition has resulted in substantial pressure on pricing and
profit margins.

 Dependence on Individual Customers

  Revenue derived from the construction of U.S. Navy vessels accounted for
approximately 9.1%, 17.1%, and 37.4% of the Company's consolidated revenue in
fiscal 1999, 1998, and 1997, respectively. There can be no assurance that the
Company will be successful in obtaining new U.S. Navy contracts, all of which
are competitively bid.

  During fiscal 1998, revenue derived from one customer for offshore support
vessels accounted for approximately 11% of the Company's consolidated revenue.
During fiscal 1999 and 1997, revenue generated from this customer was less
than 10%. There can be no assurance that the Company will be successful in
obtaining new contracts with this customer, all of which are competitively
bid.

 Dependence on the Offshore Oil and Gas Industry

  A significant portion of the Company's current contracts relate to the new
construction of offshore support vessels and the new construction, repair and
conversion of mobile offshore drilling rigs and equipment for vessels, rigs
and offshore construction. Customer demand for offshore support vessels,
mobile offshore rigs, and some of the Company's engineered products is
dependent upon, among other things, the level of activity in offshore oil and
gas exploration, development and production, particularly in the Gulf of
Mexico where many of the offshore support vessels manufactured by the Company
and the substantial majority of the mobile offshore rigs modified or repaired
by the Company have been put into service. The level of activity in offshore
oil and gas exploration, development and production is affected by such
factors as prevailing oil and gas prices, expectations about future prices,
the cost of exploring for, producing and delivering oil and gas, the sale and
expiration dates of available offshore leases, the discovery rate of new oil
and gas reserves in offshore areas, local and international political and
economic conditions, technological advances and the ability of oil and gas
companies to generate or otherwise obtain funds for capital expenditures. The
level of offshore drilling activity has declined from higher levels of
activity experienced in 1997 and 1998. A substantial reduction of offshore
drilling and development activity would reduce demand for the Company's
offshore-related products and could have a material adverse effect on the
Company's financial condition and results of operations.

 Availability of Shipyard Workers

  While the Company's shipyards are not currently experiencing labor
shortages, shortages of skilled labor could limit the Company's ability to
increase production to an extent that the Company might otherwise desire. No
assurances can be given regarding whether shortages will be experienced at one
or more of the Company's shipyards in the future.

 Integration of Acquisitions and Management of Growth

  The Company's growth strategy has emphasized the acquisition of other
offshore marine construction and equipment businesses and assets. There can be
no assurance, however, that the Company will be able to continue to identify
attractive acquisition opportunities, acquire additional companies on
favorable terms and conditions or successfully acquire identified targets. In
addition, no assurance can be given that the Company will be successful in
integrating those businesses already acquired into its existing operations,
and such integration may result in unforeseen operational difficulties or
require a disproportionate amount of management's attention. Furthermore,
there can be no assurance that competition for acquisition opportunities in
the industry will not escalate, thereby increasing the cost to the Company of
making further acquisitions or causing the Company to refrain from making
further acquisitions.

                                      10
<PAGE>

  On June 1, 1999, the Company and Friede Goldman entered into the Merger
Agreement. Consummation of the Merger is subject to various conditions. See
"Recent Developments--Proposed Merger".

 Contract Bidding Risk

  Most new construction contracts entered into by the Company, whether
governmental or commercial, are fixed priced contracts under which the Company
retains all cost savings on completed contracts but is also liable for the
full amount of all cost overruns. Although the Company attempts to anticipate
any increases through its estimating process which would be reflected in the
contract's pricing, there can be variation in the total costs as estimated and
the total costs as realized based upon a number of factors, including changing
job conditions, variations in labor and equipment productivity and
inefficiencies due to other work under construction during the life of the
contract. Depending on the nature and size of the fixed price contract,
variations from estimated contract performance could have a significant effect
on the Company's operating results in any particular fiscal quarter or year.

  Many of the Company's contracts contain provisions requiring the payment by
the Company of liquidated damages in the event that the Company fails to meet
specified performance criteria and deadlines. There can be no assurance that
the Company will not be required to make payments under such liquidated damage
provisions or that the requirement to make such payments will not have a
material adverse effect on the Company's operating results.

 Percentage of Completion Accounting

  The Company uses the percentage of completion method to account for its new
construction contracts in process. Under the percentage of completion method
used in its Vessels and Rigs segments, revenue from contracts is measured by
the percentage of labor hours incurred as compared to estimated total labor
hours for each contract. Under the percentage of completion method used in its
Engineered Products segment, revenue from contracts is measured by the
percentage of cost incurred as compared to estimated total cost for each
contract. The timing of recognition of revenues and expenses for financial
reporting purposes may differ materially from the timing of actual cash flows
from contract payments received and expenses paid. Provisions for estimated
losses on uncompleted contracts are made in the period in which such losses
are determined. To the extent that such provisions result in a loss or a
reduction or elimination of previously reported profits with respect to a
project, the Company would recognize a charge against earnings for the total
amount of the expected loss, which could be material.

 Backlog

  The Company accounts for its backlog of new construction projects for
vessels, rigs and engineered products by including only the remaining contract
values not previously recognized as revenue in any prior accounting period for
signed contracts on which the Company has received a down payment. In many
cases, the amounts included in backlog for the Company's rig conversion and
repair contracts are management's estimate of the total remaining contract
values of such jobs. Many of the Company's rig repair and conversion contracts
are a combination of fixed price, time and materials and unit pricing. To the
extent that the contracts have a time and materials or unit pricing component,
management estimates the remaining value of such work to be performed. If
management's estimates of the remaining value is incorrect, amounts included
in the Company's backlog could increase or decrease. The Company's level of
backlog is entirely dependent upon the Company's ability to contract for new
projects as current projects are completed. No assurance can be given that the
Company will be able to successfully replace existing backlog at any
particular rate or level in the short or long term.

 Dependence on Key Personnel

  The Company believes that its success in the future will be attributable to
and dependent upon, to a significant extent, the efforts and abilities of its
management team, including its current executive officers. John

                                      11
<PAGE>

Dane III, the Company's Chairman, President and Chief Executive Officer has
entered into a non-competition agreement with the Company. In connection with
the TDI acquisition and the acquisition of certain assets of AmClyde
Engineered Products, Inc., the Company entered into employment and non-
competition agreements with the chief executive officers of each of those
operating groups.

Properties

 Corporate Headquarters

  The Company's corporate headquarters is 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.

 Vessels and Rigs

  The Company's Vessels segment headquarters is located 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 has
available eight shipyards for the new construction of marine vessels, although
several of these facilities also can perform work for the Rigs and Engineered
Products segments. The Vessels segment has available six shipyards for the
repair and conversion of vessels and barges.

  The Company's Rigs segment is headquartered in Port Arthur, Texas. The Rigs
segment has available eight shipyards where it can perform new construction
and repair and conversion work on mobile offshore drilling units including
jack-up, submersible, semi-submersible and drill barges. In addition to the
yards dedicated to the Rigs segment, facilities included in the Vessels
segment can also support the fabrication requirements of the Rigs segment.

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

 Shipyards dedicated to New Construction:
<TABLE>
<CAPTION>
                                                Covered
                                            Fabrication Area Own or Expiration
        Property Name and Location          (Square Footage) Lease     Date
        --------------------------          ---------------- ------ ----------
<S>                                         <C>              <C>    <C>
Vessels Segment
Equitable and Trinity Yachts Shipyards.....     225,000      Lease     2016
 New Orleans, Louisiana

Halter Moss Point Shipyard.................     121,665        Own       --
 Moss Point, Mississippi

Lockport Shipyard..........................      97,000        Own       --
 Lockport, Louisiana

Moss Point Marine Shipyard.................      75,000        Own       --
 Escatawpa, Mississippi

Gulfport Shipyard..........................     554,500        Own       --
 Gulfport, Mississippi

Panama City Shipyard.......................      35,000        Own       --
 Panama City, Florida(1)

Gulf Coast Fabrication Shipyard............      15,000        Own       --
 Pearlington, Mississippi

Rigs Segment
TDI-Halter Orange Shipyard.................     600,000        Own       --
 Orange, Texas

Pascagoula Shipyard........................     220,000        Own       --
 Pascagoula, Mississippi
</TABLE>
--------
(1) Facility is temporarily closed until demand warrants reopening.

                                      12
<PAGE>

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

 Shipyards dedicated to Conversion and Repair:

<TABLE>
<CAPTION>
                                                 Drydock Features
                          --------------------------------------------------------------
                                                             Maximum     Own
   Property Name and               Number  Maximum Lifting    Vessel     or   Expiration
        Location          Acreage Drydocks Capacity (Tons) Width (Feet) Lease    Date
   -----------------      ------- -------- --------------- ------------ ----- ----------
<S>                       <C>     <C>      <C>             <C>          <C>   <C>
Vessels Segment
Gretna Shipyard.........     30       1         1,800           55       Own        --
 Harvey, Louisiana

Halter Gulf Repair
 Shipyard...............     59       4        22,400          120      Lease     2016
 New Orleans, Louisiana

TDI-Halter Pier 1
 Shipyard...............      4       1        10,000          126      Lease  Monthly
 Orange, Texas

Bludworth Bond-Houston
 Shipyard...............     11       4         2,000           65       Own        --
 Houston, Texas

Bludworth Bond-Texas
 City Shipyard..........      4       3         4,500           80       Own        --
 Texas City, Texas

Halter-Calcasieu
 Shipyard...............     35       3         2,200           60       Own        --
 Sulphur, Louisiana

Rigs Segment
TDI-Halter Childers
 Road...................      9      --            --           --      Lease     2000
 Orange, Texas(1)

TDI-Halter North Yard...     17      --            --           --       Own        --
 Port Arthur, Texas(1)

TDI-Halter Dock Yard
 --Ship Mode                100       1        64,000          122
 --Rig Mode                 100       1        64,000          363      Lease     2009
 Port Arthur, Texas

TDI-Halter Central
 Yard...................     32      --            --           --       Own        --
 Sabine Pass, Texas(1)

TDI-Halter Sabine Yard..     34      --            --           --       Own        --
 Sabine Pass, Texas

TDI-Halter South Yard...     21      --            --           --       Own        --
 Sabine Pass, Texas
</TABLE>
(1) Facility is temporarily closed until demand warrants reopening.

 Engineered Products

  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.

                                      13
<PAGE>

  The Engineered Products segment utilizes four plants to manufacture winches,
cranes, mooring systems, jacks, locking devices, windlasses, capstans, tuggers
and other related products used in the marine and offshore construction
industries. These manufacturing plants are summarized in the table below.

<TABLE>
<CAPTION>
                                                Covered
                                            Fabrication Area Own or    Expiration
        Property Name and Location          (Square Footage) Lease        Date
        --------------------------          ---------------- ------    ----------
<S>                                         <C>              <C>       <C>
Engineered Products Segment
Gulf Coast Manufacturing Division
 Slidell, Louisiana
  Bayou Liberty Facility...................      54,250      Lease(1)     2000
  Cabiran Road Facility....................     100,750       Own          --
Covington Manufacturing Division...........      46,000       Own          --
 Covington, Louisiana
Gulfport Manufacturing Division............      30,000       Own          --
 Gulfport, Mississippi
</TABLE>
--------
(1)   Lease/purchase whereby the Company will own the facility at conclusion
      of the lease.

Item 3: Legal Proceedings

  The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and suits in the
aggregate will not have a material adverse effect on the Company's business,
financial condition, results of operations or liquidity.

Item 4: Submission of Matters to a Vote of Security Holders

  There were no matters submitted to a vote of security holders during the
fourth quarter of fiscal 1999.

                                      14
<PAGE>

Item 4A: Executive Officers of the Registrant

 Executive Officers of the Company:

  The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
          Name            Age                     Position
          ----            ---                     --------
<S>                       <C> <C>
John Dane III............  48 Chairman, President and Chief Executive Officer
                              since September 1996. President of the Company
                              since 1987. Employed 1987.(1)

Daniel J. Mortimer.......  51 Former Executive Vice President and Chief
                              Operating Officer. Employed November 1997 until
                              May 1999, Director from April 1997 until June
                              1999. President of Gulf Coast Industries, Inc.
                              since 1988. Chairman and President of Gulf Coast
                              Fabrication, Inc., which was acquired by the
                              Company in 1994, from 1981 to 1994. Employed
                              1997. Resigned as Executive Vice President and
                              Chief Operating Officer in May 1999. Resigned
                              from Board of Directors in June 1999.

Rick S. Rees.............  46 Executive Vice President since April 1997.
                              Director since September 1996. Chief Financial
                              Officer since November 1997. President, Maritime
                              Holdings, Inc., which was acquired by the
                              Company in 1997, from September 1996 to April
                              1997. President Maritime Capital Corporation,
                              1989 to 1996. Employed 1997.

Richard T. McCreary......  43 Senior Vice President, Administration since
                              April 1997. From April 1995 to 1997, President
                              Gulf Division, Maritrans Operating Partners.
                              From 1990 to 1995 Vice President Operations,
                              Canal Barge Company, Inc. Employed 1997.

Maureen O'Connor           50 Senior Vice President, General Counsel and
 Sullivan................     Secretary since August 1997. 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.
                              Employed 1997.

Don O. Covington.........  64 Group President--TDI-Halter since April 1998.
                              From 1986 to 1998, President and Chief Executive
                              Officer of Texas Drydock, Inc., which was
                              acquired by the Company in 1997. Employed 1997.

Richard J. Juelich.......  48 Group President--Engineered Products Group since
                              April 1998. From 1992 to 1997, Chief Operating
                              Officer, and from 1995 to 1997, President of
                              AmClyde Engineered Products, which was acquired
                              by the Company in 1997. Chief Operating Officer
                              of AmClyde Engineered Products since 1992.
                              Employed 1997.
</TABLE>
--------
(1) Employment includes employment with Trinity Marine Group, the predecessor
    of the Company.

  There are no family relationships among the officers of the Company. The
Company's officers are elected annually by the Board of Directors and serve
one-year terms or until their successors are elected.

                                      15
<PAGE>

Item 5: Market for the Registrant's Common Stock and Related Stockholder
Matters

  The approximate number of holders of the Company's common stock as of the
record date is incorporated herein by reference from "Voting Securities and
Stockholders" in the definitive proxy statement for the Company's 1999 Annual
Meeting of Stockholders. The following table sets forth the high and low
closing sales price of the Company's common stock as reported on the American
Stock Exchange Composite Tape.

<TABLE>
<CAPTION>
      Quarter                                                       High   Low
      -------                                                      ------ ------
      <S>                                                          <C>    <C>
      Fiscal Year 1998
        First..................................................... $17.38 $ 9.83
        Second....................................................  32.25  16.00
        Third.....................................................  40.81  23.44
        Fourth....................................................  27.25  13.88

      Fiscal Year 1999
        First..................................................... $19.75 $13.88
        Second....................................................  18.44   8.50
        Third.....................................................  10.81   4.13
        Fourth....................................................   7.50   3.69
</TABLE>

  The Company has paid no dividends and does not expect to pay dividends in
the foreseeable future.

Sales of Unregistered Securities

  In July 1998, the Company issued an aggregate of 33,820 shares of its common
stock to certain executives who elected to take the stock in lieu of the
deferred amount of a cash bonus for fiscal year 1998. The issuance of such
shares was the only issuance or sale of securities by the Company during its
most recently completed fiscal 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, each of the certificates
representing the Company's securities issued in connection with such
transaction contained a restrictive legend.

                                      16
<PAGE>

Item 6: Selected Consolidated Financial Data

  The following table sets forth selected consolidated financial data for the
Company as of the dates and for the periods indicated. The selected
consolidated balance sheet data as of March 31, 1999, 1998, 1997, 1996 and
1995 and consolidated income statement data for the fiscal years ended March
31, 1999, 1998, 1997, 1996 and 1995 have been derived from the audited
consolidated financial statements of the Company. The selected consolidated
financial data set forth below should be read in conjunction with Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and related notes
included elsewhere in this report.

<TABLE>
<CAPTION>
                                         Year Ended March 31,
                             -------------------------------------------------
                               1999      1998       1997      1996      1995
                             --------  ---------  --------  --------  --------
                                 (in thousands, except per share data)
<S>                          <C>       <C>        <C>       <C>       <C>
Income Statement Data:(4)
Contract revenue earned....  $998,149  $ 670,238  $406,797  $254,294  $250,586
Cost of revenue earned.....   912,131    589,579   355,209   214,559   207,398
                             --------  ---------  --------  --------  --------
Gross profit...............    86,018     80,659    51,588    39,735    43,188
Selling, general and
 administrative expenses...    60,442     38,613    21,361    15,911    13,471
Amortization of excess of
 cost over net assets
 acquired..................     5,845      2,801        --        --        --
                             --------  ---------  --------  --------  --------
Operating income...........    19,731     39,245    30,227    23,824    29,717
Interest expense...........     8,135      6,600     3,232     3,268     3,844
Other, net.................      (719)       932       ( 8)      (11)       (5)
                             --------  ---------  --------  --------  --------
Income before income
 taxes.....................    12,315     31,713    27,003    20,567    25,878
Provision for income
 taxes.....................    (1,017)     9,197    10,887     8,102    10,170
                             --------  ---------  --------  --------  --------
Net income.................  $ 13,332  $  22,516  $ 16,116  $ 12,465  $ 15,708
                             ========  =========  ========  ========  ========
Net income per share, basic
 (pro forma for 1996)(1)...  $   0.46  $    0.80  $   0.59  $   0.46
                             ========  =========  ========  ========
Net income per share,
 diluted (pro forma for
 1996)(1)..................  $   0.46  $    0.78  $   0.59  $   0.46
                             ========  =========  ========  ========
Net cash provided
 (required) by:(4)
Operating activities.......  $ (3,480) $  38,324  $ 12,488  $ 23,742  $ 14,803
Investing activities.......  $(62,863) $(107,697) $(14,491) $(15,687) $(10,443)
Financing activities.......  $ 19,124  $ 113,440  $  8,410  $ (7,907) $ (4,057)
Other Data:(4)
EBITDA(2)..................  $ 44,149  $  53,106  $ 38,134  $ 30,579  $ 35,136
Depreciation and
 amortization..............  $ 24,607  $  15,217  $  7,899  $  6,744  $  5,414
Capital expenditures.......  $ 47,863  $  40,988  $ 14,491  $  5,568  $  6,337

<CAPTION>
                                               March 31,
                             -------------------------------------------------
                               1999      1998       1997      1996      1995
                             --------  ---------  --------  --------  --------
<S>                          <C>       <C>        <C>       <C>       <C>
Balance Sheet Data:(4)
Working capital............  $134,914  $ 151,057  $ 88,431  $ 36,601  $ 40,855
Total assets...............  $591,780  $ 499,601  $209,411  $141,374  $124,271
Long-term debt(3)..........  $239,727  $ 218,215  $ 52,000  $ 25,000  $ 25,000
Total equity...............  $164,949  $ 151,103  $ 93,301  $ 66,743  $ 54,278
Backlog data...............  $655,976  $ 817,102  $478,803  $431,292  $244,229
</TABLE>
--------
(1) Shares outstanding for 1996 have been assumed to be 27,000,000 (the total
    number of shares issued to Trinity and the public as a result of the
    initial public offering, exclusive of the underwriters' overallotment
    option of 675,000 shares and adjusted for the three-for-two stock split)
    for purposes of calculating pro forma net income per share.
(2) EBITDA (earnings before interest, taxes, depreciation and amortization
    expense) is presented here not as a measure of operating results, but
    rather as a measure of the Company's operating performance and ability to
    service debt. EBITDA should not be construed as an alternative to
    operating income (determined in accordance with GAAP), as an indicator of
    the Company's operating performance or as an alternative to cash flows
    from operating activities (determined in accordance with GAAP) as a
    measure of liquidity. EBITDA measures presented herein may not be
    comparable to similarly titled measures of other companies.
(3) Prior to March 31, 1997, long-term debt represented intercompany notes due
    to Trinity.
(4) Consolidated financial data for fiscal 1998 reflects the impact of
    companies acquired during the year from the dates of acquisition.

                                      17
<PAGE>

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

Forward Looking Statements

  See Part I, Items 1 and 2: Business, "Forward Looking Statements and Factors
Affecting Future Performance" for a discussion of forward looking statements
and factors affecting future performance contained in this report, including,
but not limited to, those contained in this Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations."

General

  The Company is a leading provider of design, new construction, conversion
and repair services for ocean-going vessels, mobile offshore drilling rigs and
production platforms, and engineered products servicing the offshore energy,
government and commercial markets. The Company classifies its business into
three segments: Vessels, Rigs, 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 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 Rigs 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, derricks, hoists, windlasses,
jacks, linear winches, fairleads, capstans, tuggers, locking devices, turret
bearings, control systems, winches and other related products used in the
marine and offshore construction industries. At March 31, 1999, the Company
had 22 shipyards which are strategically located along the Gulf Coast from
Florida to Texas.

  As of March 31, 1999, the Company had backlog with an aggregate remaining
value of approximately $656.0 million (excluding unexercised options held by
customers) covering construction of a total of 84 vessels, the new
construction of two multi-service drill barges, three semi-submersible rigs,
and one jackup drilling rig; and conversion or repair services on two mobile
offshore rigs. The Company anticipates that approximately $598 million of the
aggregate remaining value of this backlog will be completed during fiscal
2000.

  Although the Company cannot predict future levels or the timing of activity
in offshore oil and gas exploration, development and production, the Company
is optimistic that orders for new offshore support vessels and mobile offshore
rigs may be made in the next several years due to the demand for larger
vessels and rigs to support deep water oil and gas exploration and production
activities, as well as the substantial worldwide fleet attrition over the past
ten years and the aging of the remaining fleets. The demand for these products
could temporarily decrease as a result of short-term declines in oil prices as
it did during fiscal 1999. Orders generated by the Company's Engineered
Products segment are less directly related to the existing level of activity
in the offshore oil and gas exploration, development and production industry.
At March 31, 1999, the Company had 16 offshore support vessels, six rigs and
two drill barges under contract.

  The Company also hopes to capitalize on the anticipated increase in offshore
tank barge construction and conversion resulting from OPA '90 and the aging of
the worldwide fleet. The Company had two offshore double hull tank barges
under contract at March 31, 1999.

  Pursuant to the provisions of a separation agreement with Trinity, the
Company is prohibited, for four years plus an additional period under certain
circumstances, after the separation from Trinity, from engaging in the
construction of inland hopper barges and inland tank barges. Under special
arrangements with Trinity, the Company has built a limited number of such
vessels. Revenue related to this business was $0.7 million, $23.1 million and
$19.9 million for fiscal years 1999, 1998 and 1997, respectively. The
Company's gross profit from such activities was $0.2 million, $2.0 million and
$2.2 million for fiscal years 1999, 1998 and 1997, respectively. The Company's
management does not believe that the restrictions imposed pursuant to the
Separation Agreement will have a material adverse effect on the Company's
business, financial condition, results of operations or liquidity.

                                      18
<PAGE>

  The Company believes its multiple yard strategy and aggressive recruiting of
personnel will protect it from labor shortfalls in any one market. The
production labor force grew from 5,604 employees at March 31, 1998 to 5,978
employees at March 31, 1999.

  The Company has taken several steps during fiscal 2000 in response to
current market conditions including reallocation of production, allowing
temporary closure of certain yards until market demands warrant reopening, and
reduced levels of selling, general and administrative spending.

Results of Operations

  The following tables set forth certain statement of income information as a
percentage of the Company's revenue for the periods indicated below. Revenues
generated by the Company's Rigs and Engineered Products segments are included
from dates of acquisition.

<TABLE>
<CAPTION>
                                              Year Ended March 31,
                                  --------------------------------------------
                                       1999           1998           1997
                                  -------------- -------------- --------------
                                  Amount Percent Amount Percent Amount Percent
                                  ------ ------- ------ ------- ------ -------
<S>                               <C>    <C>     <C>    <C>     <C>    <C>
Contract revenue earned by
 business segment:
  Vessels........................ $515.7   51.7% $476.3   71.1% $406.8  100.0%
  Rigs...........................  355.7   35.6   159.9   23.9      --     --
  Engineered Products............  126.7   12.7    34.0    5.0      --     --
                                  ------  -----  ------  -----  ------  -----
                                  $998.1  100.0% $670.2  100.0% $406.8  100.0%
                                  ======  =====  ======  =====  ======  =====

Contract revenue earned by
 customer type:
  Government:(1)
    Vessels...................... $146.4   14.7% $171.9   25.6% $215.8   53.1%
  Energy:(2)
    Vessels......................  234.7   23.5   180.1   26.9    86.1   21.1
    Rigs.........................  355.7   35.6   159.9   23.9      --     --
                                  ------  -----  ------  -----  ------  -----
                                   590.4   59.1   340.0   50.8    86.1   21.1
  Commercial:(3)
    Vessels......................   44.7    4.5    62.8    9.4    81.4   20.0
  Other(4)
    Vessels......................   89.9    9.0    61.5    9.2    23.5    5.8
    Engineered Products..........  126.7   12.7    34.0    5.0      --     --
                                  ------  -----  ------  -----  ------  -----
                                   261.3   26.2    95.5   14.2    23.5    5.8
                                  ------  -----  ------  -----  ------  -----
                                  $998.1  100.0% $670.2  100.0% $406.8  100.0%
                                  ======  =====  ======  =====  ======  =====
</TABLE>
--------
(1) Consists of revenue from the Company's government customers, including the
    U.S. Navy, state and local governments and foreign governments.
(2) Consists of revenue from the construction or conversion of vessels and the
    construction, conversion and repair of mobile offshore drilling rigs.
    Vessels include offshore support vessels, offshore double-hull barges and
    tank barges.
(3) Consists of revenue from the Company's commercial customers and includes
    vessels such as tugboats, hopper barges, inland towboats and other
    vessels.
(4) Consists of revenue from customers for the construction of yachts, vessel
    repairs and assorted marine products and the design and manufacture of
    engineered products.


                                      19
<PAGE>

 Fiscal 1999 Compared with Fiscal 1998

  Contract revenue increased 48.9% to $998.1 million in the fiscal year ended
March 31, 1999 compared with $670.2 million in the fiscal year ended March 31,
1998. The majority of this increase in revenue was within the Rigs and
Engineered Products segments of the Company. The growth in revenue in the Rigs
segment was attributable to an increase in rig orders placed during fiscal
1998 in response to the favorable offshore drilling market conditions. Also
included in revenue in the Rigs segment was $9.0 million related to a contract
claim which is subject to meditation and possible arbitration. The growth in
revenue in the Engineered Products segment was partially attributable to the
fact that fiscal 1999 revenue reflected a full year of revenue compared to
only five months of revenue in the prior fiscal year. Revenue generated from
the energy customer group of the Vessels segment grew as a result of increased
construction of offshore support vessels. The "other" customer group within
the Vessels segment experienced revenue growth due to increased vessel repair
activity and increased orders for yachts. The decline in government revenue
within the Vessels segment occurred because fiscal 1998 included revenue from
a contract for a ferry that was being constructed for the State of Alaska that
closed in early fiscal 1999 and was not replaced.

  The gross profit margin decreased to 8.6% in fiscal 1999 compared to 12.0%
in fiscal 1998. The overall decrease in gross margin was primarily a result of
a decline in the gross margin experienced in the Rigs segment. The Rigs
segment gross margin decreased principally as a result of cost overruns
associated with the new construction of five of six multi-service drill
barges. These cost overruns were principally related to delays in owner
furnished contract drawings, engineering delays, owner-imposed changes, an
accelerated delivery schedule, and a shortage of trained supervision. The
Company has made a claim to recover certain of these costs as described in the
paragraph above. Additionally, production delays in the Rigs segment were
experienced during the second quarter of the current year resulting from the
effects of two tropical storms that affected the Texas coast. The gross margin
in the Vessels segment remained relatively stable compared to the prior year.

  Gross profit margins, by segment, for fiscal 1999 were: Vessels, 8.8%; Rigs,
4.9%; and Engineered Products, 18.0%. Gross profit margins, by segment, for
fiscal 1998 were: Vessels, 8.2%; Rigs, 22.9%; and Engineered Products, 14.9%.

  Selling, general and administrative expenses increased $21.8 million to
$60.4 million in fiscal 1999, or 6.1% of revenue, compared to $38.6 million,
or 5.8% of revenue, in fiscal 1998. Major increases in expenses included:
salaries and employee related expenses, $6.8 million; management and
consulting fees, $8.1 million; legal fees, $1.0; and expenses associated with
bids and proposals on new contracts, $1.1 million. Of the $8.1 million
increase in management and consulting fees, $7.4 million is related to a
business improvement project undertaken in the Vessels segment during the
latter part of fiscal 1998. The Company expects to spend and additional $2.1
million on consulting fees related to this project during fiscal 2000.

  The Company's construction backlog decreased 20% to $656.0 million at March
31, 1999 compared to $817.1 million at March 31, 1998 and consisted of the
following as of March 31:

<TABLE>
<CAPTION>
                                       1999                             1998
                         -------------------------------- --------------------------------
                                        Engineered                       Engineered
                         Vessels  Rigs   Products  Total  Vessels  Rigs   Products  Total
                         ------- ------ ---------- ------ ------- ------ ---------- ------
                                                  (in thousands)
<S>                      <C>     <C>    <C>        <C>    <C>     <C>    <C>        <C>
Backlog by customer
 type:
  Government............ $124.2  $   --   $  --    $124.2 $179.3  $   --   $  --    $179.3
  Commercial............   47.4      --      --      47.4   29.6      --      --      29.6
  Energy................  121.3   268.2      --     389.5  285.8   228.7      --     514.5
  Other.................   22.3      --    72.6      94.9   34.0      --    59.7      93.7
                         ------  ------   -----    ------ ------  ------   -----    ------
                         $315.2  $268.2   $72.6    $656.0 $528.7  $228.7   $59.7    $817.1
                         ======  ======   =====    ====== ======  ======   =====    ======
</TABLE>

  Interest expense, net of interest income, increased $1.5 million to $8.1
million for fiscal 1999 compared to $6.6 million for fiscal 1998 primarily due
to the issuance, by the Company, of $30 million in Taxable Revenue

                                      20
<PAGE>

Bonds in January 1998 and cash advances under the Company's revolving credit
facility. These increases were offset by $1.7 million of interest capitalized
on self-constructed assets.

  Amortization of excess of cost over net assets acquired increased $3.0
million to $5.8 million for fiscal 1999 compared to $2.8 million for fiscal
1998 as fiscal 1999 included a full year effect of amortization on fiscal 1998
acquisitions and certain purchase accounting adjustments.

  Income before income taxes decreased $19.4 million or 61.2% to $12.3 million
for the fiscal year ended March 31, 1999 compared to $31.7 million for the
fiscal year ended March 31, 1998. The decrease was the result of a decline in
gross profit margin as well as increases in selling, general and
administrative expenses, interest expense, and amortization of excess of cost
over net assets acquired as discussed above. The Company does not expect its
gross margin percentage to improve significantly during fiscal 2000,
principally because its Rigs segment contains several contracts on which it
expects to earn minimal gross profit. The Company does not anticipate
continued increases in its selling, general and administrative expenses during
fiscal 2000, as the Company has implemented a plan to reduce these expenses.
Interest expense is expected to increase during fiscal 2000 resulting from
projected increased borrowings under the Company's revolving credit facility,
and a reduced amount of capitalized interest.

  The Company recorded an income tax benefit of $1.0 million or an 8.3%
effective tax rate for fiscal 1999 compared to income tax expense of $9.2
million or a 29% effective tax rate for fiscal 1998. The benefit for the
current year reflects tax credits for the Company's research and development
activities, and, the write-off for tax purposes, of the Company's investment
in an international joint venture. The write-off of the investment in joint
venture was recorded as a purchase accounting adjustment for financial
accounting purposes. Additionally, a refund of income taxes previously paid to
Trinity Industries, Inc., the Company's former parent, also favorably impacted
the Company's income tax position for fiscal 1999. The Company does not
anticipate that its income tax rate during fiscal 2000 will be similarly
impacted.

 Fiscal 1998 Compared with Fiscal 1997

  Contract revenue increased 64.8% to $670.2 million in the fiscal year ended
March 31, 1998 compared with $406.8 million in the fiscal year ended March 31,
1997. The increase was primarily attributable to $203.6 million in revenue
generated by companies acquired during fiscal 1998. The majority of this
increase in revenue is reflected within the Rigs and Engineered Products
segments of the Company. Growth was also experienced within the energy
customer group of the Vessels segment as a result of increased construction of
offshore support vessels and within the other customer group resulting from
increased vessel repair and yacht activity. The decline in government revenue
within the Vessels segment occurred as fiscal 1997 included revenue from a
major contract that was not replaced in fiscal 1998.

  The gross profit margin decreased to 12.0% in fiscal 1998 compared to 12.7%
in fiscal 1997. Excluding newly acquired companies, the gross margin was 7.5%.
The decrease in gross margin was due to cost overruns on a ferry being
constructed for the State of Alaska and certain yachts and certain double hull
tank barges; increased costs on other contracts resulting from delays in the
production of engineering drawings; inefficiencies resulting from the rapid
buildup of the Company's labor force; use of more expensive contract labor;
and adverse weather conditions during the fourth quarter.

  Gross profit margins, by segment, for fiscal 1998 were: Vessels, 8.2%; Rigs,
22.9%; and Engineered Products, 14.9%. The gross margin of the Company's
Vessels segment was also adversely impacted by the Company's construction of a
large number of new designs for the offshore supply vessel market during
fiscal 1998 which strained internal capacity and caused delays in the
production of engineering drawings, resulting in out of sequence work
performed at sub-optimal efficiencies. During the year, the Company initiated
a project to review, evaluate, and improve all of its business processes in
the Vessels segment.

  Selling, general and administrative expenses increased $17.2 million to
$38.6 million in fiscal 1998, or 5.8% of revenue compared to $21.4 million or
5.3% of revenue in fiscal 1997. The increase is a result of the overall

                                      21
<PAGE>

growth of the Company during the current year. Newly acquired companies added
approximately $11.9 million in expenses. Other major increases in expenses
included: salaries and employee related expenses, $2.2 million; general fees
and services, including auditing, accounting, management and consulting, $1.7
million; and property and casualty insurance, $1.2 million. These increases
were offset by decreases in legal fees, $0.5 million, and research and
development expenses, $0.7 million. During fiscal 1998, the Company initiated
a project to review, evaluate and improve all of its business processes in the
Vessels segment committing approximately $2 million to the project during the
year, and it expects to commit additional resources during fiscal 1999.

  The Company's construction backlog increased 70.7% to $817.1 million at
March 31, 1998 compared to $478.8 million at March 31, 1997 and consisted of
the following as of March 31:

<TABLE>
<CAPTION>
                                                     1998                1997
                                       -------------------------------- -------
                                                      Engineered
                                       Vessels  Rigs   Products  Total  Vessels
                                       ------- ------ ---------- ------ -------
                                                    (in thousands)
      <S>                              <C>     <C>    <C>        <C>    <C>
      Backlog by customer type:
        Government.................... $179.3  $   --   $  --    $179.3 $251.3
        Commercial....................   29.6      --      --      29.6   49.4
        Energy........................  285.8   228.7      --     514.5  155.9
        Other.........................   34.0      --    59.7      93.7   22.2
                                       ------  ------   -----    ------ ------
                                       $528.7  $228.7   $59.7    $817.1 $478.8
                                       ======  ======   =====    ====== ======
</TABLE>

  Interest expense, net of interest income, increased $3.4 million to $6.6
million for fiscal 1998 compared to $3.2 million for fiscal 1997 due to the
issuance, by the Company, of $185 million in 4 1/2% Convertible Subordinated
Notes in September 1997 and $30 million in Taxable Revenue Bonds in January
1998.

  As a result of its acquisitions during fiscal 1998, the Company recorded
amortization of excess of cost over net assets acquired of $2.8 million.

  The effective tax rate for fiscal 1998 was 29% compared to 40% for fiscal
1997 as the Company lowered its estimated annual effective tax rate to reflect
the anticipated benefit of research and experimentation credits.

Liquidity and Capital Resources

  The Company's principal needs for capital are the funding of ongoing
operations, capital expenditures and acquisitions. The Company's principal
sources of liquidity during fiscal 1999 were cash provided by cash balances
and borrowings from the Company's existing credit facility. Cash flows during
fiscal 1999 from these sources were $51 million from cash and cash equivalent
balances at the beginning of the year and $22 million from the existing credit
facility. These sources were used primarily to fund the Company's working
capital requirements and capital expenditures.

  Effective April 23, 1999, the Company entered into an amended and restated
secured credit agreement with a group of banks, decreasing the maximum loan
amount from $150 million to $125 million, to be used for general corporate
purposes and working capital. The credit agreement is secured by substantially
all of the assets of the Company. Any amounts outstanding under the new credit
agreement will become payable on September 30, 2001. The interest rate is
1.65% to 2.90% over the London Interbank Offering Rate ("LIBOR"), or the base
rate (as defined), at the Company's choice. The margin over LIBOR is set
quarterly, depending on the ratio of the Company's total debt to EBITDA (as
defined). Under the new credit agreement, the Company is obligated to pay
certain fees, including an annual commitment fee in an amount of .25% to .50%
of the unused portion of the commitment. The new loan agreement contains
certain financial covenants, including minimum net worth requirements (as
defined), an interest coverage ratio (as defined), a fixed charge ratio (as
defined), and a leverage ratio (as defined).

                                      22
<PAGE>

  The Company made capital expenditures, including construction in process, of
$48 million, $42 and $14 million in fiscal 1999, 1998 and 1997, respectively.
The Company currently has budgeted approximately $20 million (excluding
acquisitions) for planned capital projects at its current operating facilities
for fiscal 1999.

  The Company believes that cash flow from operations, cash on hand, and funds
available under the existing credit facility, will be sufficient to fund its
requirements for working capital, capital expenditures, acquisitions and other
capital needs for at least the next 12 months.

Inflation and Changing Prices

  The Company does not believe that general price inflation has had a
significant impact on the Company's results of operations during the periods
presented. To the extent that the effects of inflation are not offset by
improvements in manufacturing and purchasing efficiency and labor
productivity, the Company generally has been able to take such effects into
account in pricing its contracts with customers. There can be no assurance,
however, that inflation will not have a material effect on the Company's
business in the future.

Year 2000 Technological Issues

  The Company is currently working to assess the potential impact of the Year
2000 on the processing of time-sensitive information by its computerized
information systems and equipment. Year 2000 issues may arise if computer
programs have been written using two digits (rather than four) to define the
applicable year. In such case, programs that have time-sensitive logic may
recognize a date using "00" as the year 1900 rather than the Year 2000, which
could result in miscalculations or system failures.

  Management has formed a Year 2000 Project team ("Project 2000") responsible
for identifying the functions affected by Year 2000 and has developed a plan
to reduce the potentially harmful impact of Year 2000 issues on its
operations. The focus of Project 2000 is segregated into three areas:
information technology, which primarily includes the Company's financial
applications and voice communication equipment; production processes and
systems, which primarily includes machinery and equipment with embedded
technology and software used in the design and production of its products; and
external agents, which includes key business relationships with vendors,
customers, and other third parties including, but not limited to, financial
institutions. An evaluation of each of these areas has been or is being
performed according to the following four phases: assessment, remediation,
testing and implementation.

  Project 2000 has completed its assessment of significant software used in
the information technology area and is currently in the remediation, testing
and implementation phases of this area. Each of these phases is expected to be
completed by September 1999. The Company has determined that its financial
software is Year 2000 compliant and expects to be able to continue to take
customer orders, invoice customers, collect payments and process payments to
vendors. Project 2000 has substantially completed its assessment of the
production processes and systems area and has begun the remediation, testing,
and implementation phases which it expects to complete by September 1999.

  Assessment, remediation, testing and implementation measures are currently
underway in the area of external agents. These phases are expected to be
completed by September 1999. Beginning in August 1998, the Company developed
purchasing guidelines designed to limit the Company's liability for Year 2000
non-compliant products provided by suppliers that are used either by the
Company or installed in its products. The Company has circulated Year 2000
questionnaires among its major vendors giving them the opportunity to inform
the Company of their efforts to become Year 2000 compliant. As of this report
date, the Company has experienced a response rate from its major vendors of
approximately 41%, none of which have indicated situations of Year 2000 non-
compliance which the Company believes would materially affect its operations.
In the event of non-responses, the Company has developed a list of Year 2000
compliant strategic vendors that it expects to be available to replace the
vendors that do not offer an adequate level of assurance that they will be
Year 2000 compliant. The Company has substantially completed an assessment of
its exposure to failure to

                                      23
<PAGE>

deliver products or services to its customers by reviewing components and
systems of products scheduled for delivery through the year 2000. This
assessment includes evaluation of the terms and conditions of purchases of
equipment and supplies necessary to deliver its products and services to
determine if they are compliant with the previously mentioned purchasing
guidelines. Remediation, testing, and implementation in this area is expected
to be completed in September 1999. Based upon its procedures to date, the
Company does not anticipate significant exposure related to its vendors,
customers, or other third parties.

  The Company has already begun implementing certain measures to alter,
validate or replace time-sensitive software prior to any anticipated material
impact on its computerized information systems and equipment. Costs of
addressing potential problems have not been material to date and, based on
preliminary information, are not currently expected to have a material adverse
impact on the Company's financial position, results of operations or cash
flows in future periods.

  Management believes it has an effective program in place to resolve Year
2000 issues in a timely manner. The Company expects to complete all phases of
its Year 2000 review by September 1999; although the Company will continuously
take steps to reaffirm Year 2000 compliance in the areas of information
technology, production processes and systems, and external agents. The Company
is still in the process of reviewing machinery and equipment used to
manufacture products. In the event that the Company is unable to remediate
potential problems, if any, with this equipment, the Company may be unable to
manufacture products on a timely basis. Disruptions in the economy generally
resulting from Year 2000 issues could materially adversely affect the Company.
The Company could be subject to litigation for failure of computer systems
installed in its products. The amount of potential liability and lost revenue
cannot be estimated at this time.

  The Company is in the process of developing a contingency plan in the event
that material year 2000 situations arise. The Company expects to have
completed this plan by September 1999.

Item 7a. Quantitative and Qualitative Disclosures about Market Risk

  The Company is exposed to market risks, primarily changes in interest rates
in the United States. The Company has not used derivative financial
instruments to manage its interest rate risk or engage in speculative
transactions. The following table provides information about the Company's
future maturities of principal for outstanding debt instruments and related
weighted-average interest rates. The table also provides the fair value of
outstanding debt instruments at March 31, 1999.

<TABLE>
<CAPTION>
                                      March 31,
                         ------------------------------------
                                                                           Fair
                          2000   2001     2002    2003  2004  Thereafter  Value
                         ------- ----- ---------- ----- ----- ---------- --------
<S>                      <C>     <C>   <C>        <C>   <C>   <C>        <C>
Long-term debt,
 including current
 portion
  Fixed rate............ $ 2,839  $117       $126  $137  $149  $217,727  $131,766
  Avg. interest rate....   4.76% 4.76%      4.76% 4.76% 4.76%     4.76%
  Variable rate.........      --    --    $22,000    --    --        --  $ 22,000
  Avg. interest rate....      --    --      LIBOR    --    --        --
                                       plus 0.75%
                                         to 1.75%
</TABLE>

                                      24
<PAGE>

Item 8: Financial Statements and Supplementary Data

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors.............................................  26
Consolidated Balance Sheets................................................  27
Consolidated Statements of Income..........................................  28
Consolidated Statements of Stockholders' Equity............................  29
Consolidated Statements of Cash Flows......................................  30
Notes to Consolidated Financial Statements.................................  31
</TABLE>

                                       25
<PAGE>

                        REPORT OF INDEPENDENT AUDITORS

Board of Directors and Stockholders
Halter Marine Group, Inc.

  We have audited the accompanying consolidated balance sheets of Halter
Marine Group, Inc. and Subsidiaries as of March 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended March 31, 1999. 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 Halter Marine
Group, Inc. and Subsidiaries at March 31, 1999 and 1998, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended March 31, 1999 in conformity with generally accepted
accounting principles.

                                          ERNST & YOUNG LLP

New Orleans, Louisiana
May 12, 1999, except for Note 17,
as to which the date is June 1, 1999

                                      26
<PAGE>

                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                                 (in thousands)

<TABLE>
<CAPTION>
                                                                  March 31,
                                                              -----------------
                                                                1999     1998
                           ASSETS                             -------- --------
<S>                                                           <C>      <C>
Current Assets:
  Cash and cash equivalents.................................. $  3,927 $ 51,146
  Contract receivables ......................................  117,376  115,389
  Costs and estimated earnings in excess of billings on
   uncompleted contracts.....................................  146,313   81,229
  Inventories................................................   33,501   19,692
  Other current assets.......................................   11,408    5,124
                                                              -------- --------
    Total current assets.....................................  312,525  272,580
Property, plant and equipment, net...........................  170,972  125,962
Excess of cost over net assets acquired, net.................   99,977   92,101
Other assets ................................................    8,306    8,958
                                                              -------- --------
                                                              $591,780 $499,601
                                                              ======== ========

<CAPTION>
            LIABILITIES AND STOCKHOLDERS' EQUITY
<S>                                                           <C>      <C>
Current Liabilities:
  Accounts payable and accrued liabilities................... $ 85,529 $ 51,433
  Billings in excess of costs and estimated earnings on
   uncompleted contracts.....................................   89,243   68,172
  Notes payable and current portion of long-term debt........    2,839    1,918
                                                              -------- --------
    Total current liabilities................................  177,611  121,523
Long-term debt, less current portion.........................  239,727  218,215
Deferred income taxes .......................................    9,445    7,025
Other noncurrent liabilities.................................       48    1,735
                                                              -------- --------
    Total liabilities........................................  426,831  348,498
Stockholders' equity:
  Common stock, $.01 par value; authorized 150,000 shares;
   issued 28,857 and 28,822 shares at March 31, 1999 and
   1998, respectively........................................      288      288
  Preferred stock, authorized 1,000 shares; issued, none.....       --       --
  Additional paid-in capital ................................  119,910  119,396
  Retained earnings..........................................   44,751   31,419
                                                              -------- --------
    Total stockholders' equity...............................  164,949  151,103
                                                              -------- --------
                                                              $591,780 $499,601
                                                              ======== ========
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       27
<PAGE>

                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES

                       CONSOLIDATED STATEMENTS OF INCOME

                    (in thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                         March 31,
                                                 ----------------------------
                                                   1999      1998      1997
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Contract revenue earned......................... $998,149  $670,238  $406,797
Cost of revenue earned .........................  912,131   589,579   355,209
                                                 --------  --------  --------
  Gross profit..................................   86,018    80,659    51,588
Selling, general and administrative expenses....   60,442    38,613    21,361
Amortization of excess of cost over net assets
 acquired.......................................    5,845     2,801        --
                                                 --------  --------  --------
  Operating income..............................   19,731    39,245    30,227
Other (income) expenses:
  Interest expense, net.........................    8,135     6,600     3,232
  Other, net....................................     (719)      932        (8)
                                                 --------  --------  --------
                                                    7,416     7,532     3,224
                                                 --------  --------  --------
Income before income taxes......................   12,315    31,713    27,003
Provision (benefit) for income taxes:
  Current ......................................   (3,437)   10,253     5,125
  Deferred......................................    2,420    (1,056)    5,762
                                                 --------  --------  --------
                                                   (1,017)    9,197    10,887
                                                 --------  --------  --------
Net income ..................................... $ 13,332  $ 22,516  $ 16,116
                                                 ========  ========  ========
Net income per share............................ $   0.46  $   0.80  $   0.59
                                                 ========  ========  ========
Net income per share, diluted................... $   0.46  $   0.78  $   0.59
                                                 ========  ========  ========
Weighted average shares outstanding:
  Basic.........................................   28,846    28,052    27,281
  Diluted.......................................   28,990    29,008    27,339
</TABLE>


          See accompanying notes to consolidated financial statements.

                                       28
<PAGE>

                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                 (in thousands)

<TABLE>
<CAPTION>
                                     Additional          Stockholder's
                              Common  Paid-In   Retained      Net
                              Stock   Capital   Earnings  Investment    Total
                              ------ ---------- -------- ------------- --------
<S>                           <C>    <C>        <C>      <C>           <C>
Balance at March 31, 1996...                               $ 66,743    $ 66,743
  Net income prior to
   initial public offering..                                  7,213       7,213
  Debt assumed from former
   parent...................                                (25,000)    (25,000)
  Proceeds from initial
   public offering..........   $185   $ 35,257                   --      35,442
  Transfer to additional
   paid-in capital..........     --     48,956              (48,956)         --
  Net income subsequent to
   initial public offering..     --         --  $ 8,903          --       8,903
                               ----   --------  -------    --------    --------
Balances at March 31, 1997..    185     84,213    8,903          --      93,301
  Issuances of common stock:
    Stock split.............     92       (110)      --          --         (18)
    Employee stock options..     --         90       --          --          90
    Acquired companies......     11     35,203       --          --      35,214
  Net income................     --         --   22,516          --      22,516
                               ----   --------  -------    --------    --------
Balances at March 31, 1998..    288    119,396   31,419          --     151,103
  Issuances of common stock:
    Employee stock options..     --         21       --          --          21
    Employee bonuses........     --        493       --          --         493
  Net income................     --         --   13,332          --      13,332
                               ----   --------  -------    --------    --------
Balances at March 31, 1999..   $288   $119,910  $44,751    $     --    $164,949
                               ====   ========  =======    ========    ========
</TABLE>



          See accompanying notes to consolidated financial statements.

                                       29
<PAGE>

                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (in thousands)

<TABLE>
<CAPTION>
                                                      Year ended March 31,
                                                   ----------------------------
                                                     1999      1998      1997
                                                   --------  --------  --------
<S>                                                <C>       <C>       <C>
Operating activities:
 Net income......................................  $ 13,332  $ 22,516  $ 16,116
 Adjustments to reconcile net income to net cash
  provided (required) by operating activities:
  Depreciation and amortization..................    24,607    15,217     7,899
  Deferred provision (benefit) for income taxes..     2,420    (1,056)    5,762
  Changes in operating assets and liabilities:
  Increase in contract receivables...............    (1,987)  (42,255)  (27,713)
  Decrease in due from former parent.............        --    11,513        --
  (Increase) decrease in costs and estimated
   earnings in excess of billings on uncompleted
   contracts.....................................   (65,084)      984    (9,799)
  (Increase) decrease in inventories.............   (13,809)     (771)   (4,764)
  (Increase) decrease in other current assets....     1,101      (105)   (4,114)
  (Increase) decrease in other assets............      (190)      707        --
  Increase (decrease) in accounts payable and
   accrued liabilities...........................    16,746    (8,463)   35,491
  Decrease in income taxes payable to affiliate..        --        --   (15,785)
  Increase in billings in excess of costs and
   estimated earnings on uncompleted contracts...    21,071    40,269     7,428
  Increase (decrease) in other noncurrent
   liabilities...................................    (1,687)     (232)    1,967
                                                   --------  --------  --------
 Net cash provided (required) by operating
  activities.....................................    (3,480)   38,324    12,488
                                                   --------  --------  --------
Investing activities:
 Capital expenditures............................   (47,863)  (40,988)  (14,491)
 Business acquisitions, net of cash acquired.....   (15,000)  (66,709)       --
                                                   --------  --------  --------
   Net cash required by investing activities.....   (62,863) (107,697)  (14,491)
                                                   --------  --------  --------
Financing activities:
 Net proceeds from sale and issuance of stock....        21        72    35,442
 Net borrowings from former parent...............        --        --   (79,032)
 Issuance of long-term subordinated debentures...        --   185,000        --
 Issuance of taxable revenue bonds...............        --    30,000        --
 Debt issuance costs.............................       (34)   (6,013)       --
 Principal payments on debt......................    (2,863)  (43,619)       --
 Net borrowings (repayments) under line of
  credit.........................................    22,000   (52,000)   52,000
                                                   --------  --------  --------
   Net cash provided by financing activities.....    19,124   113,440     8,410
                                                   --------  --------  --------
Net increase (decrease) in cash and cash
 equivalents.....................................   (47,219)   44,067     6,407
Cash and cash equivalents at beginning of year...    51,146     7,079       672
                                                   --------  --------  --------
Cash and cash equivalents at end of year.........  $  3,927  $ 51,146  $  7,079
                                                   ========  ========  ========
Supplemental disclosures:
Cash paid for:
 Interest........................................  $ 11,525  $  8,519  $  1,586
                                                   ========  ========  ========
 Income taxes....................................  $  9,830  $  5,455  $     --
                                                   ========  ========  ========
 Purchase of subsidiaries........................  $ 15,000  $ 66,928  $     --
                                                   ========  ========  ========
Fair value of assets of subsidiaries purchased...  $ 15,000  $ 90,748  $     --
                                                   ========  ========  ========
Fair value of liabilities of subsidiaries
 assumed.........................................  $     --  $ 56,511  $     --
                                                   ========  ========  ========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       30
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                MARCH 31, 1999

1. General Information

  Halter Marine Group, Inc. is a Delaware corporation incorporated on June 24,
1996 to serve as the parent of a new consolidated group that formerly
conducted the business of construction, repair and conversion of primarily
ocean-going vessels for the governmental and commercial markets for Trinity
Industries, Inc. ("Trinity"). On September 26, 1996, Halter Marine Group, Inc.
and subsidiaries (collectively, the "Company") completed an initial public
offering of 16.7% of its stock (18.7% after the underwriters exercised their
overallotment option). On March 31, 1997, Trinity distributed all of the
remaining stock of the Company to its stockholders. As part of the
transactions related to the spin-off, the Company assumed $25 million of
indebtedness of Trinity associated with the Company's businesses.

2. Basis of Presentation and Significant Accounting Policies

 Basis of Presentation

  The consolidated financial statements include the accounts of Halter Marine
Group, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. The consolidated financial
statements reflect the results of operations, financial condition and cash
flows of the Company as a component of Trinity prior to October 1, 1996 and
those results may not be indicative of actual results of operations and
financial position of the Company under other ownership. Management believes
that the consolidated income statements include a reasonable allocation of the
administrative costs incurred by Trinity on the Company's behalf prior to
October 1, 1996. These costs include payroll services, benefits
administration, and cash management. The allocations of such costs to the
Company were approximately $1.8 million in 1996 and approximately $1.2 million
for the six months ended September 30, 1996.

  Additionally, prior to the initial public offering, the Company provided
administrative services for Trinity's Inland Marine division in the areas of
accounting, human resources, marketing and public relations. The allocation of
such costs to the Inland Marine division was approximately $2.6 million in
1996, and approximately $1.6 million for the six months ended September 30,
1996.

 Estimates

  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

 Cash and Cash Equivalents

  Cash and cash equivalents include cash, interest-bearing deposits in
domestic banks, and highly liquid investments with original maturities of
three months or less when purchased.

 Construction Contracts

  The Company uses the percentage of completion method to account for its new
construction contracts in process. Under the percentage of completion method
used in its Vessels and Rigs segments, revenues from construction contracts
are measured by the percentage of labor hours incurred to date to estimated
total labor hours for each contract. Management considers expended labor hours
to be the best available measure of progress on its vessels and rigs
contracts. Under the percentage of completion method used in its Engineered
Products segment, revenue from contracts is measured by the percentage of cost
incurred as compared to estimated total cost for each contract. Management
considers cost incurred to be the best available measure of progress on its

                                      31
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
engineered products contracts. Changes in estimated profitability may result
in revisions to income and costs and are recognized in the period in which the
revisions are determined. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Other
changes, including those arising from contract penalty provisions, and final
contract settlements are recognized in the period in which the revisions are
determined. An amount equal to contract cost attributable to claims is
included in revenues when realization is probable and the amount can be
reliably estimated.

  Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Indirect manufacturing costs
are allocated on the basis of labor hours incurred on the respective
contracts. Selling, general and administrative costs are charged to expense as
incurred.

  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.

 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.

 Depreciation

  Additions to property, plant and equipment are recorded at cost.
Depreciation and amortization are generally computed using the straight-line
method over the estimated useful lives of the assets which range from 3 to 30
years for buildings and improvements and 2 to 28 years for machinery and
equipment. The costs of ordinary maintenance and repair are charged to
expense, while renewals and major replacements are capitalized.

 Excess of Cost Over Net Assets Acquired

  The excess of cost over the value of net assets acquired is amortized using
the straight-line basis over 20 years. Accumulated amortization of goodwill
was $8.6 million and $2.8 million as of March 31, 1999 and 1998, respectively.

 Other Assets

  Other assets includes $6.0 million of debt issuance costs capitalized in
conjunction with the issuance of the $185.0 million of 4 1/2% Convertible
Subordinated Notes and the $30.0 million of Taxable Revenue Bonds. These costs
are being amortized over the life of the related debt. Accumulated
amortization of debt issuance costs was $1.2 million and $0.4 million at March
31, 1999 and 1998, respectively.

 Income Taxes

  The Company accounts for income taxes using the liability method under
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." 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.

 Net Income Per Share

  In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS 128)
which was required to be adopted for the quarter ended

                                      32
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997. This Statement replaced the previously reported primary and
fully diluted net income per share with basic and diluted net income per
share. Unlike primary net income per share, basic net income per share
excludes the dilutive effects of stock options and convertible securities.
Diluted net income per share is very similar to the previously reported fully
diluted net income per share. All net income per share amounts for all periods
have been presented, and where necessary, restated, to conform to SFAS 128
requirements.

  On September 29, 1997, the Board of Directors declared a three-for-two split
of the Company's common stock, effectuated in the form of a stock dividend
paid October 31, 1997 to shareholders of record as of October 15, 1997. As a
result, net income per share computations and related weighted average shares
outstanding for all periods presented in the foregoing financial statements
and accompanying footnotes have been adjusted to reflect the stock split.

 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 11 for stock option
information.

 Long-Lived Assets

  The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including excess of cost over net assets acquired, 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 related excess of
cost over net assets acquired, 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

  On March 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131) which established revised standards for public
companies relating to the reporting of financial and descriptive information
about operating segments in financial statements. The adoption of SFAS 131 did
not affect the Company's results of operations or financial position. See Note
8 for segment information.

 Reclassifications

  Certain items included in the consolidated financial statements for 1998 and
1997 have been reclassified to conform with the 1999 presentation.

 Recent 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," which is required to be adopted in fiscal years
beginning after June 15, 2000. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
statement will have a significant effect on financial position or earnings of
the Company.

                                      33
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Business Acquisitions

  The Company completed certain business acquisitions during fiscal 1999 and
1998, each of which was considered a purchase for accounting purposes. The
operations of these companies have been included in the consolidated financial
statements from the effective dates of the acquisitions.

  On May 29, 1998, the Company acquired all of the outstanding common stock of
Trinity Marine Orange, Inc. ("Orange") of Orange, Texas. The total purchase
price of $15.0 million, paid in cash, was allocated to property, plant and
equipment.

  On April 4, 1997, the Company acquired a 51% interest in and obtained an
option to acquire the remaining 49% of Texas Drydock, Inc. (TDI), a company
engaged principally in the construction, conversion and repair of offshore oil
drilling rigs. On May 16, 1997, the Company acquired the remaining 49% of TDI.
The aggregate purchase price amounted to approximately $47 million which
consisted of $20 million in cash and $27 million of short-term notes payable
which were paid in fiscal 1998. In addition, the Company advanced TDI $4.5
million for working capital and a fixed asset acquisition. A substantial
portion of the total purchase price was allocated to cost in excess of net
assets acquired.

  During August 1997, the Company acquired the assets of Bludworth Bond
Shipyard, Inc., Houston, Texas. During the third quarter of fiscal 1998, the
Company completed the acquisitions of four additional companies, including
AmClyde Engineered Products, Inc., and formed the Engineered Products Group.
The aggregate purchase price for these five companies was $75 million, of
which approximately $45 million was paid in cash and the balance in 835,484
shares of the Company's common stock. A substantial portion of the total
purchase price was allocated to cost in excess of net assets acquired.

  The following unaudited pro forma financial information presents the
combined results of operations for the twelve months ended March 31, 1998 and
1997, assuming consummation of the purchase of TDI and the Engineered Products
Group as of April 1, 1997 and, after giving effect to the shares issued and
certain adjustments, including amortization of excess of cost over net assets
acquired and increased interest expense on debt related to the acquisitions,
and related income tax expense. This pro forma information does not
necessarily reflect the results of operations that would have occurred had the
Company, along with TDI and the Engineered Products Group, constituted a
single entity during these periods.
<TABLE>
<CAPTION>
                                                               Twelve Months
                                                                   Ended
                                                             -----------------
                                                             3/31/98  3/31/97
                                                             -------- --------
                                                              (in thousands,
                                                             except per share
                                                                   data)
      <S>                                                    <C>      <C>
      Contract revenue earned............................... $715,403 $632,907
      Net income............................................ $ 21,764 $ 16,752
      Net income per share.................................. $   0.76 $   0.60
      Net income per share, diluted......................... $   0.74 $   0.59
      Pro forma weighted average number of shares
       outstanding:
        Basic...............................................   28,539   28,116
        Diluted.............................................   29,495   28,174
</TABLE>

  In March 1998, the Company also acquired the stock of three companies
comprising the operations of Calcasieu Shipyard, Inc., Sulphur, Louisiana. The
aggregate purchase price of these companies was approximately $10 million of
which approximately $4 million was paid in cash and the balance in
approximately 300,000 shares of the Company's common stock. The operating
results of these acquisitions would not have materially affected the Company's
consolidated revenue, net income, or net income per share for fiscal 1998 and
1997.

  In conjunction with the acquisitions of AmClyde Engineered Products, Inc.
and Bludworth Bond Shipyard, contingent payment agreements based upon
operating results over the next three years were negotiated with the

                                      34
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
respective former owners. The additional payments, which are not expected to
be material, will be accounted for as additional excess of cost over net
assets acquired.

  During fiscal 1999, cost in excess of net assets acquired increased
approximately $13.7 million as a result of contingent payment provisions
included in the Bludworth Bond Shipyard purchase agreement and changes in
preacquisition contingencies.

4. Costs and Estimated Earnings on Uncompleted Contracts

<TABLE>
<CAPTION>
                                                                 March 31,
                                                           ---------------------
                                                              1999       1998
                                                           ---------- ----------
                                                              (in thousands)
<S>                                                        <C>        <C>
Costs incurred on uncompleted contracts................... $1,228,071 $1,064,026
Estimated earnings........................................    112,790    130,607
                                                           ---------- ----------
                                                            1,340,861  1,194,633
Less billings to date.....................................  1,283,791  1,181,576
                                                           ---------- ----------
                                                           $   57,070 $   13,057
                                                           ========== ==========
Included in the following balance sheet captions:
  Costs and estimated earnings in excess of billings on
   uncompleted contracts.................................. $  146,313 $   81,229
  Billings in excess of costs and estimated earnings on
   uncompleted contracts..................................     89,243     68,172
                                                           ---------- ----------
                                                           $   57,070 $   13,057
                                                           ========== ==========
</TABLE>

  Costs and estimated earnings in excess of billings includes $9 million
relating to a claim arising from a dispute with a customer over design and
specification changes in certain drill barges. In the opinion of counsel, the
Company has a valid claim against the customer.

5. Property, Plant and Equipment
<TABLE>
<CAPTION>
                                                                  March 31,
                                                              -----------------
                                                                1999     1998
                                                              -------- --------
                                                               (in thousands)
<S>                                                           <C>      <C>
Land......................................................... $ 15,847 $ 13,676
Buildings and improvements...................................   81,602   64,849
Machinery and equipment......................................  135,913  104,448
Construction in progress ....................................   27,112   16,418
                                                              -------- --------
                                                               260,474  199,391
Less accumulated depreciation................................   89,502   73,429
                                                              -------- --------
Property, plant and equipment, net........................... $170,972 $125,962
                                                              ======== ========
</TABLE>

6. Long-Term Debt

<TABLE>
<CAPTION>
                                                                  March 31,
                                                              -----------------
                                                                1999     1998
                                                              -------- --------
                                                               (in thousands)
<S>                                                           <C>      <C>
4 1/2% Convertible Subordinated Notes........................ $185,000 $185,000
Taxable Revenue Bonds, Series 1998...........................   30,000   30,000
Revolving Credit Agreement...................................   22,000       --
Other........................................................    5,566    5,133
                                                              -------- --------
                                                               242,566  220,133
Less current portion.........................................    2,839    1,918
                                                              -------- --------
                                                              $239,727 $218,215
                                                              ======== ========
</TABLE>

                                      35
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

 4 1/2% Convertible Subordinated Notes

  On September 15, 1997, the Company issued an aggregate principal amount of
$185 million of 4 1/2% Convertible Subordinated Notes (the "Notes") which
mature on September 15, 2004. The Notes were issued under an Indenture
Agreement (the "Indenture") which 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 $31.50 per share, subject to adjustment for certain events
(as defined in the Indenture).

  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 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.

 Taxable Revenue Bonds, Series 1998

  On January 1, 1998, the Company issued an aggregate principal amount of $30
million of Mississippi Business Finance Corporation Taxable Revenue Bonds,
Series 1998 (the "Bonds") which 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.

 Revolving Credit Agreement

  At March 31, 1999, the Company had a revolving credit agreement with a group
of banks with a maximum loan amount of $150 million. Any amounts outstanding
under this revolving credit agreement would have become payable on September
30, 2002. Letters of credit were limited to an aggregate of $50 million. The
interest rate was 0.75% to 1.75% over the London Interbank Offered Rate
(LIBOR), or the base rate (as defined), at the Company's option. The margin
over LIBOR was set quarterly, depending on the ratio of the Company's total
debt to EBITDA (as defined). Effective December 31, 1998 through April 23,
1999, the Company was in violation of certain financial covenants included in
this credit agreement. The group of banks waived non-compliance with these
covenants during this period.

                                      36
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Effective April 23, 1999, the Company entered into an amended and restated
secured credit agreement decreasing the maximum loan amount from $150 million
to $125 million. The credit agreement is secured by substantially all of the
assets of the Company. Any amounts outstanding under the new credit agreement
will become payable on September 30, 2001. The interest rate is 1.65% to 2.90%
over the London Interbank Offered Rate ("LIBOR"), or the base rate (as
defined), at the Company's option. The margin over LIBOR is set quarterly,
depending on the ratio of the Company's total debt to EBITDA (as defined).

  Under the new credit agreement, the Company is obligated to pay certain
fees, including an annual commitment fee in an amount ranging from 0.25% to
0.50% of the unused portion of the commitment. The new loan agreement contains
certain financial covenants, including minimum net worth requirements (as
defined), an interest coverage ratio (as defined), a fixed charge ratio (as
defined), and a leverage ratio (as defined).

  At March 31, 1999, the Company had $22 million in cash advances under the
credit agreement with no additional amount available. As of April 23, 1999,
availability under the credit agreement was $23 million.

 Other Debt

  Other long-term debt of $5.6 million at March 31, 1999 consists principally
of promissory notes due in monthly installments. The notes have fixed interest
rates ranging from 7% to 10% and variable rates of prime plus 1%. The notes
are secured by land, buildings, docking facilities, and improvements and
machinery and equipment with a net book value approximating $8.7 million. The
notes have final maturities ranging from the year 2000 through 2013.

  Scheduled maturities of long-term debt are as follows:

<TABLE>
<CAPTION>
      Year ending March 31                                            Amount
      --------------------                                        --------------
                                                                  (in thousands)
      <S>                                                         <C>
      2000.......................................................    $ 2,839
      2001.......................................................        117
      2002.......................................................     22,126
      2003.......................................................        137
      2004.......................................................        149
                                                                     -------
                                                                     $25,368
                                                                     =======
</TABLE>

  Interest capitalized during the year ended March 31, 1999 was $1.7 million.
No interest was capitalized during the years ended March 31, 1998 and 1997.

  The fair value of the Company's 4 1/2% convertible subordinated notes as of
March 31, 1999 was $96.2 million. The fair value of the Company's remaining
long-term debt approximates its recorded value.

7. Leases

  The Company leases certain machinery and equipment under noncancelable
operating leases which expire at various dates through the year 2016. Total
lease expense recorded by the Company was $2.0 million, $0.9 million, and $0.3
million for fiscal 1999, 1998, and 1997, respectively.

                                      37
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Future minimum lease commitments are as follows:

<TABLE>
<CAPTION>
      Year ending March 31,                                           Amount
      ---------------------                                       --------------
                                                                  (in thousands)
      <S>                                                         <C>
      2000.......................................................    $ 3,759
      2001.......................................................      3,457
      2002.......................................................      3,140
      2003.......................................................      3,058
      2004.......................................................      2,985
      Thereafter.................................................     10,600
                                                                     -------
                                                                     $26,999
                                                                     =======
</TABLE>

8. Segment Information

  The Company classifies its business into three segments: Vessels, Rigs, 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 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 Rigs 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, derricks, hoists, windlasses, jacks,
linear winches, fairleads, capstans, tuggers, locking devices, turret
bearings, control systems, winches and other related products used in the
marine and offshore construction industries. 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."

                                      38
<PAGE>

                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

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

<TABLE>
<CAPTION>
                                              Year Ended March 31, 1999
                                        --------------------------------------
                                                           Engineered
                                        Vessels     Rigs    Products   Total
                                        --------  -------- ---------- --------
                                                   (in thousands)
<S>                                     <C>       <C>      <C>        <C>
Operations:
  Contract revenue earned.............. $515,693  $355,732  $126,724  $998,149
  Cost of revenue earned...............  470,087   338,140   103,904   912,131
                                        --------  --------  --------  --------
    Gross profit.......................   45,606    17,592    22,820    86,018
  Selling, general and administrative
   expenses............................   40,966    11,718     7,758    60,442
  Amortization of excess of cost over
   net assets acquired.................      564     1,859     3,422     5,845
  Other, net...........................     (681)       --       (38)     (719)
                                        --------  --------  --------  --------
    Income before interest and income
     taxes............................. $  4,757  $  4,015  $ 11,678  $ 20,450
                                        ========  ========  ========  ========
<CAPTION>
                                              Year Ended March 31, 1998
                                        --------------------------------------
                                                           Engineered
                                        Vessels     Rigs    Products   Total
                                        --------  -------- ---------- --------
                                                   (in thousands)
<S>                                     <C>       <C>      <C>        <C>
Operations:
  Contract revenue earned.............. $476,258  $159,934  $ 34,046  $670,238
  Cost of revenue earned...............  437,239   123,363    28,977   589,579
                                        --------  --------  --------  --------
    Gross profit.......................   39,019    36,571     5,069    80,659
  Selling, general and administrative
   expenses............................   26,733     8,516     3,364    38,613
  Amortization of excess of cost over
   net assets acquired.................       58     1,645     1,098     2,801
  Other, net...........................      (75)      953        54       932
                                        --------  --------  --------  --------
    Income before interest and income
     taxes............................. $ 12,303  $ 25,457  $    553  $ 38,313
                                        ========  ========  ========  ========
</TABLE>

  Certain other financial information of the Company by segment is set forth
below.

<TABLE>
<CAPTION>
                                             Year Ended March 31, 1999
                                    -------------------------------------------
                                                   Engineered
                                    Vessels  Rigs   Products  Corporate  Total
                                    ------- ------ ---------- --------- -------
                                                   (in thousands)
<S>                                 <C>     <C>    <C>        <C>       <C>
Other financial information:
 Depreciation and amortization
  expense:
  Included in cost of revenue
   earned.......................... $12,930 $2,975   $  509     $ --    $16,414
  Included in selling, general and
   administrative expenses.........   1,684  2,102    3,499       --      7,285
  Included in interest expense.....      --     --       --      908        908
                                    ------- ------   ------     ----    -------
                                    $14,614 $5,077   $4,008     $908    $24,607
                                    ======= ======   ======     ====    =======
<CAPTION>
                                             Year Ended March 31, 1998
                                    -------------------------------------------
                                                   Engineered
                                    Vessels  Rigs   Products  Corporate  Total
                                    ------- ------ ---------- --------- -------
                                                   (in thousands)
<S>                                 <C>     <C>    <C>        <C>       <C>
Other financial information:
 Depreciation and amortization
  expense:
  Included in cost of revenue
   earned.......................... $ 9,529 $1,761   $  186     $ --    $11,476
  Included in selling, general and
   administrative expenses.........     413  1,790    1,114       --      3,317
  Included in interest expense.....      --     --       --      424        424
                                    ------- ------   ------     ----    -------
                                    $ 9,942 $3,551   $1,300     $424    $15,217
                                    ======= ======   ======     ====    =======
</TABLE>

                                       39
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  For consolidation purposes, all interest and income taxes are allocated to
corporate operations. Operations for fiscal 1997 were attributable to the
Vessels segment. Intersegment revenues are not material to the consolidated
revenue of the Company.

  Fiscal 1998 revenue from one customer of the Vessels segment totaled $114.6
million and from another customer of the Vessels segment totaled $73.6
million. Fiscal 1999 and 1997 revenue from these customers was less than 10%
of total contract revenue earned.

  Total assets and capital expenditures of the Company by segment are set
forth below.

<TABLE>
<CAPTION>
                                  As of and for the Year Ended March 31, 1999
                               -------------------------------------------------
                                                 Engineered
                               Vessels    Rigs    Products  Adjustments  Total
                               -------- -------- ---------- ----------- --------
                                                (in thousands)
<S>                            <C>      <C>      <C>        <C>         <C>
Total assets.................. $347,328 $120,797  $109,724    $13,931   $591,780
                               ======== ========  ========    =======   ========
Capital expenditures.......... $ 22,193 $ 24,757  $    913    $    --   $ 47,863
                               ======== ========  ========    =======   ========
<CAPTION>
                                  As of and for the Year Ended March 31, 1998
                               -------------------------------------------------
                                                 Engineered
                               Vessels    Rigs    Products  Adjustments  Total
                               -------- -------- ---------- ----------- --------
                                                (in thousands)
<S>                            <C>      <C>      <C>        <C>         <C>
Total assets.................. $263,820 $102,029  $ 85,247    $48,505   $499,601
                               ======== ========  ========    =======   ========
Capital expenditures.......... $ 26,453 $  8,840  $    383    $ 5,312   $ 40,988
                               ======== ========  ========    =======   ========
</TABLE>

  For consolidation purposes, certain cash and cash equivalent balances are
allocated to corporate and are included along with other accounting
eliminations and adjustments in the Adjustments column.

  Revenues included in the consolidated financial statements of the Company
are primarily derived from customers domiciled in the United States.
Substantially all of the Company's long-lived assets are located in the United
States.

9. Reconciliation of Net Income Per Share

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

<TABLE>
<CAPTION>
                                                         Year Ended March 31,
                                                        -----------------------
                                                         1999    1998    1997
                                                        ------- ------- -------
                                                         (in thousands, except
                                                            per share data)
<S>                                                     <C>     <C>     <C>
Numerator:
  Net income........................................... $13,332 $22,516 $16,116
                                                        ======= ======= =======
  Numerator for net income per share, diluted ......... $13,332 $22,516 $16,116
                                                        ======= ======= =======
Denominator:
  Denominator for net income per share--weighted
   average shares outstanding..........................  28,846  28,052  27,281
  Effect of dilutive securities:
    Stock options......................................     144     956      58
                                                        ------- ------- -------
  Denominator for net income per share, diluted........  28,990  29,008  27,339
                                                        ======= ======= =======
Net income per share................................... $  0.46 $  0.80 $  0.59
                                                        ======= ======= =======
Net income per share, diluted.......................... $  0.46 $  0.78 $  0.59
                                                        ======= ======= =======
</TABLE>

                                      40
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  The effect on net income per share, diluted, would be anti-dilutive if the
conversion of the 4 1/2% convertible subordinated notes had been assumed in
the computation. For additional information regarding the 4 1/2% convertible
subordinated notes and stock options, refer to Notes 6 and 11, respectively.

10. Related Party Transactions

  John Dane III, Chairman, President, and Chief Executive Officer of the
Company, acquired 25% of the stock of United States Marine, Inc. ("USMI") in
June 1996 with a commitment to acquire an additional 50% over the next five
years. USMI manufactures custom composite marine products for various
customers and performs services for the Company as a subcontractor with
respect to the production of high-speed composite vessels for the U.S. Navy.
During fiscal 1999, 1998 and 1997, the Company paid USMI fees of approximately
$5.7 million, $4.8 million and $7.2 million, respectively, for subcontractor
services.

  During fiscal 1999 and 1998, the Company leased certain equipment and
purchased certain materials from Gulf Coast Industries, Inc. ("GCI"), a
company 50% owned by Mr. Daniel J. Mortimer, former Executive Vice President,
Chief Operating Officer and Director. The Company made payments to GCI
totaling $0.2 million during fiscal 1999 and 1998, respectively. During fiscal
1998, GCI acquired Cajan Wire, Inc., which, from time to time, is a vendor to
the Company. The Company made payments to Cajan Wire, Inc. totaling $1.2
million and $0.2 million during fiscal 1999 and 1998, respectively. Mr.
Mortimer resigned his position as an executive officer in May 1999 and as a
director in June 1999.

  For fiscal 1997, subsequent to its initial public offering, the Company
repaid to Trinity its intercompany balance, including $21.6 million for income
taxes and $25.0 million in debt assumed by the Company from Trinity. Such
amounts aggregated approximately $79.0 million.

  As of March 31, 1997, the Company had a receivable from Trinity of $11.5
million, representing the year-end settlement of excess amounts of income tax
estimates paid to Trinity during the year, the settlement of the Company's
portion of assets in Trinity's captive insurance subsidiary, and various other
intercompany charges and credits. The majority of this amount was paid by
Trinity in fiscal 1998.

  Upon completion of the initial public offering, the Company and Trinity
entered into various agreements for the purpose of establishing the terms
governing their on-going arrangements and relationships. These agreements
contained various provisions including a noncompete provision, a provision
regarding the settlement of income tax matters and a provision related to the
settlement of other transactions between the Company and Trinity. The
agreements are not expected to have a significant impact on the Company's
business, financial position, results of operations or liquidity.

11. Stock Options

  On September 24, 1996, the Company established the 1996 Stock Option and
Incentive Plan which was amended and restated on July 15, 1997 (the "1996
Plan"). The 1996 Plan provides for awards to employees and directors in the
form of grants of stock options, stock appreciation rights, restricted or
nonrestricted stock or units denominated in stock (collectively referred to as
"Awards"). All stock options granted under the 1996 Plan vest in equal annual
amounts over a five-year period and expire 10 years from the date of grant.
The 1996 Plan also provides that shares of common stock which are the subject
of awards that are forfeited or terminated, expire unexercised, are settled in
cash in lieu of common stock or in a manner such that all or some of the
shares covered thereby are not issued or are exchanged for Awards that do not
involve common stock will again immediately become available for Awards under
the 1996 Plan. A total of 3,600,000 shares are authorized to be issued under
the Plan.

                                      41
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  Following is a summary of the option activity for the years ended March 31,
1999, 1998 and 1997:

<TABLE>
<CAPTION>
                                                                        Weighted
                                                                        Average
                                                              Shares     Price
                                                             ---------  --------
      <S>                                                    <C>        <C>
      Outstanding at April 1, 1996..........................        --   $   --
        Granted.............................................   375,000     7.33
                                                             ---------
      Outstanding at March 31, 1997.........................   375,000     7.33
        Granted............................................. 2,656,000    15.35
        Cancelled...........................................   (16,500)    8.15
        Exercised...........................................   (12,300)    7.33
                                                             ---------
      Outstanding at March 31, 1998......................... 3,002,200    14.42
        Granted.............................................   376,500    15.99
        Cancelled...........................................  (108,000)   15.08
        Exercised...........................................    (2,100)   10.33
                                                             ---------
      Outstanding at March 31, 1999......................... 3,268,600   $14.58
                                                             =========   ======
      Exercisable at March 31, 1999.........................   649,360   $13.66
                                                             =========   ======
      Exercisable at March 31, 1998.........................    60,300   $ 7.33
                                                             =========   ======
      Exercisable at March 31, 1997.........................        --   $   --
                                                             =========   ======
</TABLE>

  The following table summarizes information about stock options outstanding
at March 31, 1999:

<TABLE>
<CAPTION>
                                    Options Outstanding       Options Exercisable
                               ------------------------------ --------------------
                                           Weighted  Weighted             Weighted
                                            Average  Average              Average
   Exercise Price Range Per      Number    Remaining Exercise   Number    Exercise
            Share              Outstanding   Life     Price   Exercisable  Price
   ------------------------    ----------- --------- -------- ----------- --------
 <S>                           <C>         <C>       <C>      <C>         <C>
  $4.125 to $10.44...........   1,883,600  9.2 years  $ 9.75    432,900    $ 9.43
  $12.00 to $16.50...........     506,500  8.8 years  $15.91     31,700    $14.73
  $19.33 to $27.25...........     557,000  8.6 years  $19.72    111,400    $19.72
  $30.50 to $34.88...........     321,500  9.6 years  $31.89     64,300    $31.89
</TABLE>

  The Company accounts for options granted under the 1996 Plan as prescribed
by the provisions of APB 25 and, accordingly, no compensation expense has been
recognized for stock options granted. Had compensation expense for the 1996
Plan been determined based on the fair value at the grant dates consistent
with the method of SFAS 123, the Company's net income and net income per share
would have been reduced to the pro forma amounts indicated below. For purposes
of these pro forma disclosures, the estimated fair value of the options
granted in fiscal 1999, 1998 and 1997 are amortized to expense over the
options' vesting period.

                                      42
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

<TABLE>
<CAPTION>
                                               Year Ended March 31,
                         -----------------------------------------------------------------
                                 1999                  1998                  1997
                         --------------------- --------------------- ---------------------
                         As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
                         ----------- --------- ----------- --------- ----------- ---------
                                    (in thousands, except net income per share)
<S>                      <C>         <C>       <C>         <C>       <C>         <C>
Net income..............   $13,332    $8,361     $22,516    $19,343    $16,116    $15,912
Net income per share,
 diluted................   $  0.46    $ 0.29     $  0.78    $  0.67    $  0.59    $  0.58
</TABLE>

  The weighted average grant date fair value of options granted during the
year ended March 31, 1999 was $10.30. The fair value of options was calculated
using the Black-Scholes option pricing model using the following weighted
average assumptions for fiscal year activity: risk-free interest rate of
5.60%, expected life of 7 years, expected volatility of .589 and no dividend
yield.

  The weighted average grant date fair value of options granted during the
year ended March 31, 1998 was $9.23. The fair value of options was calculated
using the Black-Scholes option pricing model using the following weighted
average assumptions for fiscal year activity: risk-free interest rate of
5.70%, expected life of 7 years, expected volatility of .519 and no dividend
yield.

  The weighted average grant date fair value of options granted during the
year ended March 31, 1997 was $4.54. The fair value of options was calculated
using the Black-Scholes option pricing model using the following weighted
average assumptions for fiscal year activity: risk-free interest rate of
5.98%, expected life of 7 years, expected volatility of .801 and no dividend
yield.

  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.

12. Employee Benefit Plans

  The Company maintains a pension plan which 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 curtailment of plan benefits, which had an
immaterial effect on operating results, has been recognized in all actuarial
calculations.

  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 following table summarizes the changes in benefit
obligations and plan assets during the years ended March 31, 1999 and 1998 and
the funded status of the pension plan at March 31, 1999 and 1998:

<TABLE>
<CAPTION>
                                                                  March 31,
                                                                ---------------
                                                                 1999    1998
                                                                ------  -------
      <S>                                                       <C>     <C>
      Changes in benefit obligations:
        Benefit obligation at beginning of year................ $7,789  $ 6,644
        Service cost...........................................     --    1,035
        Interest cost..........................................    605      572
        Actuarial (gains) losses...............................    905    2,211
        Curtailment............................................     --   (2,668)
        Benefits paid..........................................    (25)      (5)
                                                                ------  -------
          Benefit obligation at end of year.................... $9,274  $ 7,789
                                                                ======  =======
</TABLE>

                                      43
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)


<TABLE>
<CAPTION>
                                                                 March 31,
                                                              ----------------
                                                               1999     1998
                                                              -------  -------
                                                               (in thousands)
<S>                                                    <C>    <C>      <C>
Change in plan assets:
  Fair value of plan assets at beginning of year............  $ 7,683  $ 5,437
  Actual return on plan assets..............................      833    2,251
  Company contributions.....................................    1,134       --
  Benefits paid.............................................      (25)      (5)
                                                              -------  -------
  Fair value of plan assets at end of year..................  $ 9,625  $ 7,683
                                                              =======  =======
  Funded status of the plan (underfunded)...................  $   351  $  (106)
  Unrecognized net actuarial loss...........................      829       --
                                                              -------  -------
  Prepaid (accrued) benefit cost............................  $ 1,180  $  (106)
                                                              =======  =======

  Assumptions used in actuarial calculations were as follows:

Weighted average assumptions:
  Discount rate.............................................     7.00%    7.00%
  Expected return on plan assets............................     9.00     9.00
  Rate of compensation increase.............................       --     4.75

  Net periodic benefit cost includes the following components:

<CAPTION>
                                                             March 31,
                                                       -----------------------
                                                       1999    1998     1997
                                                       -----  -------  -------
                                                           (in thousands)
<S>                                                    <C>    <C>      <C>
Components of net periodic benefit cost:
  Service cost........................................ $  --  $ 1,035  $   807
  Interest cost.......................................   605      572      501
  Expected return on plan assets......................  (758)    (489)    (502)
  Amortization of prior service cost..................    --       (2)      (2)
  Amortization of transition asset....................    --      (23)     (23)
  Recognized actuarial loss...........................    --      124       67
  Curtailment.........................................    --     (458)      --
                                                       -----  -------  -------
  Benefit cost........................................ $(153) $   759  $   848
                                                       =====  =======  =======
</TABLE>

  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. Expenses related to this plan approximated $4.0 million, $2.0 million
and $0.9 million in 1999, 1998 and 1997, respectively.

  The Company had established a Supplemental Profit Sharing Plan which,
effective April 1, 1998, has been amended and renamed as the Company's
Nonqualified Deferred Compensation Plan (the "nonqualified deferred
compensation plan"). Under this nonqualified deferred compensation plan,
certain highly compensated employees are permitted to defer compensation, and
the Company credits to an account for each such employee an amount equal to
the deferred portion of his compensation plus matching contribution. For
deferrals made on or after April 1, 1998, the Company matches fifty (50%)
percent of the amount of the employee's base salary deferrals, not in excess
of six (6%) percent of base salary. The Company may also make additional
contributions on behalf of one or more participants in its discretion for each
plan year. The bookkeeping accounts that are maintained on behalf of
participants under this plan are credited with earnings and losses based on
deemed investments made at the direction of the participant in specified
investment funds. The Company has also assumed an obligation to provide
benefits under its nonqualified deferred compensation plan based on deferrals

                                      44
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and matching contributions made by certain Company employees to a deferred
compensation plan maintained by Trinity. Benefits are paid in a lump sum
payment at termination of employment or may be paid in installments if the
participant retires after age 55. Certain pretermination distributions are
also available. Contributions to the nonqualified deferred compensation plan
are not deductible by the Company for federal income tax purposes until
benefits are paid to participants. The Company has established a grantor trust
under the plan, and the assets of the trust are considered part of the general
assets of the Company. Expenses related to this plan approximated $0.3 million
in 1999.

13. Income Taxes

  For the year ended March 31, 1997, the Company was included in the
consolidated federal income tax return of Trinity. Trinity allocated income
taxes to the Company in amounts approximating income taxes that the Company
would have been obligated to pay on a separate tax return basis. The Company
and Trinity entered into a tax allocation agreement under which the Company
and Trinity have agreed upon the allocation of certain tax liabilities and
related matters for those periods.

  The significant components of the provision (benefit) for income taxes
follow:

<TABLE>
<CAPTION>
                                                        Year Ended March 31,
                                                       -------------------------
                                                        1999     1998     1997
                                                       -------  -------  -------
                                                           (in thousands)
      <S>                                              <C>      <C>      <C>
      Current:
        Federal....................................... $(3,824) $ 9,167  $ 3,440
        State.........................................     387    1,086    1,685
                                                       -------  -------  -------
                                                        (3,437)  10,253    5,125
      Deferred:
        Federal.......................................   2,493     (970)   4,771
        State.........................................     (73)     (86)     991
                                                       -------  -------  -------
                                                         2,420   (1,056)   5,762
                                                       -------  -------  -------
          Total....................................... $(1,017) $ 9,197  $10,887
                                                       =======  =======  =======
</TABLE>

  Deferred income taxes are provided for temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the carrying amount for income tax purposes. The components of deferred tax
liabilities and assets follow:

<TABLE>
<CAPTION>
                                                                    March 31,
                                                                  -------------
                                                                   1999   1998
                                                                  ------ ------
                                                                       (in
                                                                   thousands)
      <S>                                                         <C>    <C>
      Deferred tax liabilities:
        Depreciation and amortization............................ $8,431 $8,517
        Pensions and other benefits..............................    727    757
        Other ...................................................  1,227     26
                                                                  ------ ------
          Total deferred tax liabilities......................... 10,385  9,300
                                                                  ------ ------
      Deferred tax assets:
        Long-term contracts......................................    487  1,439
        Reserve for unpaid insurance and other claims............    453    836
                                                                  ------ ------
          Total deferred tax assets..............................    940  2,275
                                                                  ------ ------
      Net deferred tax liability................................. $9,445 $7,025
                                                                  ====== ======
</TABLE>

                                      45
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

  A reconciliation between the effective tax rate and the statutory tax rate
is as follows:

<TABLE>
<CAPTION>
                                                            Year Ended March
                                                                  31,
                                                            -------------------
                                                            1999    1998   1997
                                                            -----   -----  ----
      <S>                                                   <C>     <C>    <C>
      Statutory rate.......................................  35.0%   35.0% 35.0%
      Loss from foreign joint venture...................... (22.5)     --    --
      Refund of taxes paid to former parent company........  (7.3)     --    --
      Research and experimentation tax credits............. (22.3)  (11.0)   --
      Nondeductible goodwill amortization..................   9.3     6.3    --
      State taxes, net of federal benefit..................   1.5     2.2   4.1
      Other................................................  (2.0)   (3.5)  1.2
                                                            -----   -----  ----
      Effective tax rate...................................  (8.3)%  29.0% 40.3%
                                                            =====   =====  ====
</TABLE>

14. Stockholder Rights Plan

  The Company has adopted a stockholder rights plan under which one right is
assigned to each share of common stock. Each right entitles the stockholder to
purchase from the Company one one-hundredth of a share of Series A Preferred
Stock at an exercise price to be determined by the Board when the rights are
issued. The rights are not exercisable or detachable from the common stock
until ten business days after a person acquires beneficial ownership of 15% or
more of the common stock or if a person or group commences a tender or
exchange offer upon consummation of which that person or group would
beneficially own 15% or more of the common stock.

  If any person becomes a beneficial owner of 15% or more of the common stock
other than pursuant to an offer, as defined, for all shares determined by
certain directors to be fair to the stockholders and otherwise in the best
interests of both the Company and its stockholders (other than by reason of
share purchases by the Company), each right not owned by that person or
related parties enables its holder to purchase, at the right's then current
exercise price, shares of the Company's common stock having a calculated value
of twice the right's exercise price.

  The rights, which are subject to adjustment, may be redeemed by the Company
at a price of one cent per right at any time prior to their expiration ten
years from issuance or the point at which they become exercisable.

15. Commitments and Contingencies

  The Company is involved in various claims and lawsuits incidental to its
business. In the opinion of management, these claims and suits in the
aggregate will not have a material adverse effect on the Company's financial
position, results of operations or liquidity.

  Prior to September 30, 1996, Trinity had guaranteed certain contract
performance obligations of the Company. These guarantees, bonds, letters of
credit and similar obligations will remain in effect until they expire and
Trinity will remain liable until that time as any other guarantor. The Company
has indemnified Trinity for any losses incurred by Trinity under this
arrangement.

  Subsequent to September 30, 1996, the Company obtained its own contract bid
and performance bonds, letters of credit and similar obligations in connection
with its business. As of March 31, 1999 and 1998, the total of all outstanding
performance obligations was approximately $228 million and $38 million,
respectively.

                                      46
<PAGE>

                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

16. Supplementary Unaudited Quarterly Data

<TABLE>
<CAPTION>
                                             First    Second   Third     Fourth
                                            Quarter  Quarter  Quarter   Quarter
                                            -------- -------- --------  --------
                                              (in thousands, except per share
                                                           data)
<S>                                         <C>      <C>      <C>       <C>
Year ended March 31, 1999:
  Contract revenue earned.................. $209,775 $270,782 $279,246  $238,346
  Gross profit............................. $ 25,739 $ 29,853 $ 11,539  $ 18,887
  Net income (loss)........................ $  6,128 $  6,685 $   (972) $  1,491
  Net income (loss) per share.............. $   0.21 $   0.23 $  (0.03) $   0.05
  Net income (loss) per share, diluted..... $   0.21 $   0.23 $  (0.03) $   0.05
Year ended March 31, 1998:
  Contract revenue earned.................. $149,069 $151,198 $180,569  $189,402
  Gross profit............................. $ 18,565 $ 21,653 $ 26,559  $ 13,882
  Net income............................... $  5,411 $  7,812 $  8,755  $    538
  Net income per share..................... $   0.20 $   0.28 $   0.31  $   0.02
  Net income per share, diluted............ $   0.19 $   0.27 $   0.29  $   0.02
Year ended March 31, 1997:
  Contract revenue earned.................. $ 85,981 $ 94,457 $112,496  $113,863
  Gross profit............................. $ 11,286 $ 12,779 $ 12,558  $ 14,965
  Net income............................... $  3,342 $  3,871 $  4,192  $  4,711
  Net income per share..................... $   0.12 $   0.14 $   0.15  $   0.17
  Net income per share, diluted............ $   0.12 $   0.14 $   0.15  $   0.17
</TABLE>

17. Subsequent Event

  On June 1, 1999, the Company and Friede Goldman International Inc., a
Mississippi corporation ("Friede Goldman"), entered into an Agreement and Plan
of Merger (the "Merger Agreement"). Pursuant to the Merger Agreement, the
Company will merge with and into Friede Goldman (the "Merger") and upon
consummation of the Merger, Friede Goldman will be the surviving corporation.
As of the effective date of the Merger, each outstanding share of common
stock, par value $0.01 per share, of the Company, other than shares held in
the Company's treasury or owned by Friede Goldman or any wholly owned
subsidiary of Friede Goldman, will be converted into the right to receive
0.4614 of a share of common stock, par value $0.01 per share, of Friede
Goldman ("Friede Goldman Common Stock").

  Consummation of the Merger is subject to various conditions, including the
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the approval of the Merger
by the stockholders of the Company and of Friede Goldman.

  Concurrently with the execution and delivery of the Merger Agreement, the
Company entered into a Voting and Proxy Agreement (the "Voting and Proxy
Agreement") with J.L. Holloway, the Chairman and Chief Executive Officer of
Friede Goldman. Under the Voting and Proxy Agreement, Mr. Holloway agreed to
vote the shares of Friede Goldman Common Stock owned (beneficially or
otherwise) by him in favor of the Merger. Mr. Holloway owns approximately 42%
of the outstanding Friede Goldman Common Stock. In addition, Mr. Holloway
entered into a Stockholder's Agreement with Friede Goldman (the "Stockholder's
Agreement") pursuant to which Mr. Holloway agreed to certain limits following
the Merger on (i) his acquisition or disposition of shares of Friede Goldman
Common Stock and (ii) the voting of such shares. Mr. Holloway also agreed to
resign as Chairman and Chief Executive Officer of Friede Goldman on the second
anniversary of completion of the Merger and to support the election of John
Dane III, the current Chairman and Chief Executive Officer of the Company, as
his successor.

                                      47
<PAGE>

Item 9: Changes in and disagreements with accountant on accounting and
financial disclosure.

  None

                                   PART III

Item 10: Directors and Executive Officers

  Information concerning Directors and Executive Officers is incorporated by
reference from the Proxy Statement for the annual Meeting of Stockholders to
be held August 10, 1999.

Item 11: Executive Compensation

  Information concerning executive compensation is incorporated by reference
from the proxy statement described in Item 10 of this report.

Item 12: Security Ownership of Certain Beneficial Owners and Management

  Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the proxy statement described in
Item 10 of this report.

Item 13: Certain Relationships and Related Transactions

  Information concerning certain relationships and related transactions is
incorporated by reference from the proxy statement described in Item 10 of
this report.

                                    PART IV

Item 14: Exhibits, Financial Statement Schedules, and Reports on Form 8-K

  (a) Exhibits

<TABLE>
<CAPTION>
 Exhibit
 Number  Description
 ------- -----------
 <C>     <S>
 10.1*   Form of Amended and Restated Revolving Credit Agreement, effective
         April 23, 1999, by and among Halter Marine Group, Inc., as Borrower,
         Whitney National Bank, as Administrative and Collateral Agent,
         BankBoston, N.A., as Syndication Agent, The First National Bank of
         Chicago, as Documentation Agent, and other banks named therein.

 10.2**  Agreement and Plan of Merger, dated as of June 1, 1999, between Halter
         Marine Group, Inc. and Friede Goldman International Inc.

 10.3**  Voting and Proxy Agreement, dated as of June 1, 1999, between Halter
         Marine Group, Inc. and
         J. L. Holloway

 21*     Subsidiaries of the Company

 23*     Consent of Ernst & Young LLP

 27*     Financial Data Schedule
</TABLE>
--------
 * Filed herewith
** Incorporated by reference to exhibits to Form 8-K filed June 3, 1999 with
   the Securities and Exchange Commission

  (b) Financial Statement Schedules

  Copies of Consolidated Financial Statements are included within Form 10-K
and are incorporated herein by reference (See Index To Consolidated Financial
Statements at page 25 of Form 10-K).

  Financial Statement Schedules other than the Financial Statements have been
omitted because the required information is contained in the consolidated
financial statements and notes thereto or because such schedules are not
required or applicable.

                                      48
<PAGE>

  (c) Reports on Form 8-K

  The following Form 8-K was filed with the Securities and Exchange Commission
during the fourth quarter of fiscal 1999 on the date indicated:

  1. Announcement regarding the amendment of an earlier earnings outlook for
the third quarter of fiscal 1999 filed on January 20, 1999.

                                       49
<PAGE>

                                  SIGNATURES

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

                                          HALTER MARINE GROUP, INC.


                                          By:       /s/ John Dane III
                                              ---------------------------------
                                                      John Dane III
                                                 Chairman, President and
                                                 Chief Executive Officer

Date: June 29, 1999

  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.

              Signature                      Title                   Date

   /s/     John Dane III             Chairman, President,      June 29, 1999
-----------------------------------   and Chief Executive
           John Dane III              Officer


   /s/     Rick S. Rees              Executive Vice            June 29, 1999
-----------------------------------   President, Chief
           Rick S. Rees               Financial Officer and
                                      Director

   /s/  Angus R. Cooper II           Director                  June 29, 1999
-----------------------------------
        Angus R. Cooper II


   /s/     Barry J. Galt             Director                  June 29, 1999
-----------------------------------
           Barry J. Galt


   /s/   Kenneth W. Lewis            Director                  June 29, 1999
-----------------------------------
         Kenneth W. Lewis

                                      50