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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, 1998
 
[_]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)
 
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                   DELAWARE                                        75-2656828
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 <S>                                             <C>
 (STATE OR OTHER JURISDICTION OF INCORPORATION
                OR ORGANIZATION)                       (IRS EMPLOYER IDENTIFICATION NO.)
   13085 SEAWAY ROAD, GULFPORT, MISSISSIPPI                          39503
   (ADDRESS OF PRINICIPAL EXECUTIVE OFFICES)                       (ZIP CODE)
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      REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (228) 896-0029
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
 
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             TITLE OF EACH CLASS               NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S>                                            <C>
        Common Stock, $.01 par value                    American Stock Exchange
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          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 1, 1998 was approximately $528,000,000 - based on the
closing price per share as reported by the American Stock Exchange.
 
  Common Shares outstanding as of June 1, 1998: 28,823,158
 
  Portions of the Proxy Statement with respect to the 1998 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, the "Company") is
a provider of design, construction, conversion, and repair services for
offshore drilling rigs, vessels, 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 7,400 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 governmental 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
operates nine shipyards principally dedicated to the new construction of
marine vessels, although several of the Company's 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 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 work
force, position it to be a versatile and cost efficient domestic shipbuilder.
 
  The Company also is 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 operates six shipyards along the
Gulf Coast from Louisiana to Texas dedicated to 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 providing new construction, conversion and repair
services for mobile offshore rigs in the drilling industry. The Company
operates six shipyards in southeast Texas where it performs repair and
conversion work on jackup, submersible and semi-submersible drilling rigs. In
connection with TDI's acquisition of Trinity Marine Orange, Inc. in May 1998,
the Company acquired a facility in Orange, Texas that will be dedicated to 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., Utility Steel
Fabrication, Inc., Fritz Culver, Inc., and McElroy Machine & Manufacturing
Co., Inc. These companies, which now comprise the newly-formed Engineered
Products Group, design, manufacture and market cranes, derricks, winches,
hoists, windlasses, jacks, linear winches, fairleads, capstans, tuggers,
locking devices, turret bearings, control systems, and other related products
used in the marine, offshore and 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.
 
                                       2
<PAGE>
 
BUSINESS STRATEGY
 
  The Company's 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.
 
ACQUISITIONS
 
  Since its separation from Trinity, the Company has acquired, through either
stock or asset purchase, 10 companies including the acquisition of Trinity
Marine Orange, Inc. in May 1998. The aggregate purchase price for acquisitions
was approximately $152 million, of which approximately $109 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
 
  On April 4, 1997, the Company acquired a 51% interest in Texas Drydock, Inc.
("TDI") and obtained an option to acquire the remaining 49% of the company, a
provider of new construction, modification and repair services for mobile
offshore rigs used for oil and gas drilling and production. On May 16, 1997,
the Company acquired the remaining 49% interest in TDI.
 
  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 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
design, manufacture and market cranes, derricks, winches, fairleads, capstans,
tuggers, locking devices, turret bearings, control systems, and other related
products used in the marine, offshore and construction industries.
 
 Calcasieu Shipyard Acquisition
 
  In February 1998, the Company acquired all of the outstanding capital stock
of three companies comprising the operations of Calcasieu Shipyard
("Calcasieu") of Sulphur, Louisiana. Calcasieu is a full-service shipyard
providing repair and conversion services, vessel and barge gas freeing and
cleaning services, and specialized new construction.
 
                                       3
<PAGE>
 
 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 will be used to
build mobile offshore drilling and production units as well as components for
rigs under construction at other Company shipyards.
 
PRODUCTS AND MARKETS
 
  The Company specializes in the 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 luxurious megayachts under the name "Trinity Yachts."
 
  The Company also provides a wide variety of repair and conversion services
for vessels and barges that service the offshore energy and commercial
markets.
 
  Revenue from vessels amounted to $476 million in fiscal 1998, and at March
31, 1998 the Company's construction backlog for vessels was $529 million or
65% of total backlog.
 
 Rigs
 
  The Company's Rigs segment engages in the construction, conversion and
repair of mobile offshore rigs for drilling companies servicing the offshore
energy industry. Services provided include converting 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 mobile offshore rigs was $160 million in fiscal 1998, and at
March 31, 1998 the Company's rig backlog was $229 million or 28% of total
backlog.
 
 Engineered Products
 
  The Company's Engineered Products segment designs, manufactures and markets
cranes, derricks, winches, hoists, windlasses, jacks, linear winches,
fairleads, capstans, tuggers, locking devices, turret bearings, control
systems, and other related products used in the marine, offshore and
construction industries. Brand names include American, AmClyde, Clyde, Wiley,
Lucker, Sauerman, Unit Mariner, J & B, McElroy, Fritz Culver, and Hepburn.
 
  Revenue from engineered products, included from the dates of acquisition,
was $34 million in fiscal 1998, and at March 31, 1998, the Company's
engineered products backlog was $60 million or 7% of total backlog.
 
OPERATIONS
 
  The Company conducts its new construction operations for vessels and rigs at
10 shipyards located along the Gulf Coast. The Company's new construction
shipyards employ advanced manufacturing techniques, including modular
construction methods,
 
                                       4
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advanced welding techniques, panel line fabrication, computerized plasma arc
metal cutting and automated sandblasting and painting. The Company conducts
its vessel and rig repair and conversion operations at 12 shipyards which
utilize 18 dedicated drydocks, including one of only two drydocks in the
United States capable of docking large semi-submersible rigs. The Company's
multiple shipyards, combined with its large engineering team, provide
significant flexibility in the construction, repair and conversion of a wide
variety of vessels. The Company believes that, together with its skilled and
experienced work force, it is positioned to be a versatile and cost efficient
domestic shipbuilder. In addition to its domestic operations, the Company's
operations include four international ventures in Bahrain, Argentina, China,
and the Philippines.
 
  The Company's shipyards are well-maintained facilities. The Company spent
approximately $36 million on capital improvements for its existing shipyard
facilities during fiscal 1998, and has budgeted approximately $47 million for
capital improvements (excluding acquisitions) for these facilities during
fiscal 1999.
 
  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 engineering department which has been
instrumental in helping it maintain its reputation as an innovative
shipbuilder. The Company's engineering force consists of approximately 225
employees, 107 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 has agreed to
provide consulting services for 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 and
Gulfport 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
segment 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, and
Slidell, Louisiana. The Company's sales and marketing force consists of
approximately 68 employees. The Company has contractual arrangements in
certain countries to assist it with its international marketing efforts.
 
COMPETITION
 
  The Company's Vessels segment competes for domestic commercial shipbuilding
contracts principally with six to 10 U.S. shipbuilders based in the United
States. The number and identity of competitors on particular projects vary
greatly, depending
 
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upon the type of vessel and size of project. The Company competes for foreign
commercial shipbuilding contracts principally with numerous shipyards based
outside the United States, many of which are heavily subsidized by their
governments.
 
  The Company's Rigs segment has two principal domestic competitors for the
conversion and repair of mobile offshore rigs that operate in the Gulf of
Mexico and at least three domestic competitors for the new construction of
rigs. In international markets, the Company primarily competes with at least
two additional companies located in Europe and in the Far East.
 
  The Company's Engineered Products segment competes primarily with 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.
 
CONTRACT STRUCTURE AND PRICING
 
  The Company's contracts are generally obtained through a competitive bid
process. Most of the contracts for new construction executed 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. The Company's only
current U.S. Navy fixed-price incentive contracts relate to two oceanographic
survey and research ships.
 
  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 contracts for repair and conversion services include both
fixed price and time and materials contracts. Time and materials contracts are
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, 1998, the Company had 6,744 employees of whom 1,140 were
salaried and 5,604 were employed on an hourly basis. None of the Company's
employees is represented by any collective bargaining unit. Total employees at
March 31, 1998 included contract labor of approximately 800 employees.
 
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,
 
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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 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 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.
 
                                       7
<PAGE>
 
 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 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
U.S. shipbuilders in competing successfully for international commercial
projects against foreign shipyards, many of which are heavily subsidized by
their governments. As a result of these factors, competition by U.S.
shipbuilders for domestic commercial projects has increased significantly.
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 17.1%, 37.4%, and 47.3% of the Company's consolidated revenue in
fiscal 1998, 1997, and 1996, 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.
 
  Revenue derived from one customer for offshore support vessels accounted for
approximately 11% of the Company's consolidated revenue in 1998. Revenue
generated from this customer during fiscal 1997 and 1996 comprised less than
10% of the Company's revenue. There can be no assurance that the Company will
be successful in obtaining new contracts with this customer, all of which are
competitively bid.
 
                                       8
<PAGE>
 
 Conditions in the Offshore Oil and Gas Industry
 
  A significant portion of the Company's current contracts relate to the
construction of offshore support vessels, and the construction, repair and
conversion of mobile offshore 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. Although the
Company believes there will be an increase in demand for offshore support
vessels and mobile offshore rigs, the Company cannot predict future levels of
activity in offshore oil and gas exploration, development and production.
 
 Availability of Shipyard Workers
 
  While the Company's shipyards are not currently experiencing severe 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 severe shortages will be experienced
at one or more of the Company's shipyards in future.
 
 Integration of Acquisitions and Management of Growth
 
  The Company's growth strategy has emphasized the acquisition of other
offshore marine construction 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.
 
 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 estimation 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 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,
revenue from contracts is measured by the percentage of labor hours incurred
as compared to estimated total labor hours 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
 
                                       9
<PAGE>
 
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's backlog of new construction projects for vessels, rigs and
engineered products includes 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 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.
 
 Dependence on Key Personnel
 
  The Company believes that its success to date is attributable to, and its
future performance will depend to a significant extent upon, the efforts and
abilities of John Dane III, the Company's Chairman, President and Chief
Executive Officer and its other current executive officers. Additionally, John
Dane III and Daniel J. Mortimer, the Company's Chief Operating Officer, have
entered into noncompetition agreements with the Company. In connection with
the TDI acquisition and certain of the assets of AmClyde Engineered Products,
Inc., the Company entered into employment agreements with the chief executive
officers of each of the respective companies.
 
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 54,660 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
operates nine shipyards principally dedicated to the new construction of
marine vessels, although several of these facilities also perform work for the
Rigs and Engineered Products segments. The Vessels segment operates six
shipyards dedicated to the repair and conversion of vessels and barges.
 
                                      10
<PAGE>
 
  The Company's Rigs segment is headquartered from offices located at one of
its shipyards in Orange, Texas. The Rigs segment operates six shipyards where
it performs repair and conversion work on jackup, submersible and semi-
submersible drilling rigs. With the acquisition of Trinity Marine Orange,
Inc., in May 1998, the Rigs segment acquired a seventh facility that will be
dedicated to the construction of new offshore rigs. In addition to the yards
dedicated to the Rigs segment, facilities included in the Vessels segment 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
  New Orleans, Louisiana......................     225,000      Lease     2016
Halter Moss Point Shipyard
  Moss Point, Mississippi.....................     121,665        Own       --
Lockport Shipyard
  Lockport, Louisiana.........................      97,000        Own       --
Moss Point Marine Shipyard
  Escatawpa, Mississippi......................      75,000        Own       --
Gulfport Shipyard
  Gulfport, Mississippi.......................     554,500        Own       --
Panama City Shipyard
  Panama City, Florida........................      35,000        Own       --
Gulf Coast Fabrication Shipyard
  Pearlington, Mississippi....................      15,000        Own       --
Pascagoula Shipyard
  Pascagoula, Mississippi.....................     142,000        Own       --
Rigs Segment
TDI-Halter Orange Shipyard
  Orange, Texas...............................     600,000        Own       --
</TABLE>
 
                                      11
<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
                                     NUMBER  MAXIMUM LIFTING    VESSEL    OWN OR EXPIRATION
PROPERTY NAME AND LOCATION  ACREAGE DRYDOCKS CAPACITY (TONS) WIDTH (FEET) LEASE     DATE
--------------------------  ------- -------- --------------- ------------ ------ ----------
<S>                         <C>     <C>      <C>             <C>          <C>    <C>
Vessels
Gretna Shipyard
  Harvey, Louisiana......      30      --            --           --        Own        --
Halter Gulf Repair
 Shipyard
  New Orleans, Louisiana.      59       5        22,400          120        Own        --
TDI-Halter Pier 1
 Shipyard
  Orange, Texas..........       4       1        10,000          126      Lease   Monthly
Bludworth Bond--Houston
 Shipyard
  Houston, Texas.........       4       4         2,000           65        Own        --
Bludworth Bond--Texas
 City Shipyard
  Texas City, Texas......       8       3         1,800           84        Own        --
Halter-Calcasieu Shipyard
  Sulphur, Louisiana.....      20       3         2,450           64        Own        --
Rigs
TDI-Halter Childers Road
  Orange, Texas..........       9      --            --           --      Lease     2,000
TDI-Halter-North Yard
  Port Arthur, Texas.....      17      --            --           --        Own        --
TDI-Halter Dock Yard
  Port Arthur, Texas
      --Ship Mode........     100       1        64,000          122      Lease     2,009
      --Rig Mode.........     100       1        64,000          363
TDI-Halter Central Yard
  Sabine Pass, Texas.....      32      --            --           --        Own        --
TDI-Halter Sabine Yard
  Sabine Pass, Texas.....      34      --            --           --        Own        --
TDI-Halter South Yard
  Sabine Pass, Texas.....      21      --            --           --        Own        --
</TABLE>
 
 Engineered Products
 
  The Engineered Products Group headquarters in St. Paul, Minnesota is located
in two buildings that, together, occupy 47,000 square feet. The Engineered
Products Group also operates small sales offices in Houston, Texas, Metairie,
Louisiana, and Slidell, Louisiana.
 
  The Company's 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,
offshore and 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
Gulf Coast Manufacturing
  Division (2 Locations)
  Slidell, Louisiana..........................     155,000       Own       --
Covington Manufacturing Division
  Covington, Louisiana........................      46,000       Own       --
Gulfport Manufacturing Division
  Gulfport, Mississippi.......................      30,000       Own       --
</TABLE>
 
                                      12
<PAGE>
 
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 1998.
 
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
             ----              --- --------------------------------------------
 <C>                           <C> <S>
 John Dane III...............   47 Chairman, President and Chief Executive
                                   Officer since September 1996. President of
                                   the Company since 1987. Employed 1987.(1)
 Daniel J. Mortimer..........   51 Executive Vice President and Chief Operating
                                   Officer since November 1997, Senior Vice
                                   President of Operations from November 1994
                                   until May 1996.(1) Director since April
                                   1997. 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.
 Rick S. Rees................   45 Executive Vice President since April 1997.
                                   Director since September 1996. Chief
                                   Financial Officer since November 1997.
                                   President, Maritime Holdings, Inc. from
                                   September 1996 to April 1997. President
                                   Maritime Capital Corporation, 1989 to 1996.
                                   Employed 1997.
 Richard T. McCreary.........   42 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.
 Keith L. Voigts.............   54 Senior Vice President, Chief Accounting
                                   Officer and Treasurer since November 1997.
                                   Senior Vice President and Chief Financial
                                   Officer from April-November 1997. Vice
                                   President-Finance 1995 to 1996. Chief
                                   Financial Officer, Healthcare
                                   Communications, Inc. 1994 to 1995. From 1991
                                   to 1994 owner of the KLV Group, an
                                   accounting, consulting and investments firm.
                                   Employed 1995.(1)
 Maureen O'Connor Sullivan...   49 Senior Vice President, General Counsel and
                                   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 commercial
                                   litigation. Managing partner of the firm's
                                   Dallas office and member of its Management
                                   Committee from 1989 to 1997. Employed 1997.
 Don O. Covington............   63 Group President--TDI-Halter since April
                                   1997. From 1986 to 1997, President and Chief
                                   Executive Officer of Texas Drydock, Inc.,
                                   which was acquired by the Company in 1997.
                                   Employed 1997.
 Richard J. Juelich..........   47 Group President--Engineered Products Group
                                   since April 1998. 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.
 
                                       13
<PAGE>
 
                                    PART II
 
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 a
recent date is incorporated herein by reference from "Voting Securities and
Stockholders" in the definitive proxy statement for the Company's 1998 Annual
Meeting of Stockholders. The following table sets forth the high and low
closing sales price of the Company's common stock (after adjustment for a
three-for-two stock split in October 1997) as reported on the American Stock
Exchange Composite Tape. The first day of trading for the Company's stock was
September 26, 1996.
 
Fiscal Year 1997
<TABLE>
<CAPTION>
        QUARTER                            HIGH                                                   LOW
        -------                            ----                                                   ---
        <S>                               <C>                                                    <C>
        Second                            $ 8.17                                                 $7.83
        Third                              10.00                                                  7.67
        Fourth                             12.00                                                  9.00
 
Fiscal Year 1998
<CAPTION>
        QUARTER                            HIGH                                                   LOW
        -------                            ----                                                   ---
        <S>                               <C>                                                    <C>
        First                             $17.38                                                 $9.83
        Second                             32.25                                                 16.00
        Third                              40.81                                                 23.44
        Fourth                             27.25                                                 13.88
</TABLE>
 
  The Company has paid no dividends and does not expect to pay dividends in
the foreseeable future.
 
RECENT SALES OF UNREGISTERED SECURITIES
 
  The following information relates to all securities issued or sold by the
Company during its most recently completed fiscal year and not registered
under the Securities Act. Each of the transactions described below 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
Registrant's securities issued in connection with such transaction contained a
restrictive legend.
 
  On September 15, 1997, the Company privately sold, pursuant to a Rule 144A
transaction, 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 (the "Indenture") which
provides that the Notes are convertible at the option of the holder into
shares of common stock of the Company at any time at a conversion rate of
$31.50 per share. The Company subsequently filed a shelf registration
statement covering such Notes.
 
  In October 1997, the Company issued an aggregate of 835,484 shares of its
common stock in connection with the acquisition of the assets of AmClyde
Engineered Products, Inc. and Utility Steel Fabrication, Inc. The Company
subsequently filed a shelf registration statement covering such common stock.
 
  In February 1998, the Company issued an aggregate of 299,997 shares of its
common stock in connection with the acquisition of all of the outstanding
capital stock of three companies comprising the operations of Calcasieu
Shipyard of Sulphur, Louisiana.
 
                                      14
<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, 1998, 1997, 1996 and 1995 and
consolidated income statement data for the fiscal years ended March 31, 1998,
1997, 1996, 1995 and 1994 have been derived from the audited consolidated
financial statements of the Company. The selected consolidated balance sheet
data as of March 31, 1994 was derived from unaudited financial information of
the Company but in the opinion of management includes all adjustments
necessary for a fair presentation of the financial information. The selected
consolidated financial data set forth below should be read in conjunction with
"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.
 

                              -------------------------------------------------
                                          YEAR ENDED MARCH 31,
                              -------------------------------------------------
                                1998       1997      1996      1995      1994
                              ---------  --------  --------  --------  --------
                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME STATEMENT DATA: (5)
Contract revenue earned.....  $ 670,238  $406,797  $254,294  $250,586  $275,310
Cost of revenue earned......    589,579   355,209   214,559   207,398   228,833
                              ---------  --------  --------  --------  --------
Gross profit................     80,659    51,588    39,735    43,188    46,477
Selling, general and
 administrative expenses....     38,613    21,361    15,911    13,471    12,874
Amortization of excess of
 cost over net assets
 acquired...................      2,801        --        --        --        --
                              ---------  --------  --------  --------  --------
Operating income............     39,245    30,227    23,824    29,717    33,603
Interest expense............      6,600     3,232     3,268     3,844     1,902
Other, net..................        932        (8)      (11)       (5)      (33)
                              ---------  --------  --------  --------  --------
Income before income taxes..     31,713    27,003    20,567    25,878    31,734
Provision for income taxes..      9,197    10,887     8,102    10,170    12,227
                              ---------  --------  --------  --------  --------
Net income..................  $  22,516  $ 16,116  $ 12,465  $ 15,708  $ 19,507
                              =========  ========  ========  ========  ========
Net income per share (pro
 forma for 1996)(1).........  $    0.80  $   0.59  $   0.46
                              =========  ========  ========
Net income per share,
 diluted (pro forma for
 1996)(1)...................  $    0.78  $   0.59  $   0.46
                              =========  ========  ========
NET CASH PROVIDED (REQUIRED)
 BY: (5)
Operating activities........  $  38,324  $ 12,488  $ 23,742  $ 14,803  $(28,175)
Investing activities........  $(107,697) $(14,491) $(15,687) $(10,443) $ (3,440)
Financing activities........  $ 113,440  $  8,410  $ (7,907) $ (4,057) $ 31,300
OTHER DATA: (5)
EBITDA (2)..................  $  53,106  $ 38,134  $ 30,579  $ 35,136  $ 38,266
Depreciation and
 amortization...............  $  15,217  $  7,899  $  6,744  $  5,414  $  4,630
Capital expenditures (3)....  $  40,988  $ 14,491  $  5,568  $  6,337  $  3,529

 
                                    --------------------------------------------
                                                     MARCH 31,
                                    --------------------------------------------
                                      1998     1997     1996     1995     1994
                                    -------- -------- -------- -------- --------

BALANCE SHEET DATA: (5)
Working capital.................... $151,057 $ 88,431 $ 36,601 $ 40,855 $ 31,296
Total assets....................... $499,601 $209,411 $141,374 $124,271 $120,784
Long-term debt (4)................. $218,215 $ 52,000 $ 25,000 $ 25,000 $ 25,000
Total equity....................... $151,103 $ 93,301 $ 66,743 $ 54,278 $ 38,570
Backlog data....................... $817,102 $478,803 $431,292 $244,229 $256,965

--------
(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) Excludes payments for business acquisitions.
(4) Prior to March 31, 1997, long-term debt represented intercompany notes due
    to Trinity.
(5) Consolidated financial data for fiscal 1998 reflects the impact of
    companies acquired during the year from the dates of acquisition.
 
                                      15
<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, construction, conversion and
repair services for ocean-going vessels, offshore rigs 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, 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
construction, conversion and repair of mobile offshore drilling rigs.
Operations within the Engineered Products segment include the design,
manufacture and marketing of cranes, derricks, winches, hoists, windlasses,
jacks, linear winches, fairleads, capstans, tuggers, locking devices, turret
bearings, control systems, and other related products used in the marine,
offshore and construction industries.
 
  At March 31, 1998, the Company had 21 shipyards which are strategically
located along the Gulf Coast from Florida to Texas. Additionally, the Company
had four Gulf Coast manufacturing facilities dedicated to its Engineered
Products segment. On May 29, 1998, the Company acquired all of the shares of
common stock of Trinity Marine Orange, Inc., a shipyard based in Orange,
Texas. The shipyard will be utilized in the construction of new offshore rigs
as well as components for rigs under construction at other shipyards owned by
the Company.
 
  As of March 31, 1998, the Company had firm contracts with an aggregate
remaining value of approximately $817 million (excluding unexercised options
held by customers), covering construction of a total of 102 vessels, the new
construction of six drill barges and one jackup drilling rig; the conversion
of two rigs into deepwater semi-submersible rigs and the repair or conversion
of eight jackup drilling rigs. The Company anticipates that approximately $726
million of the aggregate remaining value of the firm contracts as of March 31,
1998 will be filled during fiscal 1999.
 
  Contracts for the construction of vessels, the construction, conversion and
repair of mobile offshore rigs, and the design and manufacture of engineered
products are usually awarded on a competitive bid basis. Although the Company
believes customers consider, among other things, the availability and
technical capabilities of equipment and personnel, efficiency, condition of
equipment, safety record and reputation, price competition is currently a
primary factor in determining which qualified bidder is awarded a contract.
Accordingly, the Company's strategy is to remain a leader in cost effective
marine construction.
 
  The Company expects that substantial 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.
At March 31, 1998, the Company had 30 offshore support vessels, three rigs and
six drill barges under contract. Although the Company believes there will be
an increase in demand for offshore support vessels and mobile offshore rigs,
the Company cannot predict future levels of activity in offshore oil and gas
exploration, development and production. Although the demand for vessels and
rigs may temporarily decrease as a result of short-term declines in oil
prices, the Company believes that the overall demand will increase in the
long-term.
 
 
                                      16
<PAGE>
 
  The Company also expects 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 currently has one offshore double
hull tank barge under construction. In addition, the Company is bidding on a
number of other offshore barge construction projects.
 
  Pursuant to the provisions of a separation agreement with Trinity, the
Company will be prohibited, for four years plus an additional period under
certain circumstances after the separation from Trinity, from engaging in
Trinity businesses, which include the construction of inland hopper barges and
inland tank barges. Under special arrangements with Trinity, the Company has
built a relatively small number of such vessels. Revenue related to this
business was $23.1 million, $19.9 million and $26.2 million for fiscal years
1998, 1997 and 1996, respectively. The Company's gross profit from such
activities was $2.0 million, $2.2 million and $3.1 million for fiscal years
1998, 1997 and 1996, 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.
 
  The Company believes its current production labor force is at near optimum
levels and that its multiple yard strategy and aggressive recruiting of
personnel will protect it from labor shortfalls in any one market. The Company
has experienced a shift in the production labor force over the past year from
contract to permanently employed labor which it expects to result in lower
labor costs and production efficiencies which should improve gross margins.
The production labor force grew from 2,087 employees at March 31, 1997 to
5,604 employees at March 31, 1998, partially as a result of employees added
through the Company's business acquisitions.
 
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:
 


                                  --------------------------------------------
                                              YEAR ENDED MARCH 31,
                                  --------------------------------------------
                                       1998           1997           1996
                                  -------------- -------------- --------------
                                  AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
                                  ------ ------- ------ ------- ------ -------
                                                 (IN MILLIONS)

Contract revenue earned by
 business segment:
  Vessels........................ $476.3   71.1% $406.8  100.0% $254.3  100.0%
  Rigs...........................  159.9   23.9      --     --      --     --
  Engineered Products............   34.0    5.0      --     --      --     --
                                  ------  -----  ------  -----  ------  -----
                                  $670.2  100.0% $406.8  100.0% $254.3  100.0%
                                  ======  =====  ======  =====  ======  =====

 

                                  --------------------------------------------
                                              YEAR ENDED MARCH 31,
                                  --------------------------------------------
                                       1998           1997           1996
                                  -------------- -------------- --------------
                                  AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
                                  ------ ------- ------ ------- ------ -------
                                                 (IN MILLIONS)

Contract revenue earned by
 customer type:
  Government: (1)
    Vessels...................... $171.9   25.6% $215.8   53.1% $135.7   53.4%
  Energy: (2)
    Vessels......................  180.1   26.9    86.1   21.1    54.4   21.4
    Rigs.........................  159.9   23.9      --     --      --     --
                                  ------  -----  ------  -----  ------  -----
                                   340.0   50.8    86.1   21.1    54.4   21.4
  Commercial: (3)
    Vessels......................   62.8    9.4    81.4   20.0    49.4   19.4
  Other: (4)
    Vessels......................   61.5    9.2    23.5    5.8    14.8    5.8
    Engineered Products..........   34.0    5.0      --     --      --     --
                                  ------  -----  ------  -----  ------  -----
                                    95.5   14.2    23.5    5.8    14.8    5.8
                                  ------  -----  ------  -----  ------  -----
                                  $670.2  100.0% $406.8  100.0% $254.3  100.0%
                                  ======  =====  ======  =====  ======  =====
 
                                      17
<PAGE>
 
--------
(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 tow boats 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.
 
 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. The Company has now developed a broad
range of industry and regulatory accepted designs that it will be able to use
to fill future orders in the Vessels segment which the Company believes will
contribute to higher margins in the future. 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 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 believes that it will realize cost savings from the project in future
periods.
 
                                      18
<PAGE>
 
  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:
 
                                          --------------------------------------
                                                       1998               1997
                                          ------------------------------ -------
                                                          ENGIN.
                                          VESSELS  RIGS  PRODUCTS TOTAL  VESSELS
                                          ------- ------ -------- ------ -------
                                                      (IN MILLIONS)
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
                                          ======  ======  =====   ====== ======

 
  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.
 
 Fiscal 1997 Compared with Fiscal 1996
 
  Contract revenue increased 60.0% to $406.8 million in the fiscal year ended
March 31, 1997 compared with $254.3 million, all of which was in the Vessels
segment, in the fiscal year ended March 31, 1996. An increase in revenue from
all customer groups was experienced. Specifically, government revenue
increased by $80.1 million or 59.0%; energy revenue increased by $31.6 million
or 58.1%; commercial revenue increased by $32.0 million or 64.8%; and other
revenue increased by $8.7 million or 58.8%. Major new government contracts
added in fiscal 1997 included a large ferry for a state government and a U.S.
Navy oceanographic research vessel. The increase in energy revenue was
principally a result of increased construction of offshore support vessels.
The increase in other commercial revenue occurred in part from the
construction of five casino barges. The increase in other revenue was a result
of a $9.2 million increase in revenue from yacht construction as well as
increased repair and conversion business.
 
  The gross profit margin decreased to 12.7% in fiscal 1997 compared to 15.6%
in fiscal 1996. This decrease is attributable, in part, to the favorable
margin received on a major contract in fiscal 1996. The Company did not
replace that contract with a similarly performing contract in 1997. Further,
fiscal 1997 gross profit was favorably impacted by a reduction in the workers
compensation reserve. This benefit was substantially offset by specific
writedowns in work in process inventory. In addition, in fiscal 1997,
contracts with energy customers had lower than normal margins reflecting the
Company's efforts to regain entry into a previously dormant market.
 
  Selling, general and administrative expenses increased to $21.4 million in
fiscal 1997, an increase of $5.5 million over fiscal 1996. These expenses
amounted to 5.3% of revenue in fiscal 1997 compared to 6.3% of revenue in
fiscal 1996. The increase in dollar costs was attributed to the general
overall growth of the Company and the new and additional costs the Company
incurred as a result of becoming a stand alone enterprise. Specifically,
salaries and employee benefit costs increased by $2.6 million, primarily as a
result of increased personnel, and research and development costs increased by
$1.2 million resulting from lower billings to the U.S. Government for such
costs as compared to fiscal 1996.
 
  The Company's construction backlog increased 11% to $478.8 million at March
31, 1997 compared to $431.3 million at March 31, 1996. Energy related backlog
increased by $108.6 million and other backlog increased by $9.0 million. The
increase in energy backlog was attributable to new contracts to build offshore
support vessels. The increase in other backlog was attributable to new
contracts to build megayachts. The above increases were offset by a decrease
in government related backlog of $59.0 million and
 
                                      19
<PAGE>
 
commercial related backlog of $11.2 million. The decrease in government
backlog was primarily due to revenue recognition during fiscal 1997 on a U.S.
Navy contract to build two barracks barges and the State of Alaska contract to
build a 383-foot ferry. The decrease in commercial backlog was due primarily
to completion of a large coal barge in fiscal 1997.
 
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 1998 were cash provided by operating
activities, borrowings from the Company's existing credit facility and the
issuance of convertible subordinated notes and taxable revenue bonds. Cash
flows during fiscal 1998 from these sources were $38 million from operating
activities, $185 million from the issuance of 4 1/2% Convertible Subordinated
Notes, and $30 million from the issuance of Taxable Revenue Bonds. These
sources were used primarily to fund the Company's working capital
requirements, capital expenditures, and acquisitions.
 
  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 (the
"Indenture") which provided that the Notes are convertible at the option of
the holder into shares of common stock of the Company at a conversion rate
equivalent to $31.50 per share, subject to adjustment for certain events (as
defined in the Indenture). Interest on the Notes is payable semi-annually, in
arrears, on March 15 and September 15 of each year, commencing March 15, 1998,
with principal due at maturity. The Notes are unsecured. 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 certain redemption prices (as defined), plus
accrued and unpaid interest and liquidated damages, if any, to, but excluding,
the redemption date. 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.
 
  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 semi-annually, in arrears, on June 30 and December 31 of each
year, commencing June 30, 1998, 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.
 
  During fiscal year 1998, the Company renegotiated its revolving credit
agreement ("the Credit Facility") with a group of banks, increasing the
maximum loan amount from $135 million to $150 million, to be used for general
corporate purposes and working capital. All amounts outstanding under the
Credit Facility will become payable on September 30, 2002. Letters of credit
are limited to $50 million. The interest rate is 0.75% to 1.75% over the
London Interbank Offering Rate ("LIBOR"), or the base rate (as defined),
depending on the Company's choice. The range of rates over LIBOR is set
quarterly, depending on the ratio of the Company's borrowed debt to EBITDA (as
defined). Under the Credit Facility, the Company is obligated to pay certain
fees, including an annual commitment fee in an amount of .2% to .5% of the
unused portion of the commitment. The loan agreement contains certain
restrictive covenants, including minimum net worth requirements and the
encumbering of assets. In addition, the Company, among other things, is
required to maintain certain financial ratios, including an interest coverage
ratio (as defined), a debt service coverage ratio (as defined) and a current
ratio (as defined). At March 31, 1998, the Company had no amounts outstanding
and $44 million available under the line of credit.
 
  Prior to the separation from Trinity, a significant portion of the Company's
existing contracts for the construction, repair or conversion of vessels
required that the Company's performance be guaranteed by Trinity, by a surety
company or other third party pursuant to a contract bid or performance bond,
letter of credit or similar obligation. These guarantees, bonds, letters of
credit and similar obligations will remain in effect until they expire and
Trinity will remain liable for the obligations on the same basis as any other
guarantor. The Company has indemnified Trinity against any liability under
these obligations. For the protection of Trinity in the event Trinity is
called upon to satisfy any such obligations, Trinity has been granted security
interests in certain assets of the Company which relate to the Company's
contracts from which such obligations arise and possesses the rights to
complete performance of any such contract on behalf of the Company in the
event of nonperformance by the Company. Such rights and
 
                                      20
<PAGE>
 
remedies are similar to the rights possessed by surety companies that have
issued performance bonds on behalf of the Company. The Company has arranged
its own contract bid and performance bonds, letters of credit and similar
obligations in connection with its business since September 26, 1996. The
Company believes that amounts available under the Credit Facility and bonding
commitment will be adequate to meet these obligations as they are required. As
of March 31, 1998, the total of all of the Company's outstanding performance
obligations was approximately $38 million.
 
  The Company made capital expenditures, including construction-in-process, of
$41 million and $14 million in fiscal 1998 and 1997, respectively. During
fiscal 1998, the Company made extensive improvements at its Pascagoula
facility which were funded through the issuance of taxable revenue bonds. The
Company currently has budgeted, for fiscal 1999, approximately $70 million for
planned capital projects, which included the acquisition, on May 29, 1998, for
$15 million in cash, of a shipyard located in Orange, Texas which will be used
for the construction of new offshore rigs.
 
  The Company believes that cash flow from operations, together with funds
available under the existing credit facility, and excess cash generated from
the issuance of the 4 1/2% Convertible Subordinated Notes and Taxable Revenue
Bonds 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 is in the
process of completing a review of significant software used in the Company's
operations, and, to the extent practicable, in the operations of its key
business relationships such as vendors, suppliers, and financial institutions,
in order to determine if any year 2000 risks exist that may be material to the
Company as a whole.
 
  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.
 
                                      21
<PAGE>
 
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
Report of Independent Auditors.............................................  23
Consolidated Balance Sheets................................................  24
Consolidated Income Statements.............................................  25
Consolidated Statements of Stockholders' Equity............................  26
Consolidated Statements of Cash Flows......................................  27
Notes to Consolidated Financial Statements.................................  28
</TABLE>
 
                                       22
<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, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash
flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Halter Marine
Group, Inc. and Subsidiaries at March 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for each of the three years
in the period ended March 31, 1998 in conformity with generally accepted
accounting principles.
 
                                          ERNST & YOUNG LLP
 
New Orleans, Louisiana
April 28, 1998
 
                                      23
<PAGE>
 
                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE> 
<CAPTION> 

                                                                   -----------------
                                                                       MARCH 31,
                                                                   -----------------
                                                                     1998     1997
                                                                   -------- --------
<S>                                                                <C>      <C>
                           A S S E T S
                           -----------
Current Assets:
  Cash and cash equivalents......................................  $ 51,146 $  7,079
  Contract receivables ..........................................   115,389   36,053
  Due from former parent.........................................        --   11,513
  Costs and estimated earnings in excess of billings on
   uncompleted contracts.........................................    81,229   77,704
  Inventories....................................................    19,692   10,827
  Other current assets...........................................     5,124    4,501
                                                                   -------- --------
    Total current assets.........................................   272,580  147,677
Property, plant and equipment, net...............................   125,962   61,449
Excess of cost over net assets acquired, net.....................    92,101       --
Other assets ....................................................     8,958      285
                                                                   -------- --------
                                                                   $499,601 $209,411
                                                                   ======== ========
<CAPTION>
L I A B I L I T I E S  A N D  S T O C K H O L D E R S'  E Q U I T Y
-------------------------------------------------------------------
<S>                                                                <C>      <C>
Current Liabilities:
  Accounts payable and accrued liabilities.......................  $ 51,433 $ 30,594
  Billings in excess of costs and estimated earnings on
   uncompleted contracts.........................................    68,172   19,956
  Notes payable and current portion of long-term debt............     1,918    8,696
                                                                   -------- --------
    Total current liabilities....................................   121,523   59,246
Long-term debt, less current portion.............................   218,215   52,000
Deferred income taxes ...........................................     7,025    2,897
Other noncurrent liabilities.....................................     1,735    1,967
                                                                   -------- --------
    Total liabilities............................................   348,498  116,110
Stockholders' equity:
  Common stock, $.01 par value; authorized 50,000 shares; issued
   28,822 and 27,675 shares at
   March 31, 1998 and 1997, respectively.........................       288      185
  Preferred stock, authorized 50,000 shares; issued, none........        --       --
  Additional paid-in capital ....................................   119,396   84,213
  Retained earnings..............................................    31,419    8,903
                                                                   -------- --------
    Total stockholders' equity...................................   151,103   93,301
                                                                   -------- --------
                                                                   $499,601 $209,411
                                                                   ======== ========
</TABLE>
 
          See accompanying notes to consolidated financial statements.
 
                                       24
<PAGE>
 
                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
                         CONSOLIDATED INCOME STATEMENTS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
                                                 ----------------------------
                                                            MARCH 31,
                                                 ----------------------------
                                                   1998      1997      1996
                                                 --------  --------  --------
Contract revenue earned......................... $670,238  $406,797  $254,294
Cost of revenue earned .........................  589,579   355,209   214,559
                                                 --------  --------  --------
  Gross profit..................................   80,659    51,588    39,735
Selling, general and administrative expenses....   38,613    21,361    15,911
Amortization of excess of cost over net assets
 acquired.......................................    2,801        --        --
                                                 --------  --------  --------
  Operating income..............................   39,245    30,227    23,824
Other (income) expenses:
  Interest expense, net.........................    6,600     3,232     3,268
  Other, net....................................      932        (8)      (11)
                                                 --------  --------  --------
                                                    7,532     3,224     3,257
                                                 --------  --------  --------
Income before income taxes......................   31,713    27,003    20,567
Provision (benefit) for income taxes:
  Current ......................................   10,253     5,125    15,785
  Deferred......................................   (1,056)    5,762    (7,683)
                                                 --------  --------  --------
                                                    9,197    10,887     8,102
                                                 --------  --------  --------
Net income ..................................... $ 22,516  $ 16,116  $ 12,465
                                                 ========  ========  ========
Net income per share (pro forma for 1996)....... $   0.80  $   0.59  $   0.46
                                                 ========  ========  ========
Net income per share, diluted (pro forma for
 1996) ......................................... $   0.78  $   0.59  $   0.46
                                                 ========  ========  ========
Weighted average shares outstanding (pro forma
 for 1996):
  Basic.........................................   28,052    27,281    27,000
  Diluted.......................................   29,008    27,339    27,000

 
 
          See accompanying notes to consolidated financial statements.
 
                                       25
<PAGE>
 
                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
                             -------------------------------------------------
                                    ADDITIONAL          STOCKHOLDER'S
                             COMMON  PAID-IN   RETAINED      NET
                             STOCK   CAPITAL   EARNINGS  INVESTMENT    TOTAL
                             ------ ---------- -------- ------------- --------
Balance at March 31, 1995...                              $ 54,278    $ 54,278
  Net income................                                12,465      12,465
                                                          --------    --------
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
                              ====   ========  =======    ========    ========
 
 
          See accompanying notes to consolidated financial statements.
 
                                       26
<PAGE>
 
                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
                                                 -----------------------------
                                                       YEAR ENDED MARCH 31,
                                                 -----------------------------
                                                   1998       1997      1996
                                                 ---------  --------  --------
Operating activities:
  Net income.................................... $  22,516  $ 16,116  $ 12,465
  Adjustments to reconcile net income to net
   cash provided by operating activities
    Depreciation and amortization...............    15,217     7,899     6,744
    Deferred provision (benefit) for income
     taxes......................................    (1,056)    5,762    (7,683)
    Equipment transfers from former parent, net.        --        --    (7,776)
    Changes in operating assets and liabilities:
      Increase in contract receivables..........   (42,255)  (27,713)   (1,053)
      Decrease in due from former parent........    11,513        --        --
      (Increase) decrease in costs and estimated
       earnings in excess of billings on
       uncompleted contracts....................       984   (9,799)     3,120
      (Increase) decrease in inventories........      (771)   (4,764)      455
      (Increase) decrease in other current
       assets...................................      (105)   (4,114)      107
      Decrease in other assets..................       707        --        --
      Increase (decrease) in accounts payable
       and accrued liabilities..................    (8,463)   35,491       420
      Increase (decrease) in income taxes
       payable to affiliate.....................        --   (15,785)    5,949
      Increase in billings in excess of costs
       and estimated
       Earnings on uncompleted contracts........    40,269     7,428    10,994
      Increase (decrease) in other noncurrent
       liabilities..............................      (232)    1,967        --
                                                 ---------  --------  --------
        Total adjustments.......................    15,808    (3,628)   11,277
                                                 ---------  --------  --------
    Net cash provided by operating activities...    38,324    12,488    23,742
                                                 ---------  --------  --------
Investing activities:
  Capital expenditures..........................   (40,988)  (14,491)   (5,568)
  Business acquistions, net of cash acquired....   (66,709)       --   (10,119)
                                                 ---------  --------  --------
    Net cash required by investing activities...  (107,697)  (14,491)  (15,687)
                                                 ---------  --------  --------
Financing activities:
  Net proceeds from sale and issuance of stock..        72    35,442        --
  Net borrowings from former parent.............        --   (79,032)   (7,907)
  Issuance of long-term convertible subordinated
   notes........................................   185,000        --        --
  Issuance of taxable revenue bonds.............    30,000        --        --
  Debt issuance costs...........................    (6,013)       --        --
  Principal payments on debt....................   (43,619)       --        --
  Net borrowings (repayments) under line of
   credit.......................................   (52,000)   52,000        --
                                                 ---------  --------  --------
    Net cash provided (required) by financing
     activities.................................   113,440     8,410    (7,907)
                                                 ---------  --------  --------
Net increase in cash and cash equivalents.......    44,067     6,407       148
Cash at beginning of year.......................     7,079       672       524
                                                 ---------  --------  --------
Cash and cash equivalents at end of year........ $  51,146  $  7,079  $    672
                                                 =========  ========  ========
Supplemental disclosures:
Cash paid for:
  Interest...................................... $   8,519  $  1,586  $     --
                                                 =========  ========  ========
  Income taxes.................................. $   5,455  $     --  $     --
                                                 =========  ========  ========
  Purchase of subsidiaries...................... $  66,928  $     --  $ 10,119
                                                 =========  ========  ========
Non-cash investing activities:
 Acquisitions:
  Fair value of assets acquired................. $  90,748  $     --  $ 10,119
                                                 =========  ========  ========
  Fair value of liabilities assumed............. $  56,511  $     --  $     --
                                                 =========  ========  ========
 
          See accompanying notes to consolidated financial statements.
 
 
                                       27
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
                                MARCH 31, 1998
 
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. The Company formerly
conducted the business of construction, repair and conversion of primarily
ocean-going vessels for the governmental and commercial markets as a division
of Trinity Industries, Inc. ("Trinity"). On September 26, 1996, Halter Marine
Group, Inc. and subsidiaries (collectively, 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. 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
substantially all of its contracts in process. Under this method, revenues of
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 these
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.
 
 
                                      28
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  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 revenue recognized in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts," represents billings in excess of revenue 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 repairs 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 the excess
of cost over net assets acquired was $2.8 million at March 31, 1998.
 
 Other Assets
 
  Other assets includes $6 million of debt issuance costs capitalized in
conjunction with the issuance of the $185 million of 4 1/2% Convertible
Subordinated Notes and the $30 million of Taxable Revenue Bonds. These costs
are being amortized over the life of the related debt. Accumulated
amortization of debt issuance costs was $0.4 million at March 31, 1998.
 
 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 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.
 
 
                                      29
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  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. Pro forma net income for the
year ended March 31, 1996 was $12.7 million as adjusted for a reduction in
interest expense, net of tax, resulting from the use of the net proceeds of
the offering to retire outstanding debt to Trinity as of the beginning of the
period.
 
 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 1997
have been reclassified to conform with the 1998 presentation.
 
3. BUSINESS ACQUISITIONS
 
  The Company completed certain business acquisitions during fiscal 1998 and
1996, 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 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.
 
 
                                      30
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  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 12 months ended March 31, 1998 and
1997, assuming consummation of the purchase of TDI and the Engineered Products
Group as of April 1, 1996 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 expenses. 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., located in 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 fiscal 1996, the Company acquired the assets of American Marine
Corporation (now known as Halter Gulf Repair) and CBI-Con, Inc. (now known as
Halter Pascagoula). The assets of these businesses are utilized in the
manufacture and repair of marine products. The aggregate purchase price of
approximately $10.1 million was allocated entirely to the assets acquired. The
results of these acquisitions would not have materially affected consolidated
revenue, net income, or net income per share for fiscal 1996.
 
  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
respective former owners. The additional payments, which are not expected to
be material, will be paid in cash and accounted for as additonal excess of
cost over net assets acquired.
 
                                      31
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
 

                                                             -------------------
                                                                   MARCH 31,
                                                             -------------------
                                                                1998      1997
                                                             ---------- --------
                                                               (IN THOUSANDS)

Costs incurred on uncompleted contracts..................... $1,064,026 $555,918
Estimated earnings..........................................    130,607  103,565
                                                             ---------- --------
                                                              1,194,633  659,483
Less billings to date.......................................  1,181,576  601,735
                                                             ---------- --------
                                                             $   13,057 $ 57,748
                                                             ========== ========
Included in the following balance sheet captions:
  Costs and estimated earnings in excess of billings on
   uncompleted contracts.................................... $   81,229 $ 77,704
  Billings in excess of costs and estimated earnings on
   uncompleted contracts....................................     68,172   19,956
                                                             ---------- --------
                                                             $   13,057 $ 57,748
                                                             ========== ========
 
5. PROPERTY, PLANT AND EQUIPMENT
 
                                                               ----------------
                                                                   MARCH 31,
                                                               ----------------
                                                                 1998    1997
                                                               -------- -------
                                                                (IN THOUSANDS)

Land.......................................................... $ 13,676 $ 8,427
Buildings and improvements....................................   64,849  26,929
Machinery and equipment.......................................  104,448  53,118
Construction in progress .....................................   16,418  12,696
                                                               -------- -------
                                                                199,391 101,170
Less accumulated depreciation.................................   73,429  39,721
                                                               -------- -------
Property, plant and equipment, net............................ $125,962 $61,449
                                                               ======== =======

 
6. NOTES PAYABLE AND LONG-TERM DEBT
 
                                                               ----------------
                                                                   MARCH 31,
                                                               ----------------
                                                                 1998    1997
                                                               -------- -------
                                                                (IN THOUSANDS)

4 1/2% Convertible Subordinated Notes......................... $185,000 $    --
Taxable Revenue Bonds, Series 1998............................   30,000      --
Revolving Credit Agreement....................................       --  52,000
Other.........................................................    5,133   8,696
                                                               -------- -------
                                                                220,133  60,696
Less current portion..........................................    1,918   8,696
                                                               -------- -------
                                                               $218,215 $52,000
                                                               ======== =======
 
 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 (the
"Indenture") which provides that the Notes are convertible at the option of
the holder into shares of common stock of the
 
                                      32
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
Company at a conversion rate equivalent to $31.50 per share, subject to
adjustment for certain events (as defined in the Indenture). Interest on the
Notes is payable semi-annually, in arrears, on March 15 and September 15 of
each year, commencing March 15, 1998, with principal due at maturity. The
Notes are unsecured.
 
  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 semi-annually, in arrears, on June 30 and December 31 of each
year, commencing June 30, 1998, 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. As of March 31, 1998, of the $30 million funded,
approximately $23 million had been applied to qualified construction
expenditures while approximately $7 million remained invested in an escrow
which will be utilized by the Company as it incurs qualified expenditures. The
balance remaining in escrow is expected to be expended during fiscal 1999.
 
 Revolving Credit Agreement
 
  During fiscal 1998, the Company renegotiated its revolving credit agreement
with a group of banks, increasing the maximum loan amount from $135 million to
$150 million. Any amounts outstanding under this revolving credit agreement
will become payable on September 30, 2002. Letters of credit are limited to an
aggregate of $50 million. The interest rate is 0.75% to 1.75% over the London
Interbank Offered Rate (LIBOR), or the base rate (as defined), depending on
the Company's choice. The range of rates over LIBOR is set quarterly,
depending on the ratio of the Company's borrowed 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 0.2% to
0.5% of the unused portion of the commitment. The loan agreement contains
certain restrictive covenants, including minimum net worth requirements and
the encumbering of assets. In addition, the Company, among other things, is
required to maintain certain financial ratios, including an interest coverage
ratio (as defined), a debt service coverage ratio (as defined), and a current
ratio (as defined).
 
 
                                      33
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  At March 31, 1998, the Company had no amounts outstanding under the line of
credit. The amount available under the line of credit at March 31, 1998 was
$44 million.
 
 Other Debt
 
  Other long-term debt of $5.1 million at March 31, 1998 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, building, docking facilities, and improvements and
machinery and equipment with a net book value approximating $6.0 million. The
notes have final maturities ranging from the year 2000 through 2013.
 
  Scheduled maturities of long-term debt for the next five years are as
follows:
 
<TABLE>
<CAPTION>
   YEAR ENDING MARCH 31,                                              AMOUNT
   ---------------------                                          --------------
                                                                  (IN THOUSANDS)
   <S>                                                            <C>
   1999..........................................................     $1,918
   2000..........................................................        444
   2001..........................................................        117
   2002..........................................................        126
   2003..........................................................        137
                                                                      ------
                                                                      $2,742
                                                                      ======
</TABLE>
 
  The fair value of the Company's 4 1/2% convertible subordinated notes at
March 31, 1998 was $156.9 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 non-cancelable
operating leases which expire at various dates through the year 2016. Total
lease expense recorded by the Company was $900,577, $280,902, and $247,848 for
fiscal 1998, 1997, and 1996, respectively.
 
  Future minimum lease commitments are as follows:
 
<TABLE>
<CAPTION>
   YEAR ENDING MARCH 31,                                              AMOUNT
   ---------------------                                          --------------
                                                                  (IN THOUSANDS)
   <S>                                                            <C>
   1999..........................................................    $ 1,849
   2000..........................................................      1,796
   2001..........................................................      1,521
   2002..........................................................        972
   2003..........................................................        856
   Thereafter....................................................      4,255
                                                                     -------
                                                                     $11,249
                                                                     =======
</TABLE>
 
8. SEGMENT INFORMATION
 
  The Company classifies its business into three segments: Vessels, which
includes the new construction and repair of a wide variety of vessels for the
government, energy and commercial markets; Rigs, which includes the
construction, conversion and repair of mobile offshore drilling rigs; and
Engineered Products, which includes the design, manufacture and marketing of
cranes, derricks, winches, hoists, windlasses, jacks, linear winches,
fairleads, capstans, tuggers, locking devices, turret bearings, control
systems, and other related products used in the marine, offshore and
construction industries. The Company evaluates the performance of its
 
                                      34
<PAGE>
 
                   HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
segments based upon income before interest and income taxes as these expenses
are not allocated to the segments. Accounting policies are the same as those
described in Note 2, "Basis of Presentation and Significant Accounting
Policies."
 
  Selected information as to the operations of the Company by segment is set
forth below.
 
                                         --------------------------------------
                                               YEAR ENDED MARCH 31, 1998
                                         --------------------------------------
                                                            ENGINEERED
                                         VESSELS     RIGS    PRODUCTS   TOTAL
                                         --------  -------- ---------- --------
                                                    (IN THOUSANDS)
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
                                         ========  ========  =======   ========
 
  Certain other financial information of the Company by segment is set forth
below:
 
                                   ---------------------------------------------
                                             YEAR ENDED MARCH 31, 1998
                                   ---------------------------------------------
                                                  ENGINEERED
                                   VESSELS  RIGS   PRODUCTS  ADJUSTMENTS  TOTAL
                                   ------- ------ ---------- ----------- -------
                                                   (IN THOUSANDS)
Other financial information:
Depreciation and amortization ex-
 pense:
  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       424       3,741
                                   ------  ------   ------      ----     -------
                                   $9,942  $3,551   $1,300      $424     $15,217
                                   ======  ======   ======      ====     =======
 
  For consolidation purposes, all interest, amortization of debt issuance costs
and income taxes are allocated to corporate operations. Operations for fiscal
1997 and 1996 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 1997 and 1996 included revenue from one customer of the Vessels segment
of $152.1 million and $120.3 million, respectively.
 
  Total assets and capital expenditures of the Company by segment are set forth
below.
 
                               -------------------------------------------------
                                               AS OF MARCH 31, 1998
                               -------------------------------------------------
                                                 ENGINEERED
                               VESSELS    RIGS    PRODUCTS  ADJUSTMENTS  TOTAL
                               -------- -------- ---------- ----------- --------
                                                (IN THOUSANDS)

Total assets.................. $263,820 $102,029  $85,247     $48,505   $499,601
                               ======== ========  =======     =======   ========
Capital expenditures.......... $ 26,453 $  8,840  $   383     $ 5,312   $ 40,988
                               ======== ========  =======     =======   ========
 
  For consolidation purposes, certain cash and cash equivalent balances and
certain capital expenditures 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.
 
 
                                       35
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
9. RECONCILIATION OF NET INCOME PER SHARE
 
  The following table sets forth the computation of basic and diluted net
income per share:
 
                                         --------------------------------------
                                                  YEAR ENDED MARCH 31,
                                         --------------------------------------
                                             1998         1997         1996
                                         ------------ ------------ ------------
                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)

   Numerator:
   Net Income..........................  $     22,516 $     16,116 $     12,465
                                         ============ ============ ============
   Numerator for net income per share,
    diluted ...........................  $     22,516 $     16,116 $     12,465
                                         ============ ============ ============
   Denominator:
   Denominator for net income per
    share--weighted average shares
    outstanding*.......................        28,052       27,281       27,000
   Effect of dilutive securities:
     Stock Options.....................           956           58           --
                                         ------------ ------------ ------------
   Denominator for net income per
    share, diluted*....................        29,008       27,339       27,000
                                         ============ ============ ============
   Net income per share*...............  $       0.80 $       0.59 $       0.46
                                         ============ ============ ============
   Net income per share, diluted*......  $       0.78 $       0.59 $       0.46
                                         ============ ============ ============

--------
*Pro forma for 1996.
 
  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, Chief Executive Officer and Chairman of the Company, acquired
25% of the stock of United States Marine, Inc. ("USMI") in June 1996 and an
additional 10% in July 1997, Mr. Dane has committed to acquire an additional
40% of the stock of USMI over the next four 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 1998, 1997 and 1996, the
Company paid USMI approximately $4.8 million, $7.2 million and $5.5 million,
respectively, for subcontractor services.
 
  Prior to his association with the Company, Rick S. Rees, Executive Vice
President and Chief Financial Officer, was a stockholder of Maritime Holdings,
Inc. ("MHI") and its President. MHI owned 80% of the outstanding capital stock
of Texas Drydock, Inc. ("TDI"). On February 14, 1997, the Company contracted
to acquire 51% of the outstanding capital stock of MHI; 51% of the remaining
20% of the capital stock of TDI not owned by MHI; and options to acquire the
other 49%. At the closing in April 1997, at which time Mr. Rees was a director
of the Company, he received $2.8 million. On May 16, 1997, the Company
purchased the other 49% of the outstanding stock of MHI. At the second
closing, Mr. Rees received a note from the Company in the principal sum of
$4.1 million, bearing interest at the rate of 7.1% per annum, payable in full,
principal and interest, on January 15, 1998 (the "Purchase Price Note"), and a
15.18% interest in a $1.0 million note, payable by the Company and delivered
in escrow, providing a similar interest rate (the "Escrow Note"). During
fiscal 1998, the Company pre-paid the Purchase Price Note, principal and
interest, in the amount of $4.2 million and, under the Escrow Note, interest
earned under the Escrow Note of $4,576.
 
  In 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.
 
                                      36
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  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.
 
  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 non-compete 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 non-
restricted 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.
 
  Following is a summary of the option activity for the years ended March 31,
1998 and 1997:
 
                                                            --------------------
                                                                       WEIGHTED-
                                                                        AVERAGE
                                                             SHARES      PRICE
                                                            ---------  ---------

   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
                                                            =========   ======
   Exercisable at March 31, 1998...........................    60,300   $ 7.33
                                                            =========   ======
   Exercisable at March 31, 1997...........................        --   $   --
                                                            =========   ======

 
  The following table summarizes information about stock options outstanding
at March 31, 1998:
 
<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>
   $7.33 to $16.50.........    2,074,200  9.2 years  $10.17     60,300      $7.33
   $19.33 to $27.25........      606,500  9.6 years  $19.69         --         --
   $30.50 to $34.88........      321,500  9.6 years  $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
 
                                      37
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
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 1998 and 1997 are amortized to expense over the options' vesting
period.
 
                                              ---------------------------------
                                                    YEAR ENDED MARCH 31,
                                              ---------------------------------
                                                    1998             1997
                                              ---------------- ----------------
                                                 AS      PRO      AS      PRO
                                              REPORTED  FORMA  REPORTED  FORMA
                                              -------- ------- -------- -------
                                              (IN THOUSANDS, EXCEPT NET INCOME
                                                         PER SHARE)

   Net income................................ $22,516  $19,343 $16,116  $15,912
   Net income per share, diluted............. $  0.78  $  0.67 $  0.59  $  0.58
 
  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 curtailed 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.
 
  Net periodic pension expense includes the following components:
 
                                                           --------------------
                                                            YEAR ENDED MARCH
                                                                    31,
                                                           --------------------
                                                            1998   1997   1996
                                                           ------  ----  ------
                                                             (IN THOUSANDS)

   Service cost-benefits earned during the period......... $1,035  $807  $  598
   Interest cost on projected benefit obligation..........    572   501     386
   Actual return on assets................................ (2,248)  143  (1,112)
   Net amortization and deferral .........................  1,400  (603)    699
                                                           ------  ----  ------
   Net periodic pension expense........................... $  759  $848  $  571
                                                           ======  ====  ======
 
                                      38
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Amounts recognized in the Company's consolidated balance sheets follow:
 
                                                                 --------------
                                                                   MARCH 31,
                                                                 --------------
                                                                  1998    1997
                                                                 ------  ------
                                                                      (IN
                                                                  THOUSANDS)

   Actuarial present value of benefit obligation:
     Vested benefit obligation.................................. $6,683  $3,946
                                                                 ======  ======
     Accumulated benefit obligation............................. $7,789  $4,875
                                                                 ======  ======
   Projected benefit obligation................................. $7,789  $6,644
   Plan assets at fair value....................................  7,683   5,437
                                                                 ------  ------
   Projected benefit obligation in excess of plan assets........   (106) (1,207)
   Unrecognized net asset at April 1, 1997......................     --     (42)
   Unrecognized net loss........................................     --   1,903
                                                                 ------  ------
   (Accrued) prepaid pension expense............................ $ (106) $  654
                                                                 ======  ======
 
  A discount rate of 7.00% was assumed for the valuation of the projected
benefit obligation for 1998. Assumptions used for the valuation of the
projected benefit obligation for 1997 and 1996 were a discount rate of 7.75%,
an increase in compensation levels of 4.75% and an expected long-term rate of
return on assets of 9.00%.
 
  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 pre-tax contributions which are matched, up to certain limits, by
the Company. Expenses related to this plan approximated $1,957,000, $896,000
and $614,000 in 1998, 1997 and 1996, respectively.
 
13. INCOME TAXES
 
  For the years ended March 31, 1997 and 1996, 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 Company will file its own consolidated
federal income tax return for the fiscal year ended March 31, 1998.
 
  The significant components of the provision (benefit) for income taxes
follow:
 
                                                        -----------------------
                                                         YEAR ENDED MARCH 31,
                                                        -----------------------
                                                         1998    1997    1996
                                                        ------  ------- -------
                                                            (IN THOUSANDS)
   Current:
     Federal........................................... $9,167  $ 3,440 $13,475
     State.............................................  1,086    1,685   2,310
                                                        ------  ------- -------
                                                        10,253    5,125  15,785
   Deferred:
     Federal...........................................   (970)   4,771  (6,692)
     State.............................................    (86)     991    (991)
                                                        ------  ------- -------
                                                        (1,056)   5,762  (7,683)
                                                        ------  ------- -------
       Total........................................... $9,197  $10,887 $ 8,102
                                                        ======  ======= =======
 
                                      39
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  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:
 
                                                                  -------------
                                                                    MARCH 31,
                                                                  -------------
                                                                   1998   1997
                                                                  ------ ------
                                                                       (IN
                                                                   THOUSANDS)

   Deferred tax liabilities:
     Depreciation and amortization............................... $8,517 $3,555
     Long-term contracts.........................................     --    257
     Pensions and other benefits.................................    757    640
     Other ......................................................     26     62
                                                                  ------ ------
       Total deferred tax liabilities............................  9,300  4,514
                                                                  ------ ------
   Deferred tax assets:
     Long-term contracts.........................................  1,439     --
     Reserve for unpaid insurance claims.........................    836  1,617
                                                                  ------ ------
       Total deferred tax assets.................................  2,275  1,617
                                                                  ------ ------
   Net deferred tax liability.................................... $7,025 $2,897
                                                                  ====== ======
 
  A reconciliation between the effective tax rate and the statutory tax rate
is as follows:
 
                                                              -----------------
                                                                  YEAR ENDED
                                                                   MARCH 31,
                                                              -----------------
                                                              1998   1997  1996
                                                              -----  ----  ----

   Statutory rate............................................  35.0% 35.0% 35.0%
   Research and experimentation tax credits.................. (11.0)   --    --
   Non-deductible goodwill amortization......................   6.3    --    --
   State taxes, net of federal benefit.......................   2.2   4.1   4.2
   Other.....................................................  (3.5)  1.2   0.2
                                                              -----  ----  ----
   Effective tax rate........................................  29.0% 40.3% 39.4%
                                                              =====  ====  ====
 
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.
 
                                      40
<PAGE>
 
                  HALTER MARINE GROUP, INC. AND SUBSIDIARIES
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
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, 1998 the total of all outstanding
performance obligations was approximately $38 million.
 
16. SUPPLEMENTARY UNAUDITED QUARTERLY DATA
 
                                            -----------------------------------
                                             FIRST    SECOND   THIRD    FOURTH
                                            QUARTER  QUARTER  QUARTER  QUARTER
                                            -------- -------- -------- --------
                                              (IN THOUSANDS, EXCEPT PER SHARE
                                                         AMOUNTS)

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

 
  Results for the fourth quarter of fiscal 1998 were adversely impacted by
increased production costs in the Company's marine vessel product line within
the Vessels segment. The Company's growing backlog resulted in increased
demands on engineering support and production resulting in some
inefficiencies. Costs on certain new projects rose beyond original estimates,
in part, because of the recent addition of many new, less experienced
shipbuilders. Additionally, unprecedented inclement weather during the quarter
caused production delays and a subsequent increase in the amount of planned
overtime.
 
                                      41
<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 July 28, 1998.
 
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 STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
 
  (a) Exhibits
 
<TABLE>
<CAPTION>
  EXHIBIT
   NUMBER                               DESCRIPTION
  -------                               -----------
 <C>        <S>
  4.1****   --Form of Indenture dated September 15, 1997 between the Company
             and the United States Trust Company of Texas, N.A., as Trustee for
             the Company's 4 1/2% Convertible Subordinated Notes due 2004.
  4.2****   --Form of Registration Rights Agreement dated September 15, 1997,
             among the Company and Donaldson, Lufkin & Jenrette Securities
             Corporation and Merrill Lynch, Pierce, Fenner & Smith
             Incorporated.
 10.1*      --Form of Amended and Restated Extension and Modification of
             Noncompetition Agreement between Halter Marine Group, Inc. and
             Daniel J. Mortimer dated April 1, 1998.
 10.2*****  --Form of Asset Purchase Agreement among the Company, AEPI
             Acquisition, Inc., AmClyde Engineered Products, Inc. and Wallace
             K. Fisk, Jr.
 10.3*****  --Form of Agreement and Plan of Merger by and among the Company,
             Utility Acquisition, Inc., Utility Steel Fabrication, Inc. and the
             shareholders of Utility Steel Fabrications, Inc.
 10.4****** --Form of Revolving Credit Agreement, effective October 31, 1997 by
             and among Halter Marine Group, Inc., as Borrower, Whitney National
             Bank, as Administrative Agent, BankBoston, N.A., as Syndication
             Agent, The First National Bank of Chicago, as Documentation Agent,
             and other banks named therein.
 10.5*      --Form of Trust Indenture between Mississippi Business Finance
             Corporation and Southtrust Bank, National Association, as Trustee,
             and Loan Agreement between Mississippi Business Finance
             Corporation and Halter Marine Group, Inc. dated January 1, 1998.
 10.6**     --Stock Purchase Agreement dated February 14, 1997 by and among
             Thomas C. Weller, Jr., Ronald J. Stevens, Rick S. Rees, Don O.
             Covington and Halter Marine, Inc.
 10.7**     --Amendment No. 1 to Stock Purchase Agreement dated February 14,
             1997 by and among Thomas C. Weller, Jr., Ronald J. Stevens, Rick
             S. Rees, Don O. Covington and Halter Marine, Inc.
 10.8***    --Amendment No. 2 to Stock Purchase Agreement dated February 14,
             1997 by and among Thomas C. Weller, Jr., Ronald J. Stevens, Rick
             S. Rees, Don O. Covington and Halter Marine, Inc.
</TABLE>
 
                                      42
<PAGE>
 
<TABLE>
<CAPTION>
 EXHIBIT
 NUMBER                              DESCRIPTION
 -------                             -----------
 <C>     <S>
 10.9**  --Escrow Agreement dated April 4, 1997 among Halter Marine, Inc.,
          Thomas C. Weller, Jr., Ronald J. Stevens, Rick S. Rees, Don O.
          Covington and Bank One, Louisiana, National Association.
 10.10** --Covington Employment Agreement dated April 4, 1997 by and between
          Texas Drydock, Inc. and Don O. Covington.
 10.11*  --Form of Nonqualified Deferred Compensation Plan effective as of
          April 1, 1998.
 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 April 17, 1997
        with the Securities and Exchange Commission.
    *** Incorporated by reference to exhibits to Form 8-K/A filed on June 2,
        1997 with the Securities and Exchange Commission.
   **** Incorporated by reference to exhibits in Amendment No. 1 to the
        Registration Statement (Registration No. 333-38491) filed on December
        29, 1997 with the Securities and Exchange Commission.
  ***** Incorporated by reference to exhibits in Amendment No. 1 to the
        Registration Statement (Registration No. 333-39379) filed on November
        26, 1997 with the Securities and Exchange Commission.
 ****** Incorporated by reference to exhibits to Form 8-K filed November 12,
        1997 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 22 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.
 
  (c) Reports on Form 8-K
 
  The following Forms 8-K were filed with the Securities and Exchange
Commission during the fourth quarter of fiscal 1998 on the dates indicated:
 
    1. Announcement regarding expected earnings for the fourth quarter of
       fiscal 1998 filed on March 13, 1998.
 
                                      43
<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, 1998
 
  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.
 
<TABLE>
<S>  <C>
</TABLE>
              SIGNATURE                      TITLE                   DATE
 
      /s/   John Dane III            Chairman, President,      June 29, 1998
-----------------------------------   Chief Executive
           JOHN DANE III              Officer and
                                      Chairman
 
      /s/   Rick S. Rees             Executive Vice            June 29, 1998
-----------------------------------   President, Chief
           RICK S. REES               Financial Officer,
                                      and Director
 
      /s/   Keith L. Voigts          Senior Vice               June 29, 1998
-----------------------------------   President and Chief
          KEITH L. VOIGTS             Accounting Officer
 
      /s/  Daniel J. Mortimer        Executive Vice            June 29, 1998
-----------------------------------   President, Chief
        DANIEL J. MORTIMER            Operating Officer,
                                      and Director
 
 
      /s/  Kenneth W. Lewis          Director                  June 29, 1998
-----------------------------------
         KENNETH W. LEWIS
 
                                      44