<PAGE>
 
<TABLE> 
<CAPTION> 
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C.  20549
                                  FORM 10 - K
<C>   <S>                                                            <C> 
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934 (Fee Required) 

                   For the fiscal year ended March 31, 1997
                                      OR
[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934 (No Fee Required)

For the transition period from ______________ to ______________
Commission File No. 1-4095
                                McDERMOTT INCORPORATED
--------------------------------------------------------------------------------------
                (Exact name of registrant as specified in its charter)

               DELAWARE                                       74-1032246
--------------------------------------------------------------------------------------
     (State or Other Jurisdiction of              (I.R.S. Employer Identification No.)
      Incorporation or Organization)

1450 Poydras Street, New Orleans, Louisiana                   70112-6050
--------------------------------------------------------------------------------------
 (Address of Principal Executive Offices)                     (Zip Code)

       Registrant's Telephone Number, Including Area Code (504) 587-4411
          Securities Registered Pursuant to Section 12(b) of the Act:

            Title of each class                Name of Exchange on which registered
            -------------------                ------------------------------------
 
     Series A $2.20 Cumulative Convertible            New York Stock Exchange
     Preferred Stock, $1 Par Value

     Series B $2.60 Cumulative Preferred              New York Stock Exchange
     Stock, $1 Par Value

       Securities registered pursuant to Section 12(g) of the Act:  NONE

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

                            YES    [X]       NO    [_]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this  Form 10-K or any amendment to
this Form 10-K.                                                            [X]

The aggregate market value of voting stock held by non-affiliates of the
registrant was $160,734,210 as of May 12, 1997.

The number of shares of Common Stock, par value $1 per share, outstanding as of
May 12, 1997 was 3,600.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Information Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14C under the Securities and Exchange
Act of 1934 in connection with action to be taken by the Company without a
meeting of stockholders on September 2, 1997 is incorporated by reference into
Part III of this report.
</TABLE> 
<PAGE>
 
                  M c D E R M O T T   I N C O R P O R A T E D

                         I N D E X - F O R M   10 - K

 
<TABLE> 
<CAPTION> 
                                                                         PAGE
                                    PART I               
                                                         
<S>        <C>                                                           <C>
Items 1. &  2.  BUSINESS AND PROPERTIES                  
                                                         
   A.   General                                                           1
                                                         
   B.   Power Generation Systems and Equipment           
           General                                                        3
           Foreign Operations                                             3
           Raw Materials                                                  4
           Customers and Competition                                      4
           Backlog                                                        5
           Factors Affecting Demand                                       6
                                                         
   C.   Marine Construction Services                     
           General                                                        6
           Foreign Operations                                             7
           Raw Materials                                                  7
           Customers and Competition                                      7
           Backlog                                                        8
           Factors Affecting Demand                                       8
                                                         
   D.   Patents and Licenses                                              8
                                                         
   E.   Research and Development Activities                               8
                                                         
   F.   Insurance                                                         9
                                                         
   G.   Employees                                                        10
                                                         
   H.   Environmental Regulations and Matters                            10
                                                         
   I.   Transactions With Related Parties                                12
                                                         
Item 3.  LEGAL PROCEEDINGS                                               13
 
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             14
</TABLE>

                                       i
<PAGE>
 
                       I N D E X  -   F O R M   1 0 - K

<TABLE> 
<CAPTION> 

                                                                        PAGE
<S>        <C>                                                          <C>
                                    PART II                          
                                                                     
Item 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK AND              
           RELATED SECURITY HOLDER MATTERS                               15
                                                                     
Item 6.    SELECTED FINANCIAL DATA                                       16
                                                                     
Item 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL         
           CONDITION AND RESULTS OF OPERATIONS                       
                                                                     
           General                                                       17
           Fiscal Year 1997 vs. Fiscal Year 1996                         17
           Fiscal Year 1996 vs. Fiscal Year 1995                         19
           Effects of Inflation and Changing Prices                      20
           Liquidity and Capital Resources                               20
           New Accounting Standard                                       23
                                                                     
Item 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY       
           DATA                                                      
                                                                     
           Report of Independent Auditors                                24
           Consolidated Balance Sheet - March 31, 1997 and 1996          25
           Consolidated Statement of Loss for the Three Fiscal       
            Years ended March 31, 1997                                   27
           Consolidated Statement of Stockholder's Equity for the    
            Three Fiscal Years ended March 31,1997                       28
           Consolidated Statement of Cash Flows for the Three Fiscal
            Years ended March 31, 1997                                   29
           Notes to Consolidated Financial Statements                    31
 
Item 9.    DISAGREEMENTS WITH AUDITORS ON ACCOUNTING
           AND FINANCIAL DISCLOSURE                                      60
</TABLE>

                                       ii
<PAGE>
 
                       I N D E X  -   F O R M   1 0 - K

<TABLE> 
<CAPTION> 

                                                                        PAGE
<S>           <C>                                                       <C>
                                   PART III

Item 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT         61
         
Item 11.      EXECUTIVE COMPENSATION                                     61
         
Item 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
              AND MANAGEMENT                                             61
         
Item 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS             61
         
                                       PART IV
         
Item 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
              ON FORM 8-K                                                62

Signatures                                                               64
 
Exhibit 21 - SIGNIFICANT SUBSIDIARIES OF THE REGISTRANT                  66
 
Exhibit 23 - CONSENT OF INDEPENDENT AUDITORS                             67
 
Exhibit 27 - FINANCIAL DATA SCHEDULE                                     68
</TABLE>

                                      iii
<PAGE>
 
                                   P A R T  I

Items 1. and 2.   BUSINESS AND PROPERTIES

A.  GENERAL

McDermott Incorporated was incorporated in 1946 as a successor to a business
which had been providing construction services to the oil and gas industry since
the 1920's.  McDermott International, Inc. ("International") is the parent
company of the McDermott group of companies, which includes McDermott
Incorporated and J. Ray McDermott, S.A. ("JRM").  International's Common Stock,
McDermott Incorporated's Series A $2.20 Cumulative Convertible Preferred Stock
and Series B $2.60 Cumulative Preferred Stock and JRM's Common Stock and 9-3/8%
Senior Subordinated Notes due July 2006 are publicly traded.

On January 31, 1995, International contributed substantially all of its marine
construction services business to JRM, a new company incorporated under the laws
of the Republic of Panama in 1994.  Also, on January 31, 1995, JRM acquired
Offshore Pipelines, Inc. (the "Merger").   In connection with the Merger,
McDermott Incorporated sold a portion of its marine construction services
business to International. The business sold included the fabrication and
installation of marine pipelines and offshore structures and subsea production
systems.  The discussion set forth below under Items 1. and 2. describes the
McDermott Incorporated's Marine Construction Services business segment as
currently conducted after the sale.

Unless the context otherwise requires, hereinafter "International" will be used
to mean McDermott International, Inc., a Panama corporation; "JRM" will be used
to mean J. Ray McDermott, S.A., a Panama corporation, a majority owned
subsidiary of International, and its consolidated subsidiaries; and "McDermott
International" will be used to mean the consolidated enterprise.

McDermott Incorporated operates in two business segments:

    o  Power Generation Systems and Equipment, whose principal businesses are
       the supply of fossil-fuel and nuclear steam generating equipment to the
       electric power generation industry, and nuclear reactor components and
       nuclear fuel assemblies to the U.S. Navy; and

    o  Marine Construction Services, which supplies design, engineering, and
       project and construction management services for the offshore oil and gas
       exploration and production and hydrocarbon processing industries. This
       segment's activities also provides maintenance services to energy related
       industries.

The business of the Power Generation Systems and Equipment segment is conducted
primarily through a subsidiary of McDermott Incorporated, Babcock & Wilcox
Investment Company, the principal subsidiary of which is The Babcock & Wilcox
Company.  Unless the context otherwise requires, hereinafter "B&W" will be used
to mean Babcock & Wilcox Investment Company and its consolidated subsidiaries,
including The Babcock & Wilcox Company.

McDermott Incorporated has a continuing program of reviewing joint venture,
acquisition and disposition opportunities.

                                       1
<PAGE>
 
The following tables show revenues and operating income (loss) of McDermott
Incorporated for the three fiscal years ended March 31, 1997 and do not include
the operating results for the period after January 31, 1995 for the portion of
the marine construction services business sold to International.  See Note 16 to
the consolidated financial statements for additional information with respect to
McDermott Incorporated's business segments and operations in different
geographic areas.

                                    REVENUES
                             (Dollars in Millions)
<TABLE>
<CAPTION>
                                       FOR FISCAL YEARS ENDED MARCH 31,
                                     1997            1996           1995
                                --------------  --------------  -------------
<S>                             <C>        <C>  <C>        <C>  <C>       <C>
Power Generation Systems
 and Equipment                  $1,514.1   84%  $1,708.3   84% $1,663.0   75%
Marine Construction Services       294.2   16%     329.6   16%    560.0   25%
Intersegment Transfer
 Eliminations                      (12.0)   -       (9.9)   -      (0.6)   -
-----------------------------------------------------------------------------
Total Revenues                  $1,796.3  100%  $2,028.0  100% $2,222.4  100%
=============================================================================

                                 OPERATING LOSS
                             (Dollars in Millions)

                                           FOR FISCAL YEARS ENDED MARCH 31,
                                             1997         1996        1995
                                          ----------- ------------ ----------
Segment Operating Income (Loss):/(2)/
 Power Generation Systems
   and Equipment                           $  (85.5)    $   21.2    $   18.7
Marine Construction Services/(1)/             (23.1)       (23.6)      (31.6)
-----------------------------------------------------------------------------
Total Segment Operating Loss                 (108.6)        (2.4)      (12.9)
-----------------------------------------------------------------------------
Equity in Income of Investees:
 Power Generation Systems
   and Equipment                           $    2.8     $   31.8     $   5.8
 Marine Construction Services                   4.3          4.5         4.5
-----------------------------------------------------------------------------
Total Equity in Income of Investees             7.1         36.3        10.3
-----------------------------------------------------------------------------
General Corporate Expenses/(2)/               (21.0)       (23.2)      (34.9)
-----------------------------------------------------------------------------
Total Operating Loss                       $ (122.5)    $  (10.7)    $ (37.5)
=============================================================================
</TABLE> 
/(1)/ See Note 2 to the consolidated financial statements regarding the sale of
      a portion of the marine construction business during fiscal year 1995.
/(2)/ Fiscal years 1996 and 1995 have been restated to conform to the 1997
      presentation which includes gains and losses on asset disposals and
      impairments in Operating Loss. This restatement decreased Segment
      Operating Loss by $7,410,000 and $4,084,000, respectively, in fiscal years
      1996 and 1995, increased General Corporate Expenses by $431,000 in fiscal
      year 1996 and reduced General Corporate Expenses by $26,000 in fiscal year
      1995, from amounts previously reported.

                                       2
<PAGE>
 
B.  POWER GENERATION SYSTEMS AND EQUIPMENT

GENERAL

The Power Generation Systems and Equipment segment provides engineered products
and services for energy conversion worldwide.  It supplies individually
engineered boilers, complete fossil fuel steam generating systems and related
equipment and facilities, and environmental control systems for electric power
generation and for industrial processes.  These facilities use a wide variety of
fuels, including, but not limited to coal, oil, bitumen, natural gas, solid
municipal waste, agricultural waste and biomass.  This segment is also engaged
in the erection of electric power plants and industrial facilities and the
repair and alteration of such existing equipment.  It provides replacement parts
and engineered plant enhancements for existing fossil fuel steam generating
systems and specially engineered accessories and components, such as air heaters
and cleaning systems for heat transfer surfaces.  This segment also supplies
air-cooled and condensing heat exchangers for the process and power industries.
B&W is also a major supplier of nuclear steam generating equipment, including
critical heat exchangers and replacement recirculating steam generators, and
supplies field repair and refurbishment services to the Canadian, U.S. and
international markets.

This segment is actively involved in the market for providing power through
cogeneration, refuse-fueled power plants and other independent power producing
plants.  It is participating in this market as a contractor for engineer-
procure-construct services, as an equipment supplier, as an operations and
maintenance contractor and through ownership interests.

The Power Generation Systems and Equipment segment provides nuclear fuel
assemblies and nuclear reactor components to the U. S. Navy for the Naval
Reactors Program.  This activity has made significant contributions to operating
income of McDermott Incorporated in all three fiscal years and is expected to do
so in the foreseeable future.  B&W, in addition to its Naval Reactors Program
business, supplies other equipment and services to the U.S. Government and is
proceeding with new Government projects and exploring new programs which require
the technological capabilities it developed as a Government contractor.  B&W has
applied its technological capabilities by supplying new products for power
generation applications.  It has diversified into new markets and activities not
related to power generation that require complex engineering and machining.
Examples of these markets include  environmental restoration services, computer-
integrated manufacturing products and services and the management of government
owned facilities, primarily within the Department of Energy's nuclear weapons
complex.

The principal plants of this segment, which are owned by B&W, are located at
West Point, Mississippi; Barberton and Lancaster, Ohio; Beasley and Paris,
Texas; Lynchburg, Virginia; and Cambridge, Ontario, Canada.  All these plants
are well maintained, have suitable equipment and are of adequate size.

FOREIGN OPERATIONS

The amounts of Power Generation Systems and Equipment's revenues, including
intersegment revenues, and segment operating income (loss) derived from
operations located outside of the United States, and the approximate percentages
to McDermott Incorporated's total revenues and total segment operating income
(loss), respectively, follow:

                                       3
<PAGE>
 
<TABLE>
<CAPTION> 

                       REVENUES               SEGMENT OPERATING INCOME (LOSS)
FISCAL YEAR      AMOUNT       PERCENT            AMOUNT            PERCENT  
                             (Dollars in Thousands)  
<S>              <C>          <C>                <C>               <C>
   1997         $363,983        20%            $(28,003)             26%
   1996          657,627        32%              33,609              N/A
   1995          530,689        24%              36,514              N/A
</TABLE>

Revenues and segment operating income (loss) presented above do not include the
operating results of this segment's equity investees.  This segment primarily
conducts its foreign business from its Calgary, Alberta and Cambridge, Ontario
(which also serves the United States market) locations.

RAW MATERIALS

The principal raw materials used by this segment to construct power generation
systems and equipment consist of carbon and alloy steels in various forms, such
as plate, forgings, structurals, bars, sheet, strip, heavy wall pipe and tubes.
Significant amounts of components and accessories are also purchased for
assembly for supplied systems and equipment.  These raw materials and components
generally are purchased as needed for individual contracts.  Although shortages
of certain of these raw materials have existed from time to time, no serious
shortage exists at the present time.

This segment is not sole source dependent for any significant raw materials
except for uranium, which is furnished and owned by the U.S. Government, and
used in the nuclear fuel assemblies supplied to the U.S. Navy for the Naval
Reactors Program.

CUSTOMERS AND COMPETITION

The principal customers of this segment are the electric power generation
industry (including government-owned utilities and independent power producers),
the U.S. Government (including its contractors), and the pulp and paper and
other process industries such as oil refineries and steel mills; and other
industrial institutions.  The electric power generation industry accounted for
approximately 39%, 36% and 41% of McDermott Incorporated's total revenues for
fiscal years 1997, 1996 and 1995, respectively.  For the fiscal years 1997, 1996
and 1995, the U.S. Government, excluding government-owned utilities, accounted
for approximately 19%, 19% and 16% of total revenues, including 17%, 16% and 14%
related to  nuclear fuel assemblies and reactor components for the U.S. Navy.

Steam generating system equipment orders are customarily awarded after
competitive bids have been submitted as proposals based on the estimated cost of
each job.  Within the United States, a number of domestic and foreign-based
companies, specializing in steam generating systems, equipment and services,
compete with B&W in the fossil fuel steam generating system business.  In
international markets, these companies plus additional foreign-based companies
compete with B&W.  B&W also manufactures and sells components such as
replacement recirculating steam generators, which are incorporated into nuclear
steam generating systems designed by other firms.  In the sale of these nuclear
steam generating systems, B&W competes with a small number of companies.  A
number of companies are in

                                       4
<PAGE>
 
competition with B&W in environmental control equipment, related specialized
industrial equipment and the independent power producing business.  Other
suppliers of fossil fuel steam systems, as well as many other businesses,
compete for replacement parts, repair and alteration and other services required
to backfit and maintain existing systems.

B&W is the sole supplier to the U.S. Navy of all major nuclear steam system
equipment and all nuclear fuel assemblies and reactor components for the Naval
Reactors Program.  There are a small number of suppliers of small nuclear
components with B&W being the largest based on revenues.  In addition, B&W is
involved along with other Companies in the operation of the Idaho National
Engineering and Environmental Laboratory located near Idaho Falls, Idaho; the
Rocky Flats Environmental Technology Site located near Boulder, Colorado; the
Savannah River Site located in Aiken, South Carolina; and the Hanford Site
located in Richland, Washington.

BACKLOG

Backlog as of March 31, 1997 and 1996 for the Power Generation Systems and
Equipment segment was $2,344,951,000 and $2,276,973,000 or approximately 96% and
92%, respectively, of McDermott Incorporated's backlog.  Of the March 31, 1997
backlog, it is expected that approximately $1,200,482,000 will be recognized in
revenues in fiscal year 1998, $568,218,000 in fiscal year 1999 and $576,251,000
thereafter, of which approximately 25% will be recognized in fiscal years 2000
through 2002.  At March  31, 1997, this segment's backlog with the U. S.
Government was $797,470,000 (of which $26,448,000 had not yet been funded), or
approximately 33% of McDermott Incorporated's total backlog.

During fiscal year 1997, the Power Generation Systems and Equipment segment
received contract awards valued at $111,000,000 to supply two 350-megawatt coal-
fired boilers to the Huaneng International Power Development Corporation of
China for the Nantong project site, located in the Jiangsu province; a
$90,000,000 contract with Saba Power Company Limited of Pakistan to supply a
125-megawatt oil-fired steam power plant near Farouqabad in Pakistan; and a
$68,000,000 contract from Public Service Company of New Mexico to retrofit
scrubbers on all four units at the utility's San Juan Generation Station in New
Mexico.  The remaining value of these three contracts reflected in the March 31,
1997 backlog is $241,597,000.   In fiscal year 1997, B&W was awarded
approximately $257,000,000 in new orders for aircraft carrier components and
prototypical steam generation equipment for the newest submarine design.

If in management's judgement it becomes doubtful whether contracts will proceed,
the backlog is adjusted accordingly.  If contracts are deferred or cancelled,
B&W is usually entitled to a financial settlement related to the individual
circumstances of the contract.  Operations and maintenance contracts, which are
performed over an extended period, are included in backlog based upon an
estimate of the revenues from these contracts.

B&W attempts to cover increased costs of anticipated changes in labor, material
and service costs of long-term contracts either through an estimation of such
changes, which is reflected in the original price, or through price escalation
clauses.  Most long-term contracts have provisions for progress payments.

                                       5
<PAGE>
 
FACTORS AFFECTING DEMAND

Electric utilities in Asia and the Middle East are active purchasers of large,
new baseload generating units, due to the rapid growth of their economies and to
the small existing stock of electrical generating capacity in most developing
countries.  These newly-emerging economies need power and steam generating
systems, equipment and services to build their industrial base.

Electrical consumption has grown moderately in the United States in recent
years. Competition within the electric power industry in the United States has
intensified, as the Federal Energy Regulatory Commission has begun to implement
the provisions of the Energy Policy Act of 1992, which deregulated the electric
power generation industry by allowing independent power producers and other
companies access to the electric utilities' transmission and distribution
systems.  Several states have recently changed their laws to encourage
competition among generators of electricity.  The modest growth in demand and
the changes associated with this transition from a regulated to a competitive
industry have caused electric utilities to defer ordering of large, new baseload
power plants in the United States.  When electric utilities are in need of
peaking capacity, many are purchasing combustion turbines with short lead-times
or they are purchasing electricity from other utilities and non-regulated
sources, such as cogenerators and independent power producers.

Substantially all the customers of B&W are affected by environmental regulations
of the countries in which their facilities are located.  In the United States,
the Clean Air Act Amendments of 1990 required many customer industries to
implement systems to limit or remove emissions.  These mandated expenditures
have caused some customers to defer repairs and refurbishments on existing
plants.  The same requirements have caused other customers to purchase
environmental control equipment from B&W.   Future changes in environmental
regulations will continue to effect demand for B&W products and services.

The systems, products and services of B&W are capital intensive.  As such,
demand for the company's products is heavily affected by the variations in the
business cycles in the customer industries and in the overall economies of their
countries.  Availability of funds for financing, investment and maintenance at
B&W's customers varies with the conditions of their domestic businesses.

Even with the maturing of the U.S. Navy's shipbuilding program and U.S.
Government defense budget reductions, the demand for nuclear fuel assemblies and
reactor components for the U.S. Navy has continued to comprise a substantial
portion of this segment's backlog.  Orders for the U.S. Navy nuclear fuel
assemblies and nuclear reactor components are expected to continue to be a
significant part of backlog since B&W is the sole source provider of these
assemblies and nuclear reactor components.

C. MARINE CONSTRUCTION SERVICES

GENERAL

In connection with the Merger of Offshore Pipelines, Inc. into JRM on January
31, 1995, McDermott Incorporated sold a portion of its marine construction
services business to International.  The discussion below describes McDermott
Incorporated's Marine Construction

                                       6
<PAGE>
 
Services segment as currently conducted after the sale.  The business activities
of this segment are conducted primarily through McDermott Engineers &
Constructors (Canada), Ltd., formerly Delta Catalytic Corporation.

The Marine Construction Services segment supplies design, engineering, and
project and construction management services for the offshore oil and gas
exploration and production and hydrocarbon processing industries.  This segment
also provides maintenance services to energy related industries.  This segment's
shipyard facilities were sold in March 1997.

McDermott Incorporated owns a 49% interest in a joint venture, Universal
Fabricators, Incorporated, whose activities include the fabrication and assembly
of structures and equipment for offshore drilling and production operations, and
is located in New Iberia, Louisiana.

FOREIGN OPERATIONS

The amounts of Marine Construction Services' revenues, including intersegment
revenues, and segment operating income (loss) derived from operations located
outside of the United States, and the approximate percentages of those revenues
and segment operating income to McDermott Incorporated's total revenues and
total segment operating income (loss), respectively, follow:

<TABLE>
<CAPTION> 

                       REVENUES               SEGMENT OPERATING INCOME (LOSS)
FISCAL YEAR      AMOUNT        PERCENT           AMOUNT            PERCENT  
                           (Dollars in Thousands)  
<S>             <C>            <C>             <C>                 <C>
   1997         $203,681        11%            $ (2,411)              2%
   1996          254,838        13%             (12,671)              N/A
   1995          235,923        11%             (12,821)              N/A
</TABLE>

Revenues and segment operating income (loss) presented above do not include the
operating results of this segment's equity investees.  The majority of McDermott
Incorporated's foreign operations are conducted by McDermott Engineers and
Constructors (Canada) Ltd .

RAW MATERIALS

The raw materials used by this segment, such as carbon and alloy steel in
various forms, welding gases, concrete, fuel oil and gasoline, are available
from many sources and this segment is not dependent upon any single supplier or
source.  Although shortages of certain of these raw materials and fuels have
existed from time to time, no serious shortage exists at the present time.

CUSTOMERS AND COMPETITION

This segment's principal customers are oil and gas companies.  Customers
generally contract with this segment for design, engineering, and project and
construction management services and fabrication of structures and equipment for
offshore drilling and production operations.  Contracts are usually awarded on a
competitive bid basis.

                                       7
<PAGE>
 
There are several companies which compete effectively with McDermott
Incorporated  in each of this segment's activities.

BACKLOG

As of March 31, 1997 and 1996, the Marine Construction Services' backlog
amounted to $107,502,000 and $187,288,000 or approximately 4% and 8%,
respectively, of McDermott Incorporated's total backlog.  Of the March 31, 1997
backlog, it is expected that approximately $96,538,000 will be recognized in
revenues in fiscal year 1998,  $5,904,000 in fiscal year 1999 and $5,060,000
thereafter.  Not included in backlog at March 31, 1997 and 1996 was backlog
relating to contracts performed by unconsolidated joint ventures of $32,000,000
and $24,000,000, respectively.

Work is performed on a fixed price, cost plus or day rate basis or combination
thereof.  This segment attempts to cover increased costs of anticipated changes
in labor, material and service costs of long-term contracts either through an
estimation of such changes, which is reflected in the original price, or through
price escalation clauses.  Most long-term contracts have provisions for progress
payments.

FACTORS AFFECTING DEMAND

The activity of the Marine Construction Services' segment depends mainly on the
capital expenditures of oil and gas companies for developmental construction.
These expenditures are influenced by the selling price of oil and gas along with
the cost of production and delivery, the terms and conditions of offshore
leases, the discovery rates of new reserves offshore, the ability of the oil and
gas industry to raise capital, and political and economic conditions.

Oil company capital exploration and production budgets in calendar year 1997 are
higher than 1996 expenditures.  While oil prices remain flat, natural gas prices
have increased as compared to calendar year 1995.  Expenditures are expected to
increase.  Demand for offshore drilling rigs has increased and this,
historically, has been a leading indicator for an increase in the need for
marine construction services.  This segment's markets are expected to begin to
emerge from the competitive environment that has put pressure on margins in
prior periods.

D. PATENTS AND LICENSES

Many U.S. and foreign patents have been issued to McDermott Incorporated and it
has many pending patent applications.  Patents and licenses have been acquired
and licenses have been granted to others when advantageous to McDermott
Incorporated.  While McDermott Incorporated regards its patents and licenses to
be of value, no single patent or license or group of related patents or licenses
is believed to be material in relation to its business as a whole.

E. RESEARCH AND DEVELOPMENT ACTIVITIES

McDermott Incorporated conducts its principal research and development
activities at its research centers in Alliance, Ohio and Lynchburg, Virginia;
and also conducts development activities at its various manufacturing plants and
engineering and design offices.  During the

                                       8
<PAGE>
 
fiscal years ended March 31, 1997, 1996 and 1995, approximately $49,012,000
$66,597,000, and $63,695,000, respectively, was spent by McDermott Incorporated
on research and development activities, of which approximately $34,170,000,
$45,106,000, and $44,240,000, respectively, was paid for by customers of
McDermott Incorporated.  Research and development activities were related to
development and improvement of new and existing products and equipment and
conceptual and engineering evaluation for translation into practical
applications.  McDermott Incorporated's new multi-million dollar clean
environment development facility in Alliance, Ohio was constructed in response
to present and future emission pollution standards in the U.S. and worldwide.
Approximately 200 employees were engaged full time in research and development
activities at March 31, 1997.

F. INSURANCE

McDermott Incorporated maintains liability and property insurance that it
considers normal in the industry.  However, certain risks are either not
insurable or insurance is available only at rates which McDermott Incorporated
considers uneconomical.  Among such risks are war and confiscation of property
in certain areas of the world, pollution liability in excess of relatively low
limits and, in recent years, asbestos liability.  Depending on competitive
conditions and other factors, McDermott Incorporated endeavors to obtain
contractual protection against uninsured risks from its customers.  However,
there is no assurance that insurance or contractual indemnity protection, when
obtained, will be sufficient or effective under all circumstances or against all
hazards to which McDermott Incorporated may be subject.

McDermott Incorporated's insurance policies do not insure against liability and
property damage losses resulting from nuclear accidents at reactor facilities of
its utility customers.  To protect against liability for damage to a customer's
property, McDermott Incorporated obtains waivers of subrogation from the
customer and its insurer and is generally named as an additional insured under
the utility customer's nuclear property policy.  To protect against liability
from claims brought by third parties, McDermott Incorporated is insured under
the utility  customer's nuclear liability policies and has the benefit of the
indemnity and limitation of any applicable liability provision of the Price-
Anderson Act, as amended ("the Act").  The Act limits the public liability of
manufacturers and operators of licensed nuclear facilities and other parties who
may be liable in respect of, and indemnifies them against, all claims in excess
of an amount which is determined by the sum of commercially available liability
insurance plus certain retrospective premium assessments payable by operators of
commercial nuclear reactors.  For those sites where McDermott Incorporated
provides environmental remediation services, it seeks the same protection from
its customers as it does for its other nuclear activities.

Although McDermott Incorporated does not own or operate any nuclear reactors, it
has coverage under commercially available nuclear liability and property
insurance for three of its four owned facilities which are licensed to possess
special nuclear materials.  The fourth facility operates primarily as a
conventional research center.  This facility is licensed to possess special
nuclear material and has a small and limited amount of special nuclear material
on the premises.  Two of the four owned facilities are located at McDermott
Incorporated's Lynchburg, Virginia site.  These facilities are insured under a
nuclear liability policy which also insures the facility of B&W Fuel Company
("BWFC") that was sold during fiscal year 1993.  All three facilities share the
same nuclear liability insurance limit as the commercial insurer

                                       9
<PAGE>
 
would not allow BWFC to obtain a separate nuclear liability insurance policy.
Due to the type or quantity of nuclear material present, two of the four
facilities have the benefit of the indemnity and limitation of liability
provisions of the Act, pursuant to Indemnity Agreements entered into with the
U.S. Government.  In addition, contracts to manufacture and supply nuclear fuel
or nuclear components to the U.S. Government generally contain contractual
indemnity clauses, which become effective at the time of shipment, whereby the
U.S. Government has assumed the risks of public liability claims.

The insurance coverage of McDermott Incorporated for products liability and
employers' liability claims is subject to varying insurance limits which are
dependent upon the year involved.  The Babcock & Wilcox Company has an agreement
with a majority of its principal insurers concerning the method of allocation of
products liability asbestos claim payments to the years of coverage.  Pursuant
to the agreement, The Babcock & Wilcox Company negotiates and settles these
claims and bills these amounts to the appropriate insurers.  For financial
reporting purposes, a provision has been recognized to the extent that recovery
of these amounts from McDermott Incorporated's insurers has not been determined
to be probable.  Estimated liabilities for pending and future non-employee
products liability asbestos claims are derived from McDermott Incorporated's
claims history and constitute management's best estimate of such future costs.
Estimated insurance recoveries are based upon analysis of insurers providing
coverage of the estimated liabilities.  Inherent in the estimate of such
liabilities and recoveries are expected trends in claim severity and frequency
and other factors, including recoverability from insurers (see Note 12 to the
consolidated financial statements), which may vary significantly as claims are
filed and settled.  Accordingly, the ultimate loss may differ materially from
the amount provided in the consolidated financial statements.

G. EMPLOYEES

At March 31, 1997 McDermott Incorporated employed, under its direct supervision,
approximately 12,000 persons compared with 14,600 at March 31, 1996.
Approximately 4,600 employees were members of labor unions at March 31, 1997 as
compared with approximately 6,400 at March 31, 1996.  The majority of B&W's
manufacturing facilities operate under union contracts which customarily are
renewed every two to three years.  There are no contracts covering B&W hourly
workers expiring during the next twelve months.  McDermott Incorporated
considers its relationships with its employees to be satisfactory.

H. ENVIRONMENTAL REGULATIONS AND MATTERS

McDermott Incorporated is subject to the existing and evolving standards
relating to the environment.  These laws include the Comprehensive Environmental
Response, Compensation, and Liability Act ("CERCLA") of 1980, and similar laws
which provide for responses to and liability for releases of hazardous
substances into the environment; and the Clean Air Act, the Clean Water Act, the
Resource Conservation and Recovery Act and other federal laws, each as amended,
and similar foreign, state or local counterparts to these federal laws, which
regulate air emissions, water discharges, hazardous substances and wastes, and
require public disclosure related to the use of various hazardous substances.
McDermott Incorporated's operations are also governed by laws and regulations
relating to workplace safety and worker health, primarily the Occupational
Safety and Health Act and regulations promulgated thereunder.  McDermott
Incorporated believes that its facilities are in substantial compliance with
current regulatory standards.

                                       10
<PAGE>
 
McDermott Incorporated's compliance with U. S. federal, state and local
environmental control and protection regulations necessitated capital
expenditures of $468,000 in fiscal year 1997, and it expects to spend another
$2,792,000 on such capital expenditures over the next five years.  McDermott
Incorporated cannot predict all of the environmental requirements or
circumstances which will exist in the future but it anticipates that
environmental control and protection standards will become increasingly
stringent and costly.  Complying with existing environmental regulations
resulted in pretax charges of approximately $7,352,000 in fiscal year 1997.

McDermott Incorporated has been identified as a potentially responsible party at
various cleanup sites under CERCLA.  McDermott Incorporated has not been
determined to be a major contributor of wastes to these sites.   However, each
potentially responsible party or contributor may face assertions of joint and
several liability.  Generally, however, a final allocation of costs is made
based on relative contributions of wastes to each site.  Based on its relative
contribution of waste to each site, McDermott Incorporated's share of the
ultimate liability for the various sites is not expected to have a material
effect on McDermott Incorporated's consolidated financial position, results of
operations or liquidity in any given year.

Remediation projects have been or may be undertaken at certain of McDermott
Incorporated's current and former plant sites, and, during fiscal year 1995, B&W
completed, subject to Nuclear Regulatory Commission ("NRC") certification, the
decommissioning and decontamination of its former nuclear fuel processing plant
at Apollo, Pennsylvania.  All fabrication and support buildings have been
removed, and all contaminated soil has been shipped to authorized disposal
facilities.  In fiscal year 1997, B&W was notified by the NRC that the Apollo
plant site had been released for unrestricted use.  The Apollo plant site is the
first major nuclear fuel facility to achieve "green-field" status after
remediation, and will now be removed from the NRC's Site Decommissioning
Management Plan.  The nuclear license for the plant was terminated.

During fiscal year 1995, a decision was made to close B&W's nuclear
manufacturing facilities in Parks Township, Armstrong County, Pennsylvania
("Parks Facilities"), and a provision of $41,724,000 for the decontamination,
decommissioning, and the closing of these facilities was recognized.
Previously, decontamination and decommissioning costs were being accrued over
the facilities' remaining expected life.  Decontamination is proceeding as
permitted by the existing NRC license. A decommissioning plan was submitted to
the NRC for review and approval during January 1996.  B&W expects to reach an
agreement with the NRC in fiscal year 1998 on a plan that provides for the
completion of facilities dismantlement and soil restoration by 2001.  B&W
expects to request approval from the NRC to release the site for unrestricted
use at that time.

The Department of Environmental Protection of the Commonwealth of Pennsylvania,
("PADEP"), by letter dated March 19, 1994, advised B&W that it would seek
monetary sanctions, and remedial and monitoring relief, related to B&W's Parks
Facilities.  The relief sought related to potential groundwater contamination
related to the previous operations of the facilities.  PADEP has recently
advised B&W that it does not intend to assess any monetary sanctions provided
that B&W continues its remediation program of the Parks Facilities.

                                       11
<PAGE>
 
McDermott Incorporated performs significant amounts of work for the U.S.
Government under both prime contracts and subcontracts and operates certain
facilities that are licensed to possess and process special nuclear materials
and thus are subject to continuing reviews by governmental agencies, including
the Environmental Protection Agency and the Nuclear Regulatory Commission.

Decommissioning regulations promulgated by the U.S. Nuclear Regulatory
Commission require B&W to provide financial assurance that it will be able to
pay the expected cost of decommissioning its facilities at the end of their
service lives.  B&W will continue to provide financial assurance of $18,163,000
during fiscal year 1998 by issuing letters of credit  for the ultimate
decommissioning of all its licensed facilities, except one.  This facility,
which represents the largest portion of B&W's eventual decommissioning costs,
has provisions in its government contracts pursuant to which all of its
decommissioning costs and financial assurance obligations are covered by the
U.S. Government.

Compliance with existing government regulations controlling the discharge of
materials into the environment, or otherwise relating to the protection of the
environment (including decommissioning), does not have, nor is it expected to
have, a material effect upon the consolidated financial position of McDermott
Incorporated.

I. TRANSACTIONS WITH RELATED PARTIES

McDermott Incorporated has material transactions occurring during the normal
course of operations, including the sale of engineering and design services and
the performance of certain general and administrative services, with
International and other affiliated companies.  McDermott Incorporated has also
entered into various financial agreements with International and its
subsidiaries, including a Stock Purchase and Sale Agreement.  (See Note 6 to the
consolidated financial statements.)

Effective April 1, 1996, McDermott Incorporated and JRM, through subsidiaries,
formed a joint venture which is a preferred (but not exclusive) provider of
engineering services to certain subsidiaries of McDermott International in the
U.S. for onshore-related work and to JRM for offshore-related work.  The charges
for such services are based on charges to unrelated parties for similar work and
for general and administrative activities based on allocation of cost.
Arrangements for pricing these services are reviewed periodically by  the
parties.

While McDermott Incorporated's employee liability, comprehensive, general
liability, property, marine and other insurance programs are placed through
commercial insurance carriers, substantially all of such employee liability
exposure is reinsured, and significant deductibles under McDermott
Incorporated's other insurance programs are insured, by wholly owned insurance
subsidiaries of McDermott International.  The premiums charged by such insurance
companies of McDermott International for such insurance are based upon the
claims experience and forecasted activities of McDermott Incorporated and its
subsidiaries.  Management believes this approach is more cost effective as there
is generally no commercial market for insurance on the same economic terms for
these types of exposure.

                                       12
<PAGE>
 
Item 3.  LEGAL PROCEEDINGS

Due to the nature of its business, McDermott Incorporated is, from time to time,
involved in litigation.  It is management's opinion that none of this litigation
will have a material adverse effect on the consolidated financial position of
McDermott Incorporated.

See Item 1F and Note 12 to the consolidated financial statements regarding
McDermott Incorporated's potential liability for non-employee products liability
asbestos claims.

In addition to matters of the type referred to in the preceding paragraphs,
International and JRM are conducting an internal investigation, with the
assistance of outside counsel, of wrongdoing by a limited number of former
employees of International and JRM and by others. International and JRM notified
the appropriate authorities in April 1997. In June 1997, International received
a federal grand jury subpoena for documents relating principally to an
investigation of possible anti-competitive activity in the heavy-lift barge
service business of JRM. In July 1997, International received an informal
request from the Securities and Exchange Commission for the voluntary production
of documents. International and JRM are cooperating with the authorities. The
allegations which are the subject of the internal investigation, if true, and
the outcome of the grand jury proceedings, could result in civil and/or criminal
liability. At this time, International and JRM do not have sufficient
information to predict the ultimate outcome of this matter. Subsequent to the
formation of JRM and its acquisition of Offshore Pipelines, Inc., McDermott
Incorporated does not participate in the heavy lift barge service business.

                                       13
<PAGE>
 
Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted during the fourth quarter of the fiscal year covered by
this report to a vote of security holders, through the solicitation of proxies
or otherwise.

                                       14
<PAGE>
 
                                 P A R T   I I

Item 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
         MATTERS

As a result of the plan of reorganization announced by McDermott Incorporated on
October 28, 1982 and completed on March 15, 1983, all of McDermott
Incorporated's outstanding Common Stock is owned by International and,
consequently, there is no market for McDermott Incorporated's Common Stock.  For
restrictions on McDermott Incorporated's present or future ability to pay
dividends, see Item 7 Liquidity and Capital Resources and Note 7 to the
consolidated financial statements.

                                       15
<PAGE>
 
Item 6.  SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
 
                                   FOR THE FISCAL YEARS ENDED MARCH 31,
                         1997         1996         1995         1994         1993
                      -----------  -----------  -----------  -----------  -----------
                                              (In thousands)
<S>                   <C>          <C>          <C>          <C>          <C>
Revenues              $1,796,257   $2,027,975   $2,222,390   $2,243,366   $1,969,622
Loss before
 Extraordinary
 Items and
 Cumulative Effect
 of Accounting
 Changes              $ (174,805)  $  (27,143)  $  (73,880)  $  (26,316)  $  (27,079)
Net Loss              $ (174,805)  $  (27,143)  $  (74,392)  $ (127,066)  $ (273,825)
Total Assets          $3,137,170   $3,019,780   $3,386,429   $3,500,726   $2,345,658
Long-Term Debt        $  379,487   $  423,882   $  423,150   $  584,532   $  492,036
Redeemable
 Preferred Stocks        170,983      173,301      179,251      196,672      204,482
                      ----------   ----------   ----------   ----------   ----------
       Total          $  550,470   $  597,183   $  602,401   $  781,204   $  696,518
</TABLE>

See Note 18 to the consolidated financial statements for significant items
included in fiscal year 1997 and 1996 results.  Fiscal year 1995 results include
a $46,489,000 charge for the decontamination, decommissioning and closing of
certain nuclear manufacturing facilities and the closing of a manufacturing
facility, a $14,478,000 charge for the reduction of estimated products liability
asbestos claims recoveries from insurers and a $26,300,000 benefit for a
reduction in accrued interest expense due to the settlement of outstanding tax
issues.  Fiscal year 1993 results include a $23,968,000 gain from the sale of
McDermott Incorporated's interests in two commercial nuclear joint ventures.

See Note 2 regarding the sale of a portion of the marine construction services
business to International in fiscal year 1995.  See Note 1 regarding the
adoption of Statement of Financial Accounting Standards ("SFAS") No. 112 in
fiscal year 1995.  Fiscal year 1994 includes the adoption of Emerging Issues
Task Force Issue No. 93-5.  Fiscal year 1993 includes the cumulative effect of
the adoption of SFAS No. 106 and SFAS No. 109.  See Note 12 regarding the
uncertainty as to the ultimate loss relating to products liability asbestos
claims and an internal investigation of allegations of wrongdoing by a limited
number of former employees of International and JRM.

All of the Common Stock of McDermott Incorporated is owned by International and,
therefore, no per share data is shown above.

                                       16
<PAGE>
 
Item 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

GENERAL

A significant portion of McDermott Incorporated's revenues and operating results
are derived from its foreign operations, which are primarily located in Canada.
As a result, McDermott Incorporated's operations and financial results are
affected by international factors, such as changes in foreign currency exchange
rates.  McDermott Incorporated attempts to minimize its exposure to changes in
foreign currency  exchange rates by attempting to match foreign currency
contract receipts with like foreign currency disbursements.  To the extent that
it is unable to match the foreign currency receipts and disbursements related to
its contracts, its practice of entering into forward exchange contracts to hedge
foreign currency transactions reduces the impact of foreign exchange rate
movements on operating results.

In general, both of McDermott Incorporated's business segments are capital
intensive businesses that rely on large contracts for a substantial amount of
their revenues.

Revenues of the Power Generation Systems and Equipment segment are largely a
function of capital spending by the electric power generation industry and by
the U.S. Government.  This segment has recently experienced weak and difficult
markets in nearly all of its product lines.  Domestic utility original equipment
markets remain sluggish as growth in demand remains modest and the electric
power industry transitions from a regulated to a competitive environment.
However, demand for services to the domestic utility industry and for nuclear
fuel assemblies and reactor components for the U.S. Navy continue at significant
levels.  In addition, foreign markets for industrial and utility boilers remain
strong in Asia and the Middle East.

The foregoing statements regarding McDermott Incorporated's markets and other
statements in this discussion are forward-looking statements.  These forward-
looking statements are subject to numerous risks and uncertainties.  These
include the uncertainties relating to deregulation and the Clean Air Act as well
as offshore development decisions to be made by oil and gas exploration and
development companies.

During fiscal year 1997 and 1996, McDermott Incorporated's Canadian operations
contributed $515,389,000 and $890,788,000 to total revenues and ($31,405,000)
and $18,751,000 to operating income (loss), respectively.  These results reflect
activity on contracts performed at B&W's Cambridge, Ontario location,
principally for the supply of replacement recirculating steam generators to
domestic utilities and work for government owned utilities located in the Middle
and Far East, and contracts performed by McDermott Engineers & Constructors
(Canada) Ltd., which is based in Calgary, Alberta, Canada.

FISCAL YEAR 1997 VS FISCAL YEAR 1996

Power Generation Systems and Equipment's revenues decreased $194,162,000 to
$1,514,112,000 primarily due to lower revenues from the fabrication and erection
of fossil fuel steam and environmental control systems, replacement nuclear
steam generators, construction of cogeneration plants, nuclear services and
replacement parts.  These decreases were partially offset by higher revenues
from commercial nuclear environmental services.

                                       17
<PAGE>
 
Power Generation Systems and Equipment's segment operating income (loss)
decreased $106,788,000 from income of $21,269,000 to a loss of $85,519,000.  A
provision for estimated future non-employee products asbestos claims, the write-
down of an equity investment in a domestic cogeneration joint venture and an
asset impairment loss on a domestic manufacturing facility, net of gains on
asset disposals, resulted in an increase in segment loss of $80,140,000 in the
current year.  There were also lower volume and margins on the fabrication and
erection of fossil fuel steam and environmental control systems and on
replacement parts.  There were also lower volume on replacement nuclear steam
generators and lower margins on plant enhancement projects, cost overruns on a
contract for a Canadian cogeneration plant and increased severance and
relocation costs.  These decreases were partially offset by higher volume and
margins on commercial nuclear environmental services and lower workers'
compensation expense.

Power Generation Systems and Equipment's equity in income of investees, which
represents the results of approximately 9 joint ventures, decreased $28,958,000
to $2,789,000. The income in fiscal year 1996 was primarily due to the gain on
the sale of power purchase contracts back to a local utility.  There were also
lower operating results in a Canadian joint venture in the current year.

Backlog for this segment at March 31, 1997 and 1996 was $2,344,951,000 and
$2,276,973,000, respectively.  At March 31, 1997, this segment's backlog with
the U.S. Government was $797,470,000 (of which $26,448,000 had not been funded)
and includes orders for nuclear fuel assemblies and reactor components for the
U.S. Navy. These orders are expected to continue to comprise a substantial
portion of backlog with the U.S. Government as B&W is the sole source provider
of these nuclear fuel assemblies and reactor components.

Marine Construction Services' revenues decreased $35,421,000 to $294,162,000
primarily due to lower revenues from engineering and construction activities in
domestic and Canadian operations.  These decreases were partially offset by
increased barge construction activities in shipyard operations and increased
shipbuilding activities.

Backlog for this segment at March 31, 1997 was $107,502,000 as compared to
$187,288,000 (including $28,138,000 relating to the shipyard sold in fiscal year
1997) at March 31, 1996.  Not included in backlog at March 31, 1997 and 1996 was
backlog relating to contracts performed by unconsolidated joint ventures of
$32,000,000 and $24,000,000, respectively.

Interest income decreased $9,277,000 to $2,521,000 primarily due to decreased
investments in government obligations and other investments.

Interest expense increased $3,411,000 to $56,321,000, primarily due to changes
in debt obligations and interest rates prevailing thereon.

Other-net expense increased $21,976,000 to $24,020,000 primarily due to a loss
of $19,446,000 in the current year for insurers providing coverage for estimated
future non-employee asbestos claims and gains on the sales of investments in the
prior year.

                                       18
<PAGE>
 
The benefit from income taxes increased $20,317,000 to $25,586,000 while loss
before the benefit from income taxes increased $167,979,000 to $200,391,000.
The increase in the benefit from income taxes is due primarily to the increase
in loss from operations, offset, in part, due to a limitation on the recognition
of income tax benefits in the U.S.

FISCAL YEAR 1996 VS FISCAL YEAR 1995

Power Generation Systems and Equipment's revenues increased $45,257,000 to
$1,708,274,000. This was primarily due to higher revenues from engineering,
procurement and construction of cogeneration plants, from defense and space-
related products (other than nuclear fuel assemblies and reactor components),
replacement nuclear steam generators for domestic customers manufactured at
B&W's Cambridge, Ontario location and fabrication of industrial boilers.  These
increases were partially offset by lower revenues from repair and alteration of
existing fossil fuel steam systems, fabrication and erection of fossil fuel
steam and environmental control systems and nuclear fuel assemblies and reactor
components for the U.S. Government.

Power Generation Systems and Equipment's segment operating income increased
$2,529,000 to $21,269,000 due to provisions of $46,489,000 for the
decontamination, decommissioning and closing of certain nuclear manufacturing
facilities and the closing of a manufacturing facility in the prior year.  In
addition, there were higher volume and margins from replacement nuclear steam
generators, improved margins from fabrication of fossil fuel steam and
environmental control systems (including a license buyout agreement of
$8,574,000) and higher volume from defense and space-related products (other
than nuclear fuel assemblies and reactor components).  There was also a gain on
the sale of a manufacturing facility.  These increases were offset by the write-
off of an insurance claim of $12,600,000 due to an unfavorable arbitration
ruling related to the recovery of cost incurred for corrective action in certain
utility and industrial installations.   There were also lower margins from
engineering, procurement and construction of cogeneration plants.  In addition,
there were lower volume and margins from repair and alteration of existing
fossil fuel steam systems and industrial boilers, plant enhancement projects and
from operations and maintenance contracts. 

Power Generation Systems and Equipment's equity in income of investees increased
$25,891,000 to $31,747,000. This represents the results of approximately 10
active joint ventures, but is primarily due to a nonrecurring equity income gain
of $30,612,000 resulting from the sale of power purchase contracts back to a
local utility.

Marine Construction Services' revenues decreased $230,367,000 to $329,583,000
primarily due to inclusion in the prior year of revenues related to the marine
construction services business sold to International on January 31, 1995 and
lower volume from shipyard operations.  These decreases were partially offset by
higher revenues from engineering activities in the U.S.

Marine Construction Services' segment operating loss decreased $8,019,000 to
$23,614,000  primarily due to higher margins from domestic shipyard operations,
partially offset by income in the prior period related to the marine
construction business sold to International on January 31, 1995.

                                       19
<PAGE>
 
Marine Construction Services' equity in income of investees increased $56,000 to
$4,534,000 primarily due to improved operating results of a domestic fabrication
joint venture.  Last year's results included income from its CMM joint venture
whose results are now included in J. Ray McDermott, S.A.

Interest income decreased $888,000 to $11,798,000 primarily due to decreased
investments in government obligations and other investments.

Interest expense increased $11,574,000 to $52,910,000, primarily due to a
reduction of accrued interest of $26,300,000 on proposed tax deficiencies that
was recorded in the prior year, partially offset by changes in debt obligations
and interest rates prevailing thereon.

Other-net expense decreased $35,070,000 to $2,044,000, primarily due to a loss
related to the reduction of estimated products liability asbestos claim
recoveries of $14,478,000 from insurers and a provision for the settlement of a
lawsuit, both in the prior period,  and income in the current year of $7,277,000
due to minority shareholder participation in the increased losses of McDermott
Engineers and Constructors (Canada) Ltd.

The benefit from income taxes decreased $24,120,000 to $5,269,000 while loss
before the benefit from income taxes and cumulative effect of accounting changes
decreased $70,857,000 to $32,412,000.  The decrease in the benefit from income
taxes is due primarily to the decrease in loss from operations.

Effect of Inflation and Changing Prices
---------------------------------------

McDermott Incorporated's financial statements are prepared in accordance with
generally accepted accounting principles, using historical dollar accounting
(historical cost).  Statements based on historical cost, however, do not
adequately reflect the cumulative effect of increasing costs and changes in the
purchasing power of the dollar, especially during times of significant and
continued inflation.

The management of McDermott Incorporated is cognizant of the effects of
inflation and, in order to minimize the negative impact of inflation on its
operations, attempts to cover the increased cost of anticipated changes in
labor, material and service costs, either through an estimation of such changes,
which is reflected in an original price, or through price escalation clauses in
its contracts.

Liquidity and Capital Resources
-------------------------------

During fiscal year 1997, McDermott Incorporated's cash and cash equivalents
increased $33,896,000 to $56,782,000 and total debt increased $94,308,000 to
$693,179,000, primarily due to secured borrowings of $93,769,000 on transfers of
receivables (see Note 7 to the consolidated financial statements).  During this
period, McDermott Incorporated received cash of $68,162,000 as a capital
contribution from International, $57,240,000 from short-term borrowings and
$48,345,000 from the sale of assets.  McDermott Incorporated used cash of
$26,205,000 in operating activities; $26,663,000 for additions to property,
plant and equipment;  $65,363,000 for repayment of short-term borrowings from an
affiliate; $13,291,000 for cash dividends on preferred stocks; $8,266,000 for
investment in equity investees; and $2,250,000 for the repurchase of preferred
stock to satisfy current and future

                                       20
<PAGE>
 
sinking fund requirements.  Lower accounts receivable are primarily due to
timing of collection of billings on contracts performed in Canada.

Cash from the sale of assets includes proceeds of $19,000,000 from the sale of
McDermott Incorporated's  shipyard facilities in Morgan City, Louisiana and
certain work-in-progress.

Pursuant to an agreement with the majority of its principal insurers, McDermott
Incorporated negotiates and settles products liability asbestos claims from non-
employees and bills these amounts to the appropriate insurers.  As a result of
collection delays inherent in the process, reimbursement is usually delayed for
three months or more.   The average amount of these claims (historical average
of approximately $6,000 per claim over the last three years) has continued to
rise.  Claims paid in fiscal year 1997 were $188,205,000, of which $170,003,000
has been recovered or is due from insurers. At March 31, 1997, receivables of
$80,085,000 were due from insurers for reimbursement of settled claims.  The
increase in amounts classified current for products liability asbestos claims
and insurance recoverable at March 31, 1997 reflects management's intention to
reduce the level of unpaid asserted claims over the next several quarters.  The
number of non-employee claims, which had declined moderately since fiscal year
1990, increased during the second half of fiscal year 1995 and the first half of
fiscal year 1996, but decreased the second half of fiscal year 1996.  Based on
information then currently available, management believed that the increase
represented an acceleration in the timing of receipt of claims but did not
represent an increase in the total liability.  The number of claims, however,
increased during the first nine months of fiscal year 1997 and during that
period management was investigating and evaluating the basis for the increase.
As a result of the investigation and evaluation, in the fourth quarter of fiscal
year 1997 McDermott Incorporated recorded an additional estimated liability for
the future non-employee asbestos claims of $427,001,000, estimated related
insurance recoveries of $354,601,000 and a loss of $72,400,000 for estimated
future claims for which recovery from insurers was not determined to be
probable.  Estimated liabilities for pending and future non-employee products
liability asbestos claims are derived from McDermott Incorporated's claims
history and constitute management's best estimate of such future costs.
Settlement of the  liability is expected to occur over approximately the next 15
years.  Estimated insurance recoveries are based upon analysis of insurers
providing coverage of the estimated liabilities. Inherent in the estimate of
such liabilities and recoveries are expected trends in claim severity and
frequency and other factors, including recoverability from insurers, which may
vary significantly as claims are filed and settled.  Accordingly, the ultimate
loss may differ materially from amounts provided in the consolidated financial
statements.   The collection delays and the amount of claims paid for which
insurance recovery is not probable have not had a material adverse effect on
McDermott Incorporated's liquidity, and management believes, based on
information currently available, that they will not have a material adverse
effect on liquidity in the future.

McDermott Incorporated's expenditures for property, plant and equipment
decreased $12,448,000 to $26,663,000 in fiscal year 1997.  The majority of
fiscal year 1997 expenditures were to maintain and replace existing facilities
and equipment.  McDermott Incorporated has committed to make capital
expenditures of approximately $3,912,000 during fiscal year 1998.

At March 31, 1997 and 1996, The Babcock & Wilcox Company had sold, with limited
recourse, an undivided interest in a designated pool of qualified accounts
receivable of

                                       21
<PAGE>
 
approximately $93,769,000 and $107,000,000, respectively, under an agreement
with a U.S. Bank.  During fiscal year 1997, the maximum sales limit available
under the agreement was reduced from $140,000,000 to $125,000,000 and is subject
to annual renewal.  Depending on the amount of qualified accounts receivable
available for the pool, the amount sold to the bank can vary (but not greater
than the maximum sales limit available) from time to time.  Beginning January 1,
1997, McDermott Incorporated accounts for these sales as secured borrowings.
(See Note 1 and 7 to the consolidated financial statements.)

Effective February 1, 1989, McDermott Incorporated and a subsidiary of
International, McDermott International Investments Co., Inc. ("MIICO"), entered
into a reverse repurchase agreement whereby either party acting as a "buyer"
would purchase for cash certain U. S. Government obligations owned by the other
party acting as a "seller", and, at the date of purchase, the "seller" would
agree to repurchase the same securities at a set price (including accrued
interest) at a future specified date.  There were no transactions under this
agreement during fiscal year 1997.

McDermott Incorporated and MIICO are parties to an agreement pursuant to which
McDermott Incorporated may borrow up to $150,000,000 from MIICO at interest
rates computed at the applicable federal rate determined by the IRS.  At March
31, 1996, McDermott Incorporated had borrowed $65,363,000 against this
agreement.  There were no borrowings against this agreement at March 31, 1997.

At March 31, 1997 and 1996, McDermott Incorporated had available various
uncommitted short-term lines of credit from banks totalling $134,695,000 and
$285,859,000, respectively. Borrowings against these lines of credit at March
31, 1997 and 1996 were $24,555,000 and $58,314,000, respectively.  In addition,
at March 31, 1997 and 1996, respectively,  there were borrowings of $150,000,000
and $50,000,000 under the $150,000,000 unsecured and committed revolving credit
facility of The Babcock & Wilcox Company (the "B&W Revolver").  During May and
June 1997, The Babcock & Wilcox Company repaid all amounts outstanding under the
B&W Revolver primarily with the proceeds of a loan of $115,000,000 from MIICO to
McDermott Incorporated during May 1997. As a condition to borrowing under the
B&W Revolver, The Babcock & Wilcox Company must comply with certain
requirements. In July, 1997, these requirements of the B&W Revolver were amended
so that The Babcock & Wilcox Company may borrow under this facility in the
future. During fiscal year 1998, borrowings by The Babcock & Wilcox Company 
through the B&W Revolver are expected to be minimal as The Babcock & Wilcox 
Company expects to be able to fund itself from operating cash flow.

McDermott Incorporated is restricted, as a result of covenants in certain
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
Substantially all of the net assets of McDermott Incorporated are subject to
such restrictions.  At March 31, 1997, the most restrictive of these covenants
with respect to the payment of dividends by McDermott Incorporated would
prohibit the payment of dividends other than current dividends on existing
preferred stock.

Working capital decreased to $71,284,000 at March 31, 1997 from $92,086,000 at
March 31, 1996.  During 1998, McDermott Incorporated expects to obtain funds to
meet capital expenditure, working capital and debt maturity requirements from
operating activities, additional borrowings and capital contributions from
International (if required).  Leasing agreements for equipment, which are short-
term in nature, are not expected to impact McDermott Incorporated's liquidity
nor capital resources.

                                       22
<PAGE>
 
McDermott Incorporated's quarterly dividends of $0.55 per share on the Series A
$2.20 Cumulative Convertible Preferred Stock and $0.65 per share on the Series B
$2.60 Cumulative Preferred Stock were the same in 1997 and 1996.

McDermott Incorporated has provided a valuation allowance ($53,192,000 at March
31, 1997) for deferred tax assets which cannot be realized through carrybacks
and future reversals of existing taxable temporary differences.  Management
believes that remaining deferred tax assets at March 31, 1997 are realizable
through carrybacks and future reversals of existing taxable temporary
differences and, if necessary, the implementation of tax planning strategies
involving sales  of appreciated assets.   An uncertainty that affects the
ultimate realization of deferred tax assets is the possibility of declines in
value of appreciated assets involved in identified tax planning strategies.
This factor has been considered in determining the valuation allowance.
Management will continue to assess the adequacy of the valuation allowance on a
quarterly basis.

New Accounting Standard
-----------------------

In October 1996, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") 96-1, "Environmental Remediation Liabilities."
The SOP provides guidance with respect to the recognition, measurement and
disclosure of environmental remediation liabilities.  McDermott Incorporated
believes that its accounting for environmental remediation liabilities is
essentially in compliance with the SOP.  McDermott Incorporated will formally
adopt SOP 96-1 in fiscal year 1998, and does not believe the effect of the
adoption will be material.

                                       23
<PAGE>
 
Item 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
         --------------------------------------------------------

 
                         REPORT OF INDEPENDENT AUDITORS
                         ------------------------------


The Board of Directors and Stockholders
McDermott Incorporated


We have audited the accompanying consolidated balance sheet of McDermott
Incorporated as of March 31, 1997 and 1996, and the related consolidated
statements of loss, stockholder's equity and cash flows for each of the three
years in the period ended March 31, 1997.  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 McDermott
Incorporated at March 31, 1997 and 1996, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
March 31, 1997, in conformity with generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, the Company
changed its methods of accounting for postemployment benefits and investment
securities in 1995.



                                                  ERNST & YOUNG LLP

New Orleans, Louisiana
July 10, 1997

                                       24
<PAGE>
 
                             MCDERMOTT INCORPORATED
                           CONSOLIDATED BALANCE SHEET
                            MARCH 31, 1997 AND 1996
                                     ASSETS
<TABLE>
<CAPTION>
                                                              1997       1996
                                                           ----------  --------
                                                              (In thousands)
<S>                                                        <C>         <C>
Current Assets:
 Cash and cash equivalents                                 $   56,782  $ 22,886
 Accounts receivable - trade                                  286,011   257,094
 Accounts receivable - other                                  139,949    82,145
 Accounts receivable from McDermott International, Inc.             -    38,698
 Insurance recoverable - current                              183,000   116,280
 Contracts in progress                                        244,231   284,099
 Inventories                                                   59,894    61,128
 Deferred income taxes                                         56,359    82,381
 Other current assets                                          15,053     8,355
--------------------------------------------------------------------------------
      Total Current Assets                                  1,041,279   953,066
--------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost:
 Land                                                           9,036    12,922
 Buildings                                                    131,853   160,199
 Machinery and equipment                                      377,167   474,765
 Property under construction                                   15,886    19,270
--------------------------------------------------------------------------------
                                                              533,942   667,156
Less accumulated depreciation                                 314,600   388,111
--------------------------------------------------------------------------------
      Net Property, Plant and Equipment                       219,342   279,045
--------------------------------------------------------------------------------
Insurance Recoverable                                         720,913   606,963
--------------------------------------------------------------------------------
Investment in McDermott International, Inc.                   595,982   600,292
--------------------------------------------------------------------------------
Excess of Cost Over Fair Value of Net
 Assets of Purchased Businesses Less Accumulated
 Amortization of $104,960,000 at March 31, 1997
 and $97,814,000 at March 31, 1996                           119,077    135,877
--------------------------------------------------------------------------------
Prepaid Pension Costs                                        266,837    256,802
--------------------------------------------------------------------------------
Other Assets                                                 173,740    187,735
--------------------------------------------------------------------------------
      TOTAL                                               $3,137,170 $3,019,780
================================================================================
</TABLE> 
See accompanying notes to consolidated financial statements.

                                       25
<PAGE>
 
                     LIABILITIES AND STOCKHOLDER'S EQUITY

<TABLE>
<CAPTION>
                                                             1997       1996
                                                           --------   --------
<S>                                                        <C>        <C>
Current Liabilities:                                                
 Notes payable and current maturities of long-term debt    $313,692   $109,626
 Note payable to McDermott International, Inc.                    -     65,363
 Accounts payable                                           116,452    145,779
 Accounts payable to McDermott                                      
   International, Inc.                                        9,182      4,410
 Environmental and products liabilities - current           210,352    159,824
 Accrued employee benefits                                   79,573     72,173
 Accrued liabilities - other                                130,329    152,309
 Advance billings on contracts                              109,736    149,245
 U.S. and foreign income taxes                                  679      2,251
-------------------------------------------------------------------------------
      Total Current Liabilities                             969,995    860,980
-------------------------------------------------------------------------------
Long-Term Debt                                              379,487    423,882
-------------------------------------------------------------------------------
Accumulated Postretirement Benefit Obligation               373,232    377,457
-------------------------------------------------------------------------------
Environmental and Products Liabilities                      903,379    721,740
-------------------------------------------------------------------------------
Other Liabilities                                            95,500     89,501
-------------------------------------------------------------------------------
Contingencies                                                       
-------------------------------------------------------------------------------
Redeemable Preferred Stocks:                                        
 Series A $2.20 cumulative convertible, $1.00 par value;            
  at redemption value                                        88,087     88,087
 Series B $2.60 cumulative, $1.00 par value;                        
  at redemption value                                        82,896     85,214
-------------------------------------------------------------------------------
      Total Redeemable Preferred Stocks                     170,983    173,301
-------------------------------------------------------------------------------
Stockholder's Equity:                                               
 Common stock, par value $1.00 per share, 3,700 shares              
   authorized and issued, 3,600 shares outstanding                4          4
 Capital in excess of par value                             691,605    625,841
 Deficit                                                   (422,123)  (234,075)
 Minimum pension liability                                   (1,655)      (763)
 Currency translation adjustments                           (23,237)   (18,088)
-------------------------------------------------------------------------------
      Total Stockholder's Equity                            244,594    372,919
-------------------------------------------------------------------------------
 TOTAL                                                   $3,137,170 $3,019,780
===============================================================================
</TABLE> 

                                       26
<PAGE>
 
                            McDERMOTT INCORPORATED
                         CONSOLIDATED STATEMENT OF LOSS
                FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997

<TABLE>
<CAPTION>
                                                 1997        1996        1995
                                              ----------  ----------  ----------
                                                        (In thousands)
<S>                                           <C>         <C>         <C>
Revenues                                      $1,796,257  $2,027,975  $2,222,390
---------------------------------------------------------------------------------
 Costs and Expenses:
   Cost of operations (before depreciation
     and amortization)                         1,722,129   1,862,504   2,025,188
   Depreciation and amortization                  45,991      50,280      66,104
   Selling, general and
     administrative expenses                     140,117     147,153     176,351
---------------------------------------------------------------------------------
                                               1,908,237   2,059,937   2,267,643
---------------------------------------------------------------------------------
Gain (Loss) on Asset Disposals and
 Impairments - net                               (17,645)      6,425      (2,586)
---------------------------------------------------------------------------------
Operating Loss before Equity in
 Income of Investees                            (129,625)    (25,537)    (47,839)
Equity in Income of Investees                      7,054      36,281      10,334
---------------------------------------------------------------------------------
 Operating Income (Loss)                        (122,571)     10,744     (37,505)
---------------------------------------------------------------------------------
Other Income (Expense):
 Interest income                                   2,521      11,798      12,686
 Interest expense                                (56,321)    (52,910)    (41,336)
 Other-net                                       (24,020)     (2,044)    (37,114)
---------------------------------------------------------------------------------
                                                 (77,820)    (43,156)    (65,764)
---------------------------------------------------------------------------------
Loss before Benefit from Income                                       
 Taxes and Cumulative Effect                                          
 of Accounting Change                           (200,391)    (32,412)   (103,269)
Benefit from Income Taxes                        (25,586)     (5,269)    (29,389)
---------------------------------------------------------------------------------
Loss before Cumulative Effect of                                      
 Accounting Change                              (174,805)    (27,143)    (73,880)
Cumulative Effect of Accounting Change                 -           -        (512)
---------------------------------------------------------------------------------
Net Loss                                       $(174,805)   $(27,143)   $(74,392)
=================================================================================
</TABLE>

See accompanying notes to consolidated financial statements.

                                       27
<PAGE>
 
                             MCDERMOTT INCORPORATED
                 CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
                FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997
                                 (In thousands)
<TABLE>
<CAPTION>
                                        Capital      Retained     Minimum     Currency      Total
                                         Common     in Excess     Earnings    Pension    Translation   Stockholder's
                                       Stock/(1)/  of Par Value  (Deficit)   Liability   Adjustments       Equity
                                       -----------------------------------------------------------------------------
<S>                                    <C>         <C>          <C>             <C>         <C>           <C>
Balance March 31, 1994                      $4      $589,085    $(104,859)      $(620)      $(11,507)      $ 472,103
Adoption of SFAS 115                         -             -       (1,480)          -              -          (1,480)
Sale of marine construction                                  
 services business                                           
 to International                            -        29,015            -           -              -          29,015
Redemption of preferred                                       
 shares                                      -           239            -           -              -             239
Tax benefit on exercise of                                   
 stock options                               -         2,642            -           -              -           2,642
Net loss                                     -             -      (74,392)          -              -         (74,392)
Preferred stock dividends                    -             -      (14,142)          -              -         (14,142)
Minimum pension liability                    -             -            -         581              -             581
Gain on investments                          -             -        1,532           -              -           1,532
Translation adjustments                      -             -            -           -         (3,563)         (3,563)
--------------------------------------------------------------------------------------------------------------------- 
Balance March 31, 1995                       4       620,981     (193,341)        (39)       (15,070)        412,535
--------------------------------------------------------------------------------------------------------------------- 
Division of pension plan                     -         4,585            -           -              -           4,585
Redemption of preferred                                      
 shares                                      -           206            -           -              -             206
Tax benefit on exercise of stock                             
 options                                     -            69            -           -              -              69
Net loss                                     -             -      (27,143)          -              -         (27,143)
Preferred stock dividends                    -             -      (13,539)          -              -         (13,539)
Minimum pension liability                    -             -            -        (724)             -            (724)
Loss on investments                          -             -          (52)          -              -             (52)
Translation adjustments                      -             -            -           -         (3,018)         (3,018)
--------------------------------------------------------------------------------------------------------------------- 
Balance March 31, 1996                       4       625,841     (234,075)       (763)       (18,088)        372,919
---------------------------------------------------------------------------------------------------------------------
Sale of assets to International              -         4,655            -           -              -           4,655
Capital contribution from                                    
 International                               -        61,000            -           -              -          61,000
Redemption of preferred                                      
 shares                                      -            68            -           -              -              68
Tax benefit on exercise of stock                             
 options                                     -            41            -           -              -              41
Net loss                                     -             -     (174,805)          -              -        (174,805)
Preferred stock dividends                    -             -      (13,243)          -              -         (13,243)
Minimum pension liability                    -             -            -        (892)             -            (892)
Translation adjustments                      -             -            -           -         (5,149)         (5,149)
--------------------------------------------------------------------------------------------------------------------- 
Balance March 31, 1997                      $4      $691,605    $(422,123)    $(1,655)      $(23,237)      $ 244,594
=====================================================================================================================
</TABLE> 
/(1)/ There were 3,600 common shares outstanding at March 31, 1997, 1996, and
      1995 consisting of 3,000 voting shares entitled to 12,000 votes per share
      and 600 non-voting shares./

See accompanying notes to the consolidated financial statements.

                                       28
<PAGE>
 
                             McDERMOTT INCORPORATED
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997

                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>
                                                     1997        1996          1995
                                                  ----------  ----------  ------------
                                                            (In thousands)
<S>                                               <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss                                          $(174,805)  $ (27,143)   $  (74,392)
-------------------------------------------------------------------------------------- 
Adjustments to reconcile net loss to net cash
  provided by (used in) operating activities:
  Depreciation and amortization                      45,991      50,280        66,104
  Equity in income or loss of investees,
   less dividends                                     5,648       3,453          (653)
  (Gain) loss on asset disposals and
   impairments-net                                   17,645      (6,425)        2,586
  Cumulative effect of accounting change                  -           -           512
  Provision for deferred taxes                        8,617      10,361         1,869
  Other                                                 567      (4,984)        3,654
  Changes in assets and liabilities, net of
   effects from acquisitions and divestitures:
    Accounts receivable                              65,584     (76,598)       20,425
    Accounts payable                                (26,807)    (39,001)       44,345
    Inventories                                         854       3,252           788
    Net contracts in progress and advance                               
     billings                                       (10,461)    (29,085)      (33,044)
    Environmental and products liabilities           86,561      16,989        58,083
    Income taxes                                     (4,528)    (25,230)      (48,989)
    Accrued liabilities                             (21,455)     20,310       (17,666)
    Other, net                                       15,448     (52,264)      (45,863) 
Proceeds from insurance for products liabilities                        
 claims                                             153,141     107,481       105,314
Payments of products liabilities claims            (188,205)   (151,961)     (126,151)
-------------------------------------------------------------------------------------- 
NET CASH USED IN OPERATING ACTIVITIES               (26,205)   (200,565)      (43,078)
-------------------------------------------------------------------------------------- 
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition                                               -     (13,083)            -
Proceeds from asset disposals                        48,345      29,465        13,171
Purchases of property, plant and equipment          (26,663)    (39,111)      (71,793)
Purchases of short and long-term investments              -    (196,610)      (20,699)
Sales and maturities of short and                                        
 long-term investments                                    8     560,455        20,603
Proceeds from redemption of International stock       2,500       2,500         2,500
Investment in equity investees                       (8,266)       (299)      (10,190)
Other                                                     -       1,379           (49)
-------------------------------------------------------------------------------------- 
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES                                           15,924     344,696       (66,457)
--------------------------------------------------------------------------------------
</TABLE>

                                       29
<PAGE>
 
                                                        Continued



                INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
                                                  1997        1996       1995
                                                ---------  ----------  ---------
                                                         (In thousands)
<S>                                             <C>        <C>         <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of long-term debt                       $   (165)  $(150,165)  $(16,707)
Increase (decrease)  in short-term borrowing      57,240     (37,967)   130,811
Increase (decrease) in short-term borrowing
 from McDermott International, Inc.              (65,363)     65,363          -
Dividends paid                                   (13,291)    (13,663)   (14,142)
Capital contribution from International           68,162           -          -
Redemption of preferred stock                     (2,250)     (5,743)   (17,182)
Other                                               (281)       (439)       (75)
-------------------------------------------------------------------------------- 
NET CASH PROVIDED BY (USED IN) FINANCING
 ACTIVITIES                                       44,052    (142,614)    82,705
-------------------------------------------------------------------------------- 
EFFECTS OF EXCHANGE RATE CHANGES ON CASH             125         355        480
--------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS                                      33,896       1,872    (26,350)
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT BEGINNING
 OF YEAR                                          22,886      21,014     47,364
================================================================================
CASH AND CASH EQUIVALENTS AT END
 OF YEAR                                         $56,782   $  22,886    $21,014
--------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH
 FLOW INFORMATION:

Cash paid during the period for:
 Interest (net of amount capitalized)           $ 50,341   $  57,305   $ 62,623
 Income taxes (net of refunds)                  $ (8,607)  $  24,697   $(11,705)
================================================================================
</TABLE> 

See accompanying notes to consolidated financial statements.

                                       30
<PAGE>
 
                             MCDERMOTT INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE THREE FISCAL YEARS ENDED MARCH 31, 1997

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation
---------------------------

The consolidated financial statements include the accounts of McDermott
Incorporated and all subsidiaries.  Investments in joint venture and other
entities in which McDermott Incorporated has a 20% to 50% interest are accounted
for on the equity method.  Differences between the cost of equity method
investments and the amount of underlying equity in net assets of the investees
are amortized systematically to income.  All significant intercompany
transactions and accounts have been eliminated.  Certain amounts previously
reported have been reclassified to conform with the presentation at March 31,
1997.

Unless the context otherwise requires, hereinafter, "International" will be used
to mean McDermott International, Inc., a Panamanian corporation.  International
is the parent company of McDermott Incorporated

Use of Estimates
----------------

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

Accounting Changes
------------------

Transfers of Financial Assets - During the year ended March 31, 1997, McDermott
Incorporated adopted Statement of Financial Accounting Standards ("SFAS") No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."  Accordingly, beginning January 1, 1997,
transfers of accounts receivable previously accounted for as sales are accounted
for as secured borrowings.  Adoption of the new standard was not material to
results for the three months ended March 31, 1997.

Postemployment Benefits - Effective April 1, 1994, McDermott Incorporated
adopted SFAS No. 112, "Employers' Accounting for Postemployment Benefits," in
accounting for disability benefits and other types of benefits paid to
employees, their beneficiaries and covered dependents after active employment,
but before retirement.  The cumulative effect as of April 1, 1994 of this change
in accounting was to increase net loss by $512,000 (net of income taxes of
$287,000).  Other than the cumulative effect, the accounting change had no
material effect on the results of fiscal year 1995.  Prior to April 1, 1994,
McDermott Incorporated recognized the cost of providing most of these benefits
on a cash basis.

Investments - Effective April 1, 1994, McDermott Incorporated adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities."  The
adoption of SFAS No. 115 resulted in a decrease in the opening balance of
stockholder's equity of $1,480,000 to reflect the net unrealized holding losses
on McDermott Incorporated's investment securities which were previously carried
at amortized cost.  Proceeds, gross realized gains and gross

                                       31
<PAGE>
 
realized losses on sales of available-for-sale securities were approximately
$146,254,000, $3,651,000 and $275,000, respectively for fiscal year 1996 and
proceeds and gross realized losses were $20,283,000 and $320,000, respectively,
in fiscal year 1995.

Foreign Currency Translation
----------------------------

Assets and liabilities of foreign operations, other than operations in highly
inflationary economies, are translated into U. S. Dollars at  current exchange
rates and income  statement items are translated at average exchange rates for
the year.  Adjustments resulting from the translation of foreign currency
financial statements are recorded in a separate component of equity.  Foreign
currency transaction adjustments are reported in income.  Included in Other
Income (Expense) are transaction gains (losses) of $801,000, $(750,000), and
$(384,000) for fiscal years 1997, 1996 and 1995, respectively.

Contracts and Revenue Recognition
---------------------------------

Contract revenues and related costs are principally recognized on a percentage
of completion method for individual contracts or components thereof based upon
work performed or a cost to cost method, as applicable to the product or
activity involved.  Revenues and related costs so recorded, plus accumulated
contract costs that exceed amounts invoiced to customers under the terms of the
contracts, are included in Contracts in Progress.  Billings that exceed
accumulated contract costs and revenues and costs recognized under percentage of
completion are included in Advance Billings on Contracts.  Most long-term
contracts have provisions for progress payments.  There are no unbilled revenues
which will not be billed.  Contract price and cost estimates are reviewed
periodically as the work progresses and adjustments proportionate to the
percentage of completion are reflected in income in the period when such
estimates are revised.  Provisions are made currently for all known or
anticipated losses.  Variations from estimated contract performance could result
in a material adjustment to operating results for any fiscal quarter or year.
Claims for extra work or changes in scope of work are included in contract
revenues when collection is probable.  Included in Accounts Receivable and
Contracts in Progress are approximately $39,346,000 and $46,627,000 relating to
commercial and U. S. Government contracts claims whose final settlement is
subject to future determination through negotiations or other procedures which
had not been completed at March 31, 1997 and 1996, respectively.

<TABLE>
<CAPTION>
                                                     1997      1996
                                                   --------  --------
                                                     (In thousands)
<S>                                                <C>       <C>
Included in Contracts in Progress are:
Costs Incurred less costs of revenue recognized    $ 51,775  $ 34,017
Revenues recognized less billings to customers      192,456   250,082
--------------------------------------------------------------------- 
Contracts in Progress                              $244,231  $284,099
=====================================================================
</TABLE> 

                                       32
<PAGE>
 
<TABLE>
<CAPTION>
                                                    1997       1996
                                                  ---------  --------
                                                     (In thousands)
<S>                                               <C>        <C>
Included in Advance Billings on Contracts are:
Billings to customer less revenues recognized     $130,428   $154,121
Costs incurred less cost of revenue recognized     (20,692)    (4,876)
----------------------------------------------------------------------
Advance Billings on Contracts                     $109,736   $149,245
======================================================================
</TABLE> 

McDermott Incorporated is usually entitled to financial settlements relative to
the individual circumstances of deferrals or cancellations of Power Generation
Systems and Equipment contracts.  McDermott Incorporated does not recognize such
settlements or claims for additional compensation until final settlement is
reached.

Included in accounts receivable - trade are amounts representing retainages on
contracts as follows:

<TABLE> 
<CAPTION> 
                                                         1997            1996
                                                     ------------    ------------
                                                           (In thousands)
<S>                                                  <C>             <C> 
Retainages                                             $51,623          $46,181
=================================================================================
Retainages expected to be collected after one year     $29,159          $17,699
=================================================================================
</TABLE> 

Of its long-term retainages at March 31, 1997, McDermott Incorporated
anticipates collection of $21,095,000 in fiscal year 1999, $7,525,000 in fiscal
year 2000 and $539,000 in fiscal year 2001.

Inventories
-----------

Inventories are carried at the lower of cost or market.  Cost is determined on
an average cost basis except for certain materials inventories, for which the
last-in-first-out (LIFO) method is used.  The cost of approximately 12% and 17%
of total inventories was determined using the LIFO method at March 31, 1997 and
1996, respectively.  Inventories at March 31, 1997 and 1996 are summarized
below:

<TABLE>
<CAPTION>
                                                       1997          1996
                                                      -------       -------
                                                         (In thousands)
<S>                                                   <C>           <C>
Raw Materials and Supplies                            $44,395       $39,604
Work in Progress                                        8,498         8,694
Finished Goods                                          7,001        12,830
--------------------------------------------------------------------------- 
                                                      $59,894       $61,128
===========================================================================
</TABLE> 

Warranty Expense
----------------

Estimated warranty expense which may be required to satisfy contractual
requirements, primarily of the Power Generation Systems and Equipment segment,
is accrued relative to

                                       33
<PAGE>
 
revenue recognition on the respective contracts.  In addition, specific
provisions are made where the costs of warranty are expected to significantly
exceed such accruals.

Environmental Clean-up Costs
----------------------------

McDermott Incorporated accrues for future decommissioning of its nuclear
facilities that will permit the release of these facilities to unrestricted use
at the end of each facility's life, which is a condition of its licenses from
the Nuclear Regulatory Commission, except for one facility which has provisions
in its government contracts pursuant to which all of its decommissioning costs
are covered by the U.S. Government.  Such accruals, based on the estimated cost
of those activities, are over the economic useful life of each facility, which
is estimated at 40 years.

Research and Development
------------------------

The cost of research and development which is not performed on specific
contracts is charged to operations as incurred.  Such expense was approximately
$14,842,000, $21,491,000 and $19,455,000 in fiscal years 1997, 1996 and 1995,
respectively.  In addition, expenditures on research and development activities
of approximately $34,170,000, $45,106,000 and $44,240,000 in fiscal years 1997,
1996 and 1995, respectively, were paid for by customers of McDermott
Incorporated.

Depreciation, Maintenance and Repairs
-------------------------------------

Property, plant and equipment is depreciated on the straight-line method, using
estimated economic useful lives of 8 to 40 years for buildings and 2 to 28 years
for machinery and equipment.  Maintenance, repairs and renewals which do not
materially prolong the useful life of an asset are expensed as incurred.

Amortization of Excess of Cost Over Fair Value of Net Assets of Purchased
-------------------------------------------------------------------------
Businesses
----------

Excess of the cost over fair value of net assets of purchased businesses
primarily pertains to the acquisition of The Babcock & Wilcox Company, which is
being amortized on a straight-line basis over 40 years and the acquisition of
McDermott Engineers and Constructors (Canada) Ltd. which is being amortized on a
straight-line basis over 10 years.  Management periodically reviews goodwill to
access recoverability, and impairments would be recognized in operating results
if permanent diminution in value were to occur.

Capitalization of Interest Cost
-------------------------------

In fiscal years 1997, 1996 and 1995, total interest cost incurred was
$56,428,000, $53,511,000 and $43,919,000, respectively, of which $107,000,
$601,000 and $2,583,000, respectively, was capitalized.

Cash Equivalents
----------------
Cash equivalents are highly liquid investments, with maturities of three months
or less when purchased.

                                       34
<PAGE>
 
Derivative Financial Instruments
--------------------------------

Derivatives, primarily forward exchange contracts, are utilized to minimize
exposure and reduce risk from foreign exchange fluctuations in the regular
course of business.  Gains and losses related to qualifying hedges of firm
commitments are deferred and are recognized in income or as adjustments of
carrying amounts when the hedged transactions occur.  Gains and losses on
forward exchange contracts which hedge foreign currency assets or liabilities
are recognized in income as incurred.  Such amounts effectively offset gains and
losses on the foreign currency assets or liabilities that are hedged.

NOTE 2 - SALE OF MARINE CONSTRUCTION SERVICES BUSINESS

In connection with the merger of Offshore Pipelines, Inc. into J. Ray McDermott,
S.A. ("JRM"), a subsidiary of International, on January 31, 1995, McDermott
Incorporated sold a portion of its marine construction services business having
a net book value of $187,622,000 (which included property, plant and equipment
of $190,780,000) to International and received marketable securities having an
aggregate fair value of $230,173,000.  The excess of the sales price over the
net book value of net assets sold to International of $29,015,000 (net of tax of
$13,536,000) was included in Capital in Excess of Par Value.  Revenues and
operating income, respectively, of the portion of the marine construction
services business sold were $243,959,000 and $7,324,000 in fiscal year 1995.

NOTE 3 - ACQUISITION

During fiscal year 1996, McDermott Incorporated acquired the assets of Joy
Environmental Technologies, which specialized in technologies used by electric
utilities and other industrial companies to comply with clean air regulations.
The purchase price was $13,083,000 of which approximately $6,457,000 was
assigned to excess of cost over fair value of net assets acquired and is being
amortized over a period of twenty years.  Operating results have been included
in the Consolidated Statement of Loss from the acquisition date.  Pro forma
results of operations have not been presented because the effects were not
significant.

NOTE 4 - INVESTMENTS IN JOINT VENTURES AND OTHER ENTITIES

Investments in entities which are accounted for on the equity method were
$31,434,000 and $37,958,000 at March 31, 1997 and 1996, respectively.
Transactions with entities for which investments are accounted for on the equity
method included sales to ($22,043,000, $37,487,000 and $7,166,000 in fiscal
years 1997, 1996 and 1995, respectively) and purchases from ($11,921,000,
$378,000 and $195,000 in fiscal years 1997, 1996 and 1995, respectively) these
entities.  Included in Accounts receivable - trade at March 31, 1997 and 1996
are $2,390,000 and $487,000, respectively of receivables from unconsolidated
affiliates.  Included in Accounts payable at March 31, 1997 and 1996 are $39,000
and $1,313,000, respectively of payables to unconsolidated affiliates.
Dividends received from unconsolidated investees were $12,702,000, $39,734,000
and $9,681,000 in fiscal years 1997, 1996 and 1995, respectively.  Undistributed
earnings in unconsolidated affiliates accounted for by the equity method were
$15,700,000 and $13,523,000, respectively, at March 31, 1997 and 1996.

                                       35
<PAGE>
 
Summarized combined balance sheet and income statement information based on the
most recent financial information for investments in entities accounted for by
the equity method are presented below:

<TABLE>
<CAPTION>
                                                             1997             1996
                                                           --------         --------
                                                                (In thousands)
<S>                                                        <C>              <C>
Current Assets                                             $ 69,087         $ 61,685
Non-Current Assets                                          259,108          266,017
------------------------------------------------------------------------------------ 
   Total Assets                                            $328,195         $327,702
Current Liabilities                                        $ 50,501         $ 29,881
Non-Current Liabilities                                     196,112          199,498
Owners' Equity                                               81,582           98,323
------------------------------------------------------------------------------------ 
Total Liabilities and Owners'                                       
     Equity                                                $328,195         $327,702
==================================================================================== 
 
                                              1997           1996             1995
                                            --------       --------         --------
                                                        (In thousands) 
Revenues                                    $316,178       $119,753         $221,438
Gross Profit                                $ 34,124       $ 38,343         $ 67,116
Income before Provision for Income Taxes    $ 35,225       $ 92,734         $ 32,729
Provision for Income Taxes                     3,935          4,843            3,581
------------------------------------------------------------------------------------ 
   Net Income                               $ 31,290       $ 87,891         $ 29,148
====================================================================================
</TABLE> 

                                       36
<PAGE>
 
NOTE 5 - INCOME TAXES

Deferred income taxes reflect the net tax effects of temporary differences
between the financial and tax bases of assets and liabilities.  Significant
components of deferred tax assets and liabilities as of March 31, 1997 and 1996
were as follows:

<TABLE>
<CAPTION>
                                                             1997      1996
                                                           --------  ---------
                                                             (In thousands)
<S>                                                        <C>       <C>
Deferred tax assets:
 Accrued warranty expense                                  $ 15,915  $ 13,725
 Accrued vacation pay                                         8,013     8,227
 Accrued liabilities for self-insurance (including
     postretirement health care benefits)                   162,481   166,467
 Accrued liabilities for executive and
  employee incentive compensation                            15,397    14,884
 Investments in joint ventures and affiliated companies       6,705     8,014
 Environmental and products liabilities                     434,852   344,839
 Other                                                       29,522    22,443
------------------------------------------------------------------------------ 
  Total deferred tax assets                                 672,885   578,599
------------------------------------------------------------------------------
 Valuation allowance for deferred tax assets                (53,192)  (14,673)
------------------------------------------------------------------------------
 Deferred tax assets -net                                   619,693   563,926
------------------------------------------------------------------------------
Deferred tax liabilities:
 Property, plant and equipment                              19,419     29,917
 Prepaid pension costs                                     101,982     99,997
 Investments in joint ventures and affiliated companies     10,483     11,261
 Insurance recoverable                                     353,579    282,065
 Other                                                       4,028      1,867
------------------------------------------------------------------------------ 
 Total deferred tax liabilities                            489,491    425,107
------------------------------------------------------------------------------
 Net deferred tax assets                                 $ 130,202  $ 138,819
------------------------------------------------------------------------------
</TABLE> 

Loss before benefit from income taxes and cumulative effect of accounting
changes was as follows:

<TABLE>
<CAPTION> 

                                          1997           1996          1995
                                        ---------      --------      ---------
                                                    (In thousands)
<S>                                    <C>             <C>          <C> 

U. S.                                  $(156,922)      $  (33,241)  $(120,005)
Other than U. S.                         (43,469)             829      16,736
------------------------------------------------------------------------------ 
                                       $(200,391)      $  (32,412)  $(103,269)
==============================================================================
</TABLE> 

                                       37
<PAGE>
 
The benefit from income taxes consists of:
                                                1997          1996      1995
                                              ---------     --------  ---------
                                                       (In thousands)
Current:
 Federal                                      $(29,113)  $  (18,163)  $(36,266)
 State and local                                (2,301)      (3,810)    (4,405)
 Foreign                                        (2,789)       6,343      9,413
-------------------------------------------------------------------------------
 
   Total current                               (34,203)     (15,630)   (31,258)
-------------------------------------------------------------------------------
Deferred:
 Federal                                        14,398       14,703        916
 State and local                                   723       (3,009)     2,776
 Foreign                                        (6,504)      (1,333)    (1,823)
-------------------------------------------------------------------------------
  Total deferred                                 8,617       10,361      1,869
-------------------------------------------------------------------------------
  Benefit from Income Taxes                   $(25,586)  $   (5,269)  $(29,389)
===============================================================================

The effective income tax rate is reconciled to the statutory federal income tax
rate as follows:

<TABLE>
<CAPTION>
 
                                                 1997        1996       1995    
                                               PERCENT      PERCENT    PERCENT  
                                               --------     --------   -------- 
<S>                                            <C>          <C>         <C>   
Statutory federal tax rate                       (35.0)       (35.0)     (35.0) 
State and local income tax effect                  0.2         (8.5)      (0.6) 
Foreign operations                                 2.2         10.6        1.3
Excess of cost over fair value of                                               
   net assets of purchased businesses              2.1          7.3        2.3  
Non-deductible business expenses                   0.6          4.9        1.2  
Dividends from affiliates                          0.9          1.7        1.8  
Minority interest                                 (1.1)        (6.9)      (0.5) 
Federal valuation allowance                       16.3          3.8        1.1  
Other                                              1.0          5.8       (0.1) 
-------------------------------------------------------------------------------
Effective Income Tax Rate                        (12.8)       (16.3)     (28.5) 
===============================================================================
</TABLE> 

Undistributed earnings of foreign subsidiaries amounted to approximately
$38,000,000 at March 31, 1997.   These earnings are considered to be
indefinitely reinvested and, accordingly, no provision for U.S. federal and
state and local income taxes has been provided.  Upon distribution of those
earnings, McDermott Incorporated would be subject to both U.S. income taxes
(subject to an adjustment for foreign tax credits) and withholding taxes payable
to the foreign jurisdictions.  The unrecognized deferred income tax liability is
estimated to be approximately $14,900,000.  Withholding taxes of $3,500,000
would be payable upon remittance of all previously unremitted earnings at March
31, 1997.

During fiscal year 1995, settlements were reached with the Internal Revenue
Service ("IRS") concerning McDermott Incorporated's U.S. income tax liability
for the fiscal years ended March 31, 1983 through March 31, 1988 disposing of
all U.S. Federal income tax issues for

                                       38
<PAGE>
 
those years.  These settlements resulted in a reduction in accrued interest
expense of $26,300,000 during fiscal year 1995.  The IRS has issued notices for
fiscal years ended March 31, 1989 and March 31,1990 asserting deficiencies in
the amount of taxes reported.  The deficiencies are based on issues
substantially similar to those of earlier years.  McDermott Incorporated
believes that any income taxes ultimately assessed will not exceed amounts
already provided.

NOTE 6 - RELATED PARTY TRANSACTIONS

McDermott Incorporated has material transactions with International and its
other subsidiaries occurring in the normal course of operations.  Transactions
which are included in McDermott Incorporated's revenues include the sales of
engineering and design services and fabrication services ($12,838,000,
$40,718,000, and $13,257,000 in fiscal years 1997, 1996 and 1995 respectively)
and the leasing of equipment ($4,215,000 in fiscal year 1995).  Other
transactions include the allocation of general and administrative and other
costs to International ($21,488,000, $11,900,000 and $7,309,000 in fiscal years
1997, 1996 and 1995, respectively), placing certain insurance coverage (at
prices determined on an annual basis of $4,287,000, $15,213,000, and $28,024,000
in fiscal years 1997, 1996 and 1995, respectively) through commercial insurance
carriers which in turn substantially reinsure such exposure to a wholly-owned
subsidiary of International, and the management of certain of the investments of
McDermott Incorporated and its pension plans by a wholly-owned subsidiary of
International for which McDermott Incorporated paid fees of $2,746,000,
$2,901,000 and $2,949,000 in fiscal years 1997, 1996 and 1995, respectively.

McDermott Incorporated had sales to unconsolidated affiliates of International
of $5,649,000, $6,138,000 and $3,226,000 in fiscal years 1997, 1996 and 1995,
respectively.  Purchases from these affiliates were $19,021,000, $29,538,000 and
$11,236,000 in fiscal years 1997, 1996 and 1995, respectively.  Included in
Accounts receivable - trade at March 31, 1997 and 1996 are $2,887,000 and
$6,613,000, respectively of receivables due from unconsolidated affiliates of
International.  Included in non-current Other Assets at March 31, 1997 and 1996
are $5,976,000 and $4,766,000, respectively of receivables from these
affiliates.  Included in Accounts payable at March 31, 1997 and 1996 are
$3,204,000 and $7,879,000, respectively, of payables to these affiliates.

During fiscal year 1997, McDermott Incorporated sold certain property, plant and
equipment having a net book value of $1,440,000 to International for $8,602,000.
The excess of the sales price over the net book value of net assets sold to
International of $4,655,000 (net of tax of $2,507,000) was included in Capital
in Excess of Par Value.

McDermott Incorporated and MIICO are parties to an agreement pursuant to which
McDermott Incorporated may borrow up to $150,000,000.  At March 31, 1996,
McDermott Incorporated had borrowed $65,363,000 against this agreement.  There
were no borrowings against this agreement at March 31, 1997.

Under a reorganization during the fiscal year ended March 31, 1983,
International became the parent of the McDermott group of companies, which
includes McDermott Incorporated which prior to the reorganization was the parent
company.  McDermott Incorporated's investment in International represents its
right to the undistributed earnings of International existing at the

                                       39
<PAGE>
 
time of the reorganization less subsequent distributions by International to
McDermott Incorporated.  In order to preserve  McDermott Incorporated's right to
the undistributed earnings and provide for the distribution of such earnings to
McDermott Incorporated should either McDermott Incorporated or International
elect not to keep these earnings invested with International, McDermott
Incorporated retained its ownership of 100,000 shares of International Common
Stock, received 100,000 shares of International Series A Participating Preferred
Stock and 100,000 shares of International Series B Non-Voting Preferred Stock,
and entered into a stock purchase and sale agreement with International (the
"Intercompany Agreement").  Both Series A and Series B Preferred Stocks have
certain rights in the event of liquidation of International.  Series B Preferred
Stock is currently callable by International at $275 per share and 10,000 shares
are to be redeemed by International each year at $250 per share. Such redemption
began in November 1992.  The Series A and Series B Preferred Stocks are entitled
to annual per share dividends of $10 (but no more than ten times the amount of
per share dividends paid by International on its Common Stock) and $20,
respectively, and such dividends are cumulative to the extent not paid.  Shares
of Series A Preferred Stock are also entitled to additional dividends whenever
dividends in excess of $3 per International Common Share are declared in any
fiscal year.  Dividends and proceeds from redemption of Series B Preferred Stock
received from International have been accounted for as a reduction of McDermott
Incorporated's investment in International.

Pursuant to the Intercompany Agreement, McDermott Incorporated  has the right to
sell to International and International has the right to buy from McDermott
Incorporated, 100,000 units, each unit consisting of one share of International
Common Stock and one share of International Series A Participating Stock, at a
price based primarily upon the stockholders' equity of McDermott International
at the close of the fiscal year preceding the date at which the right to sell or
buy, as the case may be, is exercised, and, to a limited extent, upon the price-
to-book value of the Dow Jones Industrial Average.  If a unit is sold to
International upon McDermott Incorporated's exercise of its right to sell under
the Intercompany Agreement, the purchase price of such unit will be 90% of the
then current value of the unit (the "current unit value").  If a unit is sold to
International pursuant to an exercise by International of its right to purchase
under the Intercompany Agreement, the purchase price of such unit will be 110%
of the current unit value.  At April 1, 1997, the current unit value was $1,602
and the aggregate current unit value for  McDermott Incorporated's 100,000 units
was $160,206,000.  Both parties intend to preserve McDermott Incorporated's
right to the undistributed earnings by not exercising any rights under the
Intercompany Agreement that would result in a loss to McDermott Incorporated.
The net proceeds to McDermott Incorporated from the exercise of any rights under
the Intercompany Agreement would be subject to U.S. federal, state and other
applicable taxes.  No tax provisions have been established, since there is no
present intention by either party to exercise such rights.

McDermott Incorporated maintains the Thrift Plan for Employees of McDermott
Incorporated and Participating Subsidiary and Affiliated Companies (the "Thrift
Plan"), which is a defined contribution plan that includes a cash or deferred
arrangement.  Monthly employer contributions are equal to 50% of the first 6% of
compensation (as defined in the plan) contributed by participants, and may be
made, at the discretion of McDermott Incorporated, in cash or in common stock of
International.  When monthly employer contributions are made in stock, McDermott
Incorporated pays cash to International and shares of common stock are issued to
the Thrift Plan from the authorized but unissued share capital of International.
The

                                       40
<PAGE>
 
number of such shares is determined based on the closing price on the last
business day of the month as reported on the New York Stock Exchange Composite
Tape with fractional shares paid in cash.  During fiscal years 1997, 1996 and
1995, respectively, 306,089, 300,951 and 312,883 shares were purchased by
McDermott Incorporated for $6,030,000, $6,347,000 and $7,713,000.

<TABLE>
<CAPTION>
 
NOTE 7 - LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt consists of:                                 1997      1996
                                                          --------  --------
                                                           (In thousands)
<S>                                                       <C>       <C> 
Unsecured Debt:
  Series A Medium-Term Notes (maturities ranging
    from 1 to 6 years; interest at various
    rates ranging from 7.92% to 9.00%)                    $ 75,000  $ 75,000
  Series B Medium-Term Notes (maturities ranging
    from 2 to 26 years; interest at various
    rates ranging from 6.50% to 8.75%)                     101,000   101,000
  9.375% Notes due 2002 ($225,000,000 principal value)     224,598   224,538
  Other notes payable through 2009 (interest at
    various rates ranging to 10.0%)                         19,170    19,310
Secured Debt:
  Other notes payable through 2012 and
    capitalized lease obligations                            5,087     5,346
----------------------------------------------------------------------------
                                                           424,855   425,194
Less: Amounts due within one year                           45,368     1,312
----------------------------------------------------------------------------
                                                          $379,487  $423,882
============================================================================

Notes payable and current maturities of long-term debt consist of:

                                                            1997      1996
                                                          --------  --------
                                                            (In thousands)

Short-term lines of credit - unsecured                    $174,555  $108,314
Secured borrowings                                          93,769         -
Current Maturities of long-term debt                        45,368     1,312
----------------------------------------------------------------------------
                                                          $313,692  $109,626
============================================================================
Weighted average interest rate on short-term borrowings       6.26%     5.97%
============================================================================
</TABLE> 

The Indenture for the 9.375% Notes due 2002 and the Series A and B Medium Term
Notes contain certain covenants which restrict the amount of funded indebtedness
that McDermott Incorporated may incur, and place limitations on certain
restricted payments, certain transactions between affiliates, the creation of
certain liens and the amendment of the Intercompany Agreement.

                                       41
<PAGE>
 
Maturities of long-term debt during the five fiscal years subsequent to March
31, 1997 are as follows:  1998 - $45,368,000; 1999 - $27,196,000; 2000 -
$30,672,000; 2001 -$34,000; 2002 - $224,633,000.

McDermott Incorporated is restricted, as a result of covenants in certain credit
agreements, in its ability to transfer funds to International and its
subsidiaries through cash dividends or through unsecured loans or investments.
Substantially all of the net assets of McDermott Incorporated are subject to
such restrictions.  At March 31, 1997, the most restrictive of these covenants
with respect to the payment of dividends by McDermott Incorporated would
prohibit the payment of dividends other than the current dividends on existing
preferred stock.

The Babcock & Wilcox Company has an agreement  with a U. S. bank, whereby it can
sell with limited recourse, an undivided interest in a designated pool of
qualified accounts receivable.  Under the terms of the agreement, new
receivables are added to the pool as collections reduce previously sold accounts
receivable.  The maximum sales limit under the agreement was reduced during
fiscal year 1997 from $140,000,000 to $125,000,000. At March 31, 1997
approximately $93,769,000 of receivables had been sold under this agreement and
are accounted for as secured borrowings in the accompanying balance sheet.  At
March 31, 1996 approximately $107,000,000 had been sold and were accounted for
as a reduction of accounts receivable in the accompanying balance sheet.
Included in Other-net expense were expenses which represent bank fees and
discounts of $4,737,000, $8,518,000 and $9,709,000 in fiscal years 1997, 1996
and 1995, respectively, on receivables accounted for as sales.  Discounts were
based on the bank's cost of issuing commercial paper and bank fees were a fixed
amount based on the maximum limit which would be sold.

At March 31, 1997 and 1996, McDermott Incorporated had available various
uncommitted short-term lines of credit from banks totalling $134,695,000 and
$285,859,000, respectively. Borrowings against these lines of credit at March
31, 1997 and 1996 were $24,555,000 and $58,314,000, respectively.  In addition,
at March 31, 1997 and 1996, respectively,  there were borrowings of $150,000,000
and $50,000,000 under the $150,000,000 unsecured and committed revolving credit
facility of The Babcock & Wilcox Company (the "B&W Revolver").  During May and
June 1997, The Babcock & Wilcox Company repaid all amounts outstanding under the
B&W Revolver primarily with the proceeds of a loan of $115,000,000 from MIICO to
McDermott Incorporated during May 1997. As a condition to borrowing under the
B&W Revolver, The Babcock & Wilcox Company must comply with certain
requirements. In July, 1997, these requirements of the B&W Revolver were amended
so that The Babcock & Wilcox Company may borrow under this facility in the
future.

                                       42
<PAGE>
 
NOTE 8 - PENSION PLANS AND POSTRETIREMENT BENEFITS

Pension Plans - McDermott Incorporated provides retirement benefits, primarily
through non-contributory pension plans, for substantially all of its regular
full-time employees, except certain non-resident alien employees of foreign
subsidiaries who are not citizens of a European Community country or who do not
earn income in the United States, Canada, or the United Kingdom.  Salaried plan
benefits are based on final average compensation and years of service, while
hourly plan benefits are based on a flat benefit rate and years of service.
McDermott Incorporated's funding policy is to fund applicable pension plans to
meet the minimum funding requirements of the Employee Retirement Income Security
Act of 1974 (ERISA) and, generally, to fund other pension plans as recommended
by the respective plan actuary and in accordance with applicable law.  At
January 1, 1997 and 1996, approximately one-half of total plan assets were
invested in listed stocks and bonds.  The remaining assets were held in foreign
equity funds, U.S. Government securities and investments of a short-term nature.

U.S. Pension Plans

The net periodic pension benefit for fiscal years 1997, 1996 and 1995 included
the following components:

<TABLE>
                                                       1997            1996        1995
                                                    ---------       ---------   ---------
                                                                  (In thousands)
<S>                                                 <C>            <C>          <C>
Service cost - benefits earned during the period    $  20,317       $  18,475   $  22,686
Interest cost on projected benefit obligation          69,395          66,282      62,534
Actual return on plan assets                         (147,984)       (212,411)     16,701
Net amortization and deferral                          52,263         119,898    (114,434)
----------------------------------------------------------------------------------------- 
Net periodic pension benefit                        $  (6,009)      $  (7,756)  $ (12,513)
=========================================================================================
</TABLE> 

Due to the sale of a domestic entity, loss before cumulative effect of
accounting change in fiscal year 1995 includes a net after-tax gain of $732,000
resulting from the recognition of a curtailment of a related plan.

                                       43
<PAGE>
 
The following table sets forth the U.S. plans' funded status and amounts
recognized in the consolidated financial statements:

<TABLE> 
<CAPTION> 

                                        Plans for Which            Plans for Which
                                         Assets Exceed              Accumulated
                                          Accumulated                 Benefits
                                           Benefits                 Exceed Assets
                                   ------------------------     -----------------------
                                       1997        1996            1997        1996
                                                      (In thousands)
                                   ----------     ---------     ---------     ---------
<S>                                <C>            <C>           <C>           <C> 
Actuarial present value of
 benefit obligations:
 Vested benefit obligation         $  806,533     $ 763,561     $  30,063     $  30,445
=======================================================================================

 Accumulated benefit obligation    $  870,713     $ 824,121     $  30,063     $  30,445
=======================================================================================
   Projected benefit obligation    $  977,594     $ 930,558     $  31,772     $  33,755
Plan assets at fair value           1,254,944     1,156,121             -             -
---------------------------------------------------------------------------------------  
Projected benefit obligation
 (in excess of) or less
 than plan assets                     277,350       225,563       (31,772)      (33,755)
Unrecognized net (gain) loss          (22,276)       32,286         4,955         5,294 
Unrecognized prior service cost        21,738        13,936         2,862         3,081 
Unrecognized transition asset         (25,873)      (32,342)         (148)         (148) 
Adjustment required
 to recognize minimum
 liability                                  -             -        (5,960)       (4,917)
---------------------------------------------------------------------------------------  
Prepaid pension cost (pension
 liability)                        $  250,939     $ 239,443     $ (30,063)    $ (30,445)
======================================================================================= 
</TABLE> 

The assumptions used in determining the funded status of the U.S. plans were:

<TABLE> 
<CAPTION> 

                                                                     1997   1996   1995
                                                                     -----  -----  -----
<S>                                                                  <C>    <C>    <C> 
Actuarial assumptions:                                         
  Discount rate                                                       7.5%  7.25%  8.25%
---------------------------------------------------------------------------------------
  Rate of increase in future                                   
     compensation levels                                              5.0%   5.0%   5.0%
---------------------------------------------------------------------------------------
  Expected long-term rate of                                   
     return on plan assets                                            8.5%   8.5%   8.5%
---------------------------------------------------------------------------------------
</TABLE> 

Effective April 1, 1995, McDermott Incorporated transferred to JRM an accrued
pension liability of approximately $4,585,000 relating to certain former
employees who are now covered under JRM's plan and transferred to JRM's plan
assets, which were equal to the projected benefit obligation, of approximately
$40,456,000.

                                       44
<PAGE>
 
The change in the discount rate for 1997 decreased the projected benefit
obligation by $23,710,000 at March 31, 1997.

In accordance with the provisions of SFAS No. 87, "Employers' Accounting for
Pensions," McDermott Incorporated recorded, at March 31, 1997 and 1996, an
additional minimum liability of $5,960,000 and $4,917,000, respectively,
resulting in recognition of intangible assets of $3,414,000 and $3,744,000,
respectively, and reductions in stockholder's equity of $1,655,000 and $763,000,
respectively.

The two principal U.S. ERISA pension plans provide that, subject to certain
limitations, any excess assets in such plans would be used to increase pension
benefits if certain events occurred within a 60-month period following a change
in control of International.

Non-U.S Pension Plans

The net periodic pension cost for fiscal years 1997, 1996, and 1996 included the
following components:

<TABLE>
<CAPTION>
                                                      1997       1996       1995
                                                    ---------  ---------  --------
                                                            (In thousands)
<S>                                                 <C>        <C>        <C>
Service cost - benefits earned during the period    $  2,832   $  2,468   $ 2,403
Interest cost on projected benefit obligation          6,425      6,068     5,518
Actual return on plan assets                         (15,317)   (16,579)   (3,554)
Net amortization and deferral                          7,188      9,669    (3,859)
---------------------------------------------------------------------------------
Net periodic pension cost                           $  1,128   $  1,626   $   508
=================================================================================
</TABLE> 

Due to a curtailment of a foreign pension plan, net loss includes a loss of
$1,584,000 for fiscal year 1997.

                                       45
<PAGE>
 
The following table sets forth the non-U.S. plans' funded status (assets exceed
accumulated benefits) and amounts recognized in the consolidated financial
statements:
                                                        1997          1996
                                                      ---------     --------
                                                          (In thousands)
Actuarial present value of benefit obligations:
 Vested Benefit Obligation                            $  78,987     $ 72,481
============================================================================
 Accumulated Benefit Obligation                       $  80,532     $ 74,219
============================================================================
 Projected Benefit Obligation                         $  89,877     $ 84,294
Plan assets at fair value                               103,070       89,270
----------------------------------------------------------------------------  
Plan assets in excess of projected benefit obligation    13,193        4,976
Unrecognized net loss                                     4,221       15,169
Unrecognized prior service cost                           3,439        4,262
Unrecognized transition asset                            (5,129)      (7,510)
---------------------------------------------------------------------------- 
Net prepaid pension cost                              $  15,724     $ 16,897
============================================================================

The assumptions used in determining the funded status of the non-U.S. plans
were:

                                                    1997      1996      1995
                                                    ----      ----      ----
Actuarial assumptions:
 Discount rate                                     7.75%  7.75-8.25%  8.0-8.25%
------------------------------------------------------------------------------
 Rate of increase in future compensation levels     5.0%        5.0%       5.0%
------------------------------------------------------------------------------
 Expected long-term rate of return on plan assets   8.5%        8.5%   8.5-9.0%
------------------------------------------------------------------------------

The changes in the discount rate for 1997 increased the projected benefit
obligation at March 31, 1997 by $4,166,000.

Multiemployer Plans - One of McDermott Incorporated's subsidiaries contributes
to various multiemployer plans.  The plans generally provide defined benefits to
substantially all unionized workers in this subsidiary.  Amounts charged to
pension cost and contributed to the plans were $4,552,000, $4,441,000, and
$9,838,000 in fiscal years 1997, 1996 and 1995, respectively.

Postretirement Health Care and Life Insurance Benefits - McDermott Incorporated
offers postretirement health care and life insurance benefits to substantially
all of its retired regular full-time employees, including those associated with
discontinued operations, except certain non-resident alien retired employees who
are not citizens of a European Community country or who, while employed, did not
earn income in the United States, Canada or the United Kingdom.  McDermott
Incorporated shares the cost of providing these benefits with all

                                       46
<PAGE>
 
affected retirees, except for certain life insurance plans.  Postretirement
health care and life insurance benefits are offered under separate defined
benefit postretirement plans to union and non-union employees.  The health care
plans are contributory and contain cost-sharing provisions such as deductibles
and coinsurance; the life insurance plans are contributory and non-contributory.
McDermott Incorporated does not fund any of its plans.

The following table sets forth the amounts recognized in the consolidated
financial statements at March 31:

                                                   1997                1996
                                                 --------            --------
                                                        (In thousands)
Accumulated Postretirement Benefit Obligation:
 Retirees                                        $284,067            $335,213   
 Fully eligible active participants                20,303              15,725 
 Other active plan participants                    42,318              63,904 
-----------------------------------------------------------------------------  
                                                  346,688             414,842 
Unrecognized net gain (loss)                       58,187              (9,907)
----------------------------------------------------------------------------- 
Accrued postretirement benefit cost              $404,875            $404,935 
============================================================================= 
Weighted-average discount rate                       7.50%               7.25%
=============================================================================  

The accumulated postretirement benefit obligation includes $307,129,000 and
$373,027,000 for health care plans and $39,559,000 and $41,815,000 for life
insurance plans at March 31, 1997 and 1996, respectively.  The changes in the
accumulated postretirement benefit obligation and the unrecognized net gain
(loss) at March 31, 1997 were primarily attributable to a decrease in the health
care cost trend rate and an increase in the discount rate.

Net periodic postretirement benefit cost for fiscal years 1997, 1996 and 1995
included the following components:


                                                   1997      1996      1995   
                                                 -------   --------   ------- 
                                                         (In thousands)
Service cost                                      $ 3,414   $ 3,120   $ 4,488 
Interest cost                                      28,584    29,895    31,659 
Net amortization and deferral                         705    (1,370)    2,944 
-----------------------------------------------------------------------------
Net periodic postretirement benefit cost          $32,703   $31,645   $39,091
=============================================================================   

For measurement purposes, a weighted-average annual assumed rate of increase in
the per capita cost of covered health care claims of 7-1/2% was assumed for
1997, 10-3/4% for 1996 and 11-1/2% for 1995.  For 1998, a rate of 6-1/2% was
assumed.  The rate was assumed to decrease gradually to 4% in 2005 and remain at
that level thereafter.  The health care cost trend rate assumption has a
significant effect on the amounts reported.  For example, increasing the assumed
health care cost trend rates by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of March 31, 1997 by
$20,223,000 and the aggregate of the service cost and interest cost components
of net periodic postretirement benefit costs for fiscal year 1997 by $2,374,000.

                                       47
<PAGE>
 
NOTE 9 - IMPAIRMENT OF LONG LIVED ASSETS

During the quarter ended March 31, 1997 management identified certain long-lived
assets that are no longer expected to recover their entire carrying value
through future cash flows.  The assets include a manufacturing facility and
related equipment and goodwill of $5,631,000 in the power generation segment.
Fair value was generally determined based on sales prices of comparable assets.
The impairment loss to write the property, plant and equipment down to estimated
fair value and to write off related goodwill totaled $15,957,000.

During the quarter ended September 30, 1996, management began marketing a
building and land which is currently used as office space.  As a result, an
impairment loss of $7,295,000 was recognized to reduce the property to its
estimated fair value less the cost to sell.  Prior to recognition of the
impairment loss, the carrying value of the land and building was approximately
$15,795,000.  Management expects to sell the land and building within the next
year.

NOTE  10 - STOCK PLANS
Certain officers and employees of McDermott Incorporated participate in benefit
plans of International which involve the issuance of International Common Stock.

Under International's 1996 Officer Long-Term Incentive Plan, a total of
2,069,382 shares of International Common Stock (including approved shares that
were not awarded under predecessor plans) are available for grants to officers
and key employees of options, and rights to purchase shares at March 31, 1997.
Options to purchase shares are granted at not less than 100% of the fair market
value at date of grant, become exercisable at such time or times as determined
when granted, and expire not more than ten years after the date of the grant.
The Plan permits the grant of Nonqualified Stock Options, Incentive Stock
Options and Restricted Stock.  Pursuant to the program, eligible employees may
be granted rights to purchase shares of Common Stock at par value ($1.00 per
share) subject to restrictions on transfer which lapse at such times and
circumstances as specified when granted.  As of March 31, 1997, 800,020 shares
of Common Stock available for award may be granted as rights.

Under International's 1992 Senior Management Stock Option Plan, senior
management employees may be granted options to purchase shares of International
Common Stock.  The total number of shares available for grant is determined by
the Board of Directors of International from time to time.  Options to purchase
shares are granted at not less than 100% of the fair market value on the date of
grant, become exercisable at such time or times as determined when granted, and
expire ten years after the date of grant.

In the event of a change in control of International, both programs have
provisions that may cause restrictions to lapse and accelerate the
exercisability of options outstanding.

McDermott Incorporated and International have elected to follow Accounting
Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its employee stock
options, and not the fair value accounting

                                       48
<PAGE>
 
provided for under SFAS No. 123, "Accounting for Stock-Based Compensation."  Pro
forma results assuming the application of the fair value method of SFAS No. 123
to International's stock-based awards would not be  materially different from
those reported.

The following table summarizes activity for International's stock option plans
as it relates to employees of McDermott Incorporated (share data in thousands):

<TABLE>
<CAPTION>
 
                                1997                 1996                 1995
                         -------------------  -------------------  -------------------
                                     Weighted-            Weighted-            Weighted-
                                     Average              Average              Average
                                     Exercise             Exercise             Exercise
                          Options     Price    Options     Price    Options     Price
                          -------    ------    -------     ------   -------    ------
<S>                      <C>       <C>        <C>       <C>        <C>       <C>
Outstanding, April 1      4,423      $22.71    3,913      $23.22    3,318      $22.59
Granted                     904      $21.65      701      $19.31      808      $25.35
Exercised                   (23)     $17.27      (76)     $18.75     (147)     $20.20
Cancelled/forfeited         (75)     $23.06     (115)     $22.32      (66)     $24.04
-------------------------------------------------------------------------------------                 
Outstanding, March 31     5,229      $22.54    4,423      $22.71    3,913      $23.22
=====================================================================================
Exercisable, March 31     3,399      $22.87    2,899      $22.87    2,633      $22.24
=====================================================================================
</TABLE> 

The following tables summarize the range of exercise prices and the weighted
average remaining contractual life of the International options outstanding and
the range of exercise prices for the options exercisable at March 31, 1997
(share data in thousands):

<TABLE>
<CAPTION>
 
                             Options Outstanding
------------------------------------------------------------------------- 
                                              Weighted
                                               Average
                                              Remaining       Weighted
         Range of                            Contractual      Average
      Exercise Prices           Outstanding      Life      Exercise Price
-------------------------------------------------------------------------
      <S>                         <C>            <C>          <C> 
      $16.06 - $18.19               325          1.9          $16.64
      $19.31 - $24.00             2,788          7.5          $21.19
      $24.13 - $25.50             1,882          6.3          $24.83
      $26.50 - $31.50               234           .7          $28.25
                                  -----
      $16.06 - $31.50             5,229          6.4          $22.54
                                  =====
</TABLE>

                                       49
<PAGE>
 
<TABLE>
<CAPTION>
 
                      Options Exercisable
--------------------------------------------------------                  
                                          Weighted                        
         Range of                          Average                        
      Exercise Prices     Exercisable   Exercise Price                    
--------------------------------------------------------                  
      <S>                   <C>            <C> 
      $16.06 - $18.19         325          $16.64
      $19.31 - $24.00       1,410          $21.57
      $24.13 - $25.50       1,430          $24.71
      $26.50 - $31.50         234          $28.25
                            -----
      $16.06 - $31.50       3,399          $22.87
                            =====
</TABLE>

The fair value on the date of grant of restricted stock awards is amortized over
the vesting period.  Charges to income resulting from restricted stock awards
were $5,141,000, $1,974,000 and $1,630,000 for fiscal years 1997, 1996 and 1995,
respectively.

NOTE 11 - REDEEMABLE PREFERRED STOCKS

At March 31, 1997 and 1996, 13,000,000 shares of McDermott Incorporated
Preferred Stock, with a par value of $1 per share, were authorized.  Of the
authorized shares, 2,818,780 shares of Series A Preferred Stock, and 2,652,660
and 2,726,860 shares of Series B Preferred Stock, respectively, were outstanding
(in each case, exclusive of shares owned by McDermott Incorporated) at March 31,
1997 and 1996.  The outstanding shares are entitled to $31.25 per share in
liquidation.  Both series of Preferred Stock are entitled to general voting
rights of one-half vote for each share.  The Board of Directors of McDermott
Incorporated may authorize additional series of Preferred Stock, and may set
terms of each new series except that McDermott Incorporated cannot create any
series of stock senior to the existing Series A and Series B Preferred Stock
without the consent of the holders of at least 50% of the shares of such
Preferred Stock.

Each share of the outstanding Series A Preferred Stock is convertible into one
share of Common Stock of International plus $0.10 cash.  Series A and Series B
Preferred Stock are redeemable at the option of McDermott Incorporated at $31.25
per share, plus accrued dividends.  On March 31, 1998 and each subsequent year
through March 31, 2008, McDermott Incorporated is obligated to redeem, at a
redemption price of $31.25 plus accrued dividends, 313,878 shares of Series A
Preferred Stock.  On March 31 of fiscal years 1998 through 2006, and March 31 of
fiscal years 2007 and 2008, McDermott Incorporated is obligated to redeem
252,702 and 189,526 shares, respectively, of Series B Preferred Stock.  For the
five fiscal years subsequent to March 31, 1997, the obligation to redeem the
Series A and B Preferred Stock is $17,706,000.  McDermott Incorporated may apply
to the mandatory sinking fund obligations any Series A or B Preferred Stock
reacquired, redeemed or surrendered for conversion which have not been
previously credited against the mandatory sinking fund obligations.  McDermott
Incorporated applied 313,878 shares of Series A Preferred Stock and 252,702
shares of Series B Preferred Stock that it owned to satisfy the March 31, 1997
mandatory sinking fund obligations and 711 shares of Series B Preferred Stock
that it owned to satisfy a portion of the March 31, 1998 mandatory sinking fund
obligations.  During fiscal year 1997 and 1996, 74,200 and 190,376 shares,
respectively, of Series B Preferred Stock were purchased in the open market.  At
March 31, 1997, 49,637

                                       50
<PAGE>
 
shares of Series A Preferred Stock have been converted to date and McDermott
Incorporated owned 633,871 shares of Series A Preferred Stock.

NOTE 12 - CONTINGENCIES AND COMMITMENTS

Litigation - McDermott Incorporated and certain of its officers, directors and
subsidiaries are defendants in numerous legal proceedings.  Management believes
that the outcome of these proceedings will not have a material adverse effect
upon the consolidated financial position of McDermott Incorporated.

Products Liability -  At March 31, 1997 and 1996, the estimated liability for
pending and future non-employee products liability asbestos claims was
$1,082,782,000 (of which approximately $274,000,000 had been asserted) and
$843,986,000 and estimated insurance recoveries were $903,913,000 and
$723,243,000, respectively.  The number of non-employee claims, which had
declined moderately since fiscal year 1990, increased during the second half of
fiscal year 1995 and the first half of fiscal year 1996, but decreased during
the second half of fiscal year 1996.  Based on information then currently
available, management believed that the increase represented an acceleration in
the timing of receipt of claims but did not represent an increase in the total
liability.  The number of claims, however, increased during the first nine
months of fiscal year 1997 and during that period management was investigating
and evaluating the basis for the increase.  As a result of the investigation and
evaluation, in the fourth quarter of fiscal year 1997 McDermott Incorporated
recorded an additional estimated liability for the future non-employee asbestos
claims of $427,001,000, estimated related insurance recoveries of $354,601,000
and a loss of $72,400,000 for estimated future claims for which recovery from
insurers was not determined to be probable.  During fiscal year 1995, McDermott
Incorporated received notice that provisional liquidators had been appointed to
a London-based products liability asbestos insurer and, as a result, a loss of
$14,478,000 related to the reduction of estimated insurance recoveries was
recognized.  Estimated liabilities for pending and future non-employee products
liability asbestos claims are derived from McDermott Incorporated's claims
history and constitute management's best estimate of such future costs.
Estimated insurance recoveries are based upon analysis of insurers providing
coverage of the estimated liabilities. Inherent in the estimate of such
liabilities and recoveries are expected trends in claim severity and frequency
and other factors, including recoverability from insurers, which may vary
significantly as claims are filed and settled.  Accordingly, changes in
estimates could result in a material adjustment to operating results for any
fiscal quarter or year and the ultimate loss may differ materially from amounts
provided in the consolidated financial statements.

Environmental Matters - During fiscal year 1995, a decision was made to close
certain nuclear manufacturing facilities and a provision of $41,724,000 for the
decontamination, decommissioning and the closing of these facilities was
recognized.  Previously, decontamination and decommissioning costs were being
accrued over these facilities' remaining expected life.  Decontamination is
proceeding as permitted by the existing Nuclear Regulatory Commission ("NRC")
license.  A decommissioning plan was submitted to the NRC for review and
approval during January 1996.  The Babcock & Wilcox Company ("B&W") expects to
reach an agreement with the NRC in fiscal year 1998 on a plan that provides for
the completion of facilities dismantlement and soil restoration by 2001.  B&W
expects to request approval from the NRC to release the site for unrestricted
use at that time.

                                       51
<PAGE>
 
At March 31, 1997 and 1996, McDermott Incorporated had total environmental
reserves (including provision for the facilities discussed above) of $30,949,000
and $37,578,000, respectively, of which $10,352,000 and $9,824,000 were included
in current liabilities.

McDermott Incorporated has been identified as a potentially responsible party at
various clean up sites under the Comprehensive Environmental Response,
Compensation and Liability Act, as amended.  McDermott Incorporated has not been
determined to be a major contributor of wastes to these sites.  However, each
potentially responsible party or contributor may face assertions of joint and
several liability.  Generally, however, a final allocation of costs is made
based on its relative contribution of wastes to each site.  Based on relative
contribution of waste to each site, McDermott Incorporated's share of the
ultimate liability for the various sites is not expected to have a material
effect on its consolidated financial position or results of operations.

The Department of Environmental Protection of the Commonwealth of Pennsylvania,
("PADEP"), by letter dated March 19, 1994, advised B&W that it would seek
monetary sanctions, and remedial and monitoring relief, related to B&W's
facilities in Parks Township, Armstrong County, Pennsylvania ("Parks
Facilities").  The relief sought related to potential groundwater contamination
related to the previous operations of the facilities.   PADEP has recently
advised B&W that it does not intend to assess any monetary sanctions provided
that B&W continues its remediation program of the Parks Facilities.

Operating Leases - Future minimum payments required under operating leases that
have initial or remaining noncancellable lease terms in excess of one year at
March 31, 1997 are as follows:  1998 - $9,302,000; 1999 - $7,103,000; 2000 -
$5,978,000; 2001 - $4,781,000; 2002 - $3,073,000; and thereafter - $3,481,000.
Total rental expense for fiscal years 1997, 1996 and 1995 was $22,934,000,
$21,937,000 and $52,684,000, respectively.  These expense figures include
contingent rentals and are net of sublease income, both of which are not
material.

Other - International and JRM are conducting an internal investigation, with
the assistance of outside counsel, of wrongdoing by a limited number of former
employees of International and JRM and by others. International and JRM notified
the appropriate authorities in April 1997. In June 1997, International received
a federal grand jury subpoena for documents relating principally to an
investigation of possible anti-competitive activity in the heavy-lift barge
service business of JRM. In July 1997, International received an informal
request from the Securities and Exchange Commission for the voluntary production
of documents. International and JRM are cooperating with the authorities. The
allegations which are the subject of the internal investigation, if true, and
the outcome of the grand jury proceedings, could result in civil and/or criminal
liability. At this time, International and JRM do not have sufficient
information to predict the ultimate outcome of this matter. Subsequent to the
formation of JRM and its acquisition of Offshore Pipelines, Inc., McDermott
Incorporated does not participate in the heavy lift barge service business.

McDermott Incorporated performs significant amounts of work for the U. S.
Government under both prime contracts and subcontracts and thus is subject to
continuing reviews by governmental agencies.

McDermott Incorporated maintains liability and property insurance that it
considers normal in the industry.  However, certain risks are either not
insurable or insurance is available only at rates which McDermott Incorporated
considers uneconomical.

                                       52
<PAGE>
 
McDermott Incorporated is contingently liable under standby letters of credit
totaling $295,380,000 (including $9,710,000 issued on behalf of unconsolidated
joint ventures) at March 31, 1997, issued in the normal course of business.

NOTE 13 - FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT RISK

McDermott Incorporated's Power Generation Systems and Equipment customers are
principally the electric power generation industry (including government-owned
utilities and independent power producers), the U. S. Government (including its
contractors), and the pulp and paper and other process industries, such as oil
refineries and steel mills.  The principal customers of the Marine Construction
Services segment are the large oil and gas companies.  These concentrations of
customers may impact McDermott Incorporated's overall exposure to credit risk,
either positively or negatively, in that the customers may be similarly affected
by changes in economic or other conditions.  However, McDermott Incorporated's
management believes that the portfolio of receivables is well diversified and
that such diversification minimizes any potential credit risk.  Receivables are
generally not collateralized.

McDermott Incorporated believes that its provision for possible losses on
uncollectible accounts receivable is adequate for its credit loss exposure.  At
March 31, 1997 and 1996, the allowance for possible losses deducted from
Accounts receivable-trade on the balance sheet was $13,417,000 and $13,234,000,
respectively.

NOTE 14 - DERIVATIVE FINANCIAL INSTRUMENTS

McDermott Incorporated operates internationally giving rise to exposure to
market risks from changes in foreign exchange rates.  Derivative financial
instruments, primarily forward exchange contracts, are utilized to reduce those
risks.  McDermott Incorporated does not hold or issue financial instruments for
trading purposes.

Forward exchange contracts are entered into primarily as hedges of certain firm
purchase and sale commitments denominated in foreign currencies.  At March 31,
1997, McDermott Incorporated had forward exchange contracts to purchase
$90,686,000 in foreign currencies (primarily Canadian Dollars), and to sell
$48,546,000 in foreign currencies (primarily Canadian Dollars), at varying
maturities from fiscal year 1998 through 2000.  At March 31, 1996, McDermott
Incorporated had forward exchange contracts to purchase $172,599,000 in foreign
currencies (primarily Canadian Dollars), and to sell $70,636,000 in foreign
currencies (primarily Canadian Dollars), at varying maturities from fiscal year
1997 through 2000.

Deferred realized and unrealized gains and losses from hedging firm purchase and
sale commitments are included on a net basis in the balance sheet as a component
of either contracts in progress or advance billings on contracts.  They are
recognized as part of the purchase or sale transaction when it is recognized, or
as other gains or losses when a hedged transaction is no longer expected to
occur.  At March 31, 1997 and 1996, McDermott Incorporated had deferred gains of
$1,278,000 and $4,183,000, respectively, and deferred losses of $363,000 and
$1,059,000, respectively, related to forward exchange contracts which will be
recognized in accordance with the percentage of completion method of accounting.

                                       53
<PAGE>
 
McDermott Incorporated is exposed to credit-related losses in the event of
nonperformance by counterparties to derivative financial instruments, but it
does not anticipate nonperformance by any of these counterparties.  The amount
of such exposure is generally the unrealized gains in such contracts.

NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by McDermott Incorporated in
estimating its fair value disclosures for financial instruments:

Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximates their fair value.

Long and short-term debt: The fair value of debt instruments are based on quoted
market prices or, where quoted prices are not available, on estimated prices
based on current yields for debt issues of similar quality and terms.

Redeemable preferred stocks:  The fair values of the redeemable preferred stocks
are based on quoted market prices.

Foreign currency exchange contracts:  The fair values of foreign currency
forward exchange contracts are estimated by obtaining quotes from brokers.  At
March 31, 1997 and 1996, McDermott Incorporated had net forward exchange
contracts outstanding to purchase foreign currencies with notional values of
$42,140,000 and $101,963,000 and fair values of $48,098,000 and $104,471,000,
respectively.

The estimated fair values of McDermott Incorporated's financial instruments are
as follows:
<TABLE>
<CAPTION>
 
                                         March 31, 1997        March 31, 1996
                                      ---------------------  -------------------
                                      Carrying     Fair       Carrying    Fair
                                       Amount      Value       Amount    Value
                                      --------    --------   ---------  --------
                                                     (In thousands)   
<S>                                   <C>         <C>       <C>       <C>
Balance Sheet Instruments                         
-------------------------
Cash and cash equivalents              $ 56,782   $ 56,782  $ 22,886  $ 22,886
Debt excluding capital leases           692,920    708,306   533,015   570,622
Redeemable preferred stocks             170,983    161,698   173,301   166,362
</TABLE>

                                       54
<PAGE>
 
NOTE 16 - SEGMENT REPORTING

McDermott Incorporated operates in two industry segments - Power Generation
Systems and Equipment and Marine Construction Services.

Power Generation Systems and Equipment's principal businesses are the supply of
fossil-fuel and nuclear steam generating equipment to the electric power
generation industry, and nuclear reactor components and nuclear fuel assemblies
to the U.S. Navy.

Marine Construction Services supplies design, engineering, and project and
construction management services to offshore oil and gas exploration and
production and hydrocarbon processing industries.  This segment also provides
maintenance services to energy related industries.

Intersegment sales are accounted for at prices which are generally established
by reference to similar transactions with unaffiliated customers.  Identifiable
assets by industry segment are those assets that are used in McDermott
Incorporated's operations in each segment.  Corporate assets are principally
cash and cash equivalents and prepaid pension costs.

In fiscal year 1997, export sales accounted for approximately 18% of McDermott
Incorporated's total revenues.  In fiscal years 1997, 1996 and 1995, the U. S.
Government accounted for approximately 19%, 19% and 16%, respectively, of
McDermott Incorporated's total revenues.  These revenues are principally
included in the Power Generation Systems and Equipment segment.

In fiscal year 1997, provision for estimated future non-employee products
liability asbestos claims, the write-down of an equity investment and asset
impairment losses, net of gains on asset disposals, resulted in an increase in
Power Generation and Equipment segment operating loss of $80,140,000.  In fiscal
year 1996, the write-off of an insurance claim due to an unfavorable arbitration
ruling resulted in a decrease in Power Generation Systems and Equipment segment
operating income of $12,600,000.  The provisions for the closing of certain
facilities in fiscal year 1995 resulted in a decrease in Power Generation
Systems and Equipment segment operating income of $46,489,000.

                                       55
<PAGE>
 
Segment Information For the Three Fiscal Years Ended March 31, 1997.

1.  Information about McDermott Incorporated's Operations in Different
    Industry Segments.

<TABLE> 
<CAPTION> 
                                                                1997           1996          1995
                                                                ----           ----          ----
                                                                         (In thousands)
<S>                                                         <C>            <C>          <C>
REVENUES/(1)/ 
--------------
Power Generation Systems
 and Equipment                                               $1,514,112    $1,708,274   $1,663,017
Marine Construction Services/(2)/ /(3)/                         294,162       329,583      559,950
Intersegment Transfer Eliminations                              (12,017)       (9,882)        (577)
---------------------------------------------------------------------------------------------------
      Total Revenues                                         $1,796,257    $2,027,975   $2,222,390
===================================================================================================
OPERATING INCOME (LOSS)
-----------------------
Segment Operating Income (Loss):/(4)/
  Power Generation Systems
 and Equipment                                                $ (85,519)      $21,269      $18,740
  Marine Construction Services/(2)//(3)/                        (23,104)      (23,614)     (31,633)
---------------------------------------------------------------------------------------------------
      Total Segment Operating Loss                             (108,623)       (2,345)     (12,893)
---------------------------------------------------------------------------------------------------
Equity in Income of Investees:
  Power Generation Systems and Equipment                          2,789        31,747        5,856
  Marine Construction Services                                    4,265         4,534        4,478
---------------------------------------------------------------------------------------------------
      Total Equity in Income of Investees                         7,054        36,281       10,334
---------------------------------------------------------------------------------------------------
General Corporate Expenses/(4)/                                 (21,002)      (23,192)     (34,946)
---------------------------------------------------------------------------------------------------
      Total Operating Income (Loss)                         $  (122,571)     $ 10,744     $(37,505)
===================================================================================================
/(1)/ Segment revenues include intersegment transfers as follows:
      Power Generation Systems and Equipment                $       575      $  5,742     $    272
      Marine Construction Services                               11,442         4,140          305
      --------------------------------------------------------------------------------------------- 
      Total                                                 $    12,017      $  9,882     $    577
      ============================================================================================= 
/(2)/ See Note 2 regarding the sale of a portion of the marine construction service business during fiscal year 1995.
/(3)/ In March 1997, this segment' s shipyard facility was sold.  Revenues of $48,575,000, $31,116,000 and $64,399,000
      and Operating Losses of $7,785,000, $1,312,000 and $14,034,000, respectively, in fiscal years 1997, 1996 and 1995,
      relating to the shipyard facilities are included in this segment's results.
/(4)/ Fiscal years 1996 and 1995 have been restated to conform to the 1997 presentation which includes gains and losses on asset
      disposals and impairments in Operating Loss. This restatement decreased Segment Operating Loss by $7,410,000 and $4,084,000,
      respectively, in fiscal years 1996 and 1995, increased General Corporate Expenses by $431,000 in fiscal year 1996 and reduced
      General Corporate Expenses by $26,000 in fiscal year 1995, from amounts previously reported.

</TABLE> 

                                       56
<PAGE>
 
<TABLE>
<CAPTION>
 
                                    1997         1996        1995
                                  -------      -------      -------
                                            (In thousands)
<S>                              <C>         <C>         <C>
CAPITAL EXPENDITURES
--------------------
Power Generation Systems
 and Equipment                   $   23,743  $   27,322  $   45,306
Marine Construction Services          2,270      10,562      25,322
Corporate                               650       1,227       1,165
------------------------------------------------------------------- 
  Total Capital Expenditures     $   26,663  $   39,111  $   71,793
===================================================================
  
DEPRECIATION AND AMORTIZATION
-----------------------------
Power Generation Systems
 and Equipment                   $   40,318  $   41,835  $   34,828
Marine Construction Services          4,257       6,506      30,054
Corporate                             1,416       1,939       1,222
-------------------------------------------------------------------  
  Total Depreciation and
   Amortization                  $   45,991  $   50,280  $   66,104
===================================================================  
 
IDENTIFIABLE ASSETS
-------------------
Power Generation Systems
 and Equipment                   $2,237,227  $2,085,202  $2,078,995
Marine Construction Services         98,684     153,452     236,823
Corporate                           801,259     781,126   1,070,611
-------------------------------------------------------------------  
  Total Identifiable Assets      $3,137,170  $3,019,780  $3,386,429
=================================================================== 
</TABLE> 

                                       57
<PAGE>
 
2. Information about McDermott Incorporated's Operations in Different Geographic
   Areas.
<TABLE>
<CAPTION>
 
                                     1997        1996        1995
                                  ----------  ----------  ----------
                                            (In thousands)
<S>              <C>              <C>         <C>         <C>
 
Revenues/(1)/    - United States  $1,228,593  $1,115,510  $1,455,778
                 - Canada            515,389     890,788     751,214
                 - Other Foreign      52,275      21,677      15,398
--------------------------------------------------------------------
                  Total           $1,796,257  $2,027,975  $2,222,390
====================================================================

Segment Operating
 Income (Loss)
 by  Geographic
 Area /(2)/      - United States  $  (78,209) $  (23,283) $  (36,586)
                 - Canada            (31,405)     18,751      25,639
                 - Other Foreign         991       2,187      (1,946)
-------------------------------------------------------------------- 
                  Total           $ (108,623) $   (2,345) $  (12,893)
====================================================================

Identifiable
 Assets          - United States  $2,115,281  $1,861,367  $1,940,949
                 - Canada            188,298     357,465     348,527
                 - Other Foreign      32,332      19,822      26,342
                 - Corporate         801,259     781,126   1,070,611
-------------------------------------------------------------------- 
                  Total           $3,137,170  $3,019,780  $3,386,429
====================================================================
/(1)/ Net of inter-geographic area revenues in fiscal years 1997, 1996 and 1995
      as follows: United States - $8,462,000, $38,908,000 and $61,797,000;
      Canada- $47,358,000, $16,485,000 and $2,288,000; and Other Foreign -
      $904,000, $79,000 and $151,000, respectively.
/(2)/ Fiscal years 1996 and 1995 have been restated to conform to the fiscal
      year 1997 presentation which includes gains and losses on asset disposals
      and impairments in Operating Loss.  This restatement decreased Segment
      Operating Loss by $7,410,000 and $4,084,000, respectively, in fiscal years
      1996 and 1995, from amounts previously reported.

</TABLE> 

                                       58
<PAGE>
 
NOTE 17 - QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables set forth selected unaudited quarterly financial
information for the fiscal years ended March 31, 1997 and 1996. Operating income
(loss) includes gains and losses on asset disposals and impairments to conform 
with the presentation in the Consolidated Statement of Loss.

<TABLE>
<CAPTION>
 
 
                                                  1997
                           --------------------------------------------------
                                      Q U A R T E R   E N D E D
                           --------------------------------------------------
                            JUNE 30,   SEPT. 30,      DEC. 31,     MARCH 31,
                              1996        1996          1996          1997
                           ----------  ----------  --------------  ----------
                                             (In thousands)
<S>                        <C>         <C>         <C>             <C>
Revenues                    $482,510    $453,662        $424,629   $ 435,456
Operating income (loss)       (5,097)    (11,927)          5,799    (111,346)
Net loss                     (16,323)    (18,480)         (6,553)   (133,449)
 
</TABLE>

Pretax results for the quarter ended September 30, 1996 include an asset
impairment loss of $7,295,000.  Pretax results for the quarter ended December
31, 1996 include favorable workers' compensation cost adjustments of
$12,088,000.  Pretax results for the quarter ended March 31, 1997 include gains
on asset disposals of $11,792,000, a provision of $72,400,000 for estimated
future non-employee products liability asbestos claims, an asset impairment loss
of $15,957,000, the write-down of an equity investment of $14,300,000  and a
provision of $5,396,000 for employee severance costs.

<TABLE>
<CAPTION>
 
 
                                                 1996
                           ------------------------------------------------
                                     Q U A R T E R  E N D E D
                           ------------------------------------------------
                            JUNE 30,   SEPT. 30,     DEC. 31,     MARCH 31,
                           ---------  ----------  -------------  ----------
                             1995        1995         1995          1996
                           ---------  ----------  -------------  ----------
                                            (In thousands)
<S>                        <C>        <C>          <C>            <C>
Revenues                    $505,610   $456,129        $502,217   $564,019
Operating income (loss)       28,527     (5,750)         21,351    (33,384)
Net income (loss)              6,541    (11,131)          2,880    (25,433)
</TABLE>

Pretax results for the quarter ended June 30, 1995 include an equity income gain
of $30,612,000 resulting from the sale of two power purchase contracts.   Pretax
results for the quarter ended December 31, 1995 include a favorable worker's
compensation cost adjustment of $5,746,000.  Pretax results for the quarter
ended March 31, 1996 include the write-off of an insurance claim of $12,600,000
due to an unfavorable arbitration ruling related to the recovery of cost
incurred for corrective action in certain utility and industrial installations.

                                       59
<PAGE>
 
Item 9. DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE


                                      None

                                       60
<PAGE>
 
                                P A R T    I I I

Item 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information required by this item is incorporated by reference to the material
appearing under the headings "Election of Directors" and "Executive Officers" in
the Information Statement for action to be taken by McDermott Incorporated
without a meeting of stockholders on September 2, 1997.

Item 11.   EXECUTIVE COMPENSATION

Information required by this item is incorporated by reference to the material
appearing under the heading "Compensation of Executive Officers" in the
Information Statement for action to be taken by McDermott Incorporated without a
meeting of stockholders on September 2, 1997.

Item 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information required by this item is incorporated by reference to the material
appearing under the headings "Security Ownership of Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners" in the
Information Statement for action to be taken by McDermott Incorporated without a
meeting of stockholders on September 2, 1997.

Item 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information required by this item is incorporated by reference to the material
appearing under the heading "Certain Transactions" in the Information Statement
for action to be taken by McDermott Incorporated without a meeting of
stockholders on September 2, 1997.
 

                                       61
<PAGE>
 
                                  P A R T  I V

Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
 
(a) The following documents are filed as part of this Annual Report or
    incorporated by reference.

1.  CONSOLIDATED FINANCIAL STATEMENTS
     Report of Independent Auditors

     Consolidated Balance Sheet March 31, 1997 and 1996

     Consolidated Statement of Loss For the Three Fiscal Years
       Ended March 31, 1997

     Consolidated Statement of Stockholder's Equity For the Three
       Fiscal Years Ended March 31, 1997

     Consolidated Statement of Cash Flows For the Three Fiscal
       Years Ended March 31, 1997

     Notes to Consolidated Financial Statements For the Three Fiscal
       Years Ended March 31, 1997


2.  CONSOLIDATED FINANCIAL SCHEDULES
     All required schedules will be filed by amendment to this Form 10-K on
     Form 10-K/A.

3.  EXHIBIT INDEX

    Exhibit
    Number                     Description
    ------                     -----------

      3     Articles of Incorporation and By-Laws (Item 3(a) is incorporated by
            reference to Exhibit 3 to McDermott Incorporated's annual report on
            Form 10-K, as amended, for the fiscal year ended March 31, 1983;
            Item 3(b) is incorporated by reference to Exhibit 3 to the Company's
            annual report on Form 10-K for the fiscal year ended March 31,
            1981).

            (a) McDermott Incorporated's Restated Articles of Incorporation

            (b) McDermott Incorporated's By-Laws

 

                                       62
<PAGE>
 
     4    Indentures with respect to certain of McDermott Incorporated's
          long-term debt are not filed as exhibits hereto inasmuch as the
          securities authorized under any such Indenture do not exceed 10% of
          McDermott Incorporated's total assets. McDermott Incorporated agrees
          to furnish a copy of each such Indenture to the Securities and
          Exchange Commission upon request.
 

     10   Material Contracts (Exhibit 10(b) is incorporated by reference to
          Exhibit 10 to McDermott Incorporated's annual report on Form 10-K for
          the fiscal year ended March 31, 1981; Exhibit 10(c) is incorporated by
          reference to Exhibit 10 to McDermott Incorporated's annual report on
          Form 10-K, as amended, for the fiscal year ended March 31, 1983; and
          Exhibit 10(d) is incorporated by reference to Exhibit 10 to McDermott
          Incorporated's annual report on Form 10-K, as amended, for the fiscal
          year ended March 31, 1987; Exhibit 10(e) is incorporated by reference
          to Exhibit 10 to McDermott Incorporated's annual report on Form 10-K
          for the fiscal year ended March 31, 1990).

          (a) Supplemental Executive Retirement Plan

          (b) Restoration of Retirement Income Plan for Certain
              Participants in the Retirement Plan for Employees
              of McDermott Incorporated

          (c) Intercompany Agreement

          (d) Trust for Supplemental Executive Retirement Plan
 
          (e) Variable Supplemental Compensation Plan

     22   Significant Subsidiaries of the Registrant
 
     23   Consent of Independent Auditors
 
     27   Financial Data Schedule


                                FORM 8-K REPORTS

There were no reports on Form 8-K filed during the three months ended March 31,
1997.

 

                                       63
<PAGE>
 
                          SIGNATURES OF THE REGISTRANT

Pursuant to the requirements of Sections 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.

                                        McDERMOTT INCORPORATED
 


July 10, 1997                      By:   /s/ Roger E. Tetrault
                                        -------------------------
                                        Roger E. Tetrault
                                        Chairman of the Board and
                                        Chief Executive Officer


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 and
in the capacities and on the date indicated.


     Signature                             Title
     ---------                             -----


s/Roger E. Tetrault               Chairman of the Board
-------------------               Chief Executive Officer and Director 
Roger E. Tetrault                 (Principal Executive Officer)              
                                                                             



s/Daniel R. Gaubert               Senior Vice President and
-------------------               Chief Financial Officer  
Daniel R. Gaubert                 (Principal Financial and       
                                   Accounting Officer)           
                                                                 


s/Richard E. Woolbert             Director
---------------------
Richard E. Woolbert



s/S. Wayne Murphy                 Director
--------------------
S. Wayne Murphy


July 10, 1997

                                       64
<PAGE>
 
                               INDEX TO EXHIBITS
 
    Exhibit
    Number                                Description
    ------                                -----------

  3   Articles of Incorporation and By-Laws (Item 3(a) is incorporated by
      reference to Exhibit 3 to McDermott Incorporated's annual report on Form
      10-K, as amended, for the fiscal year ended March 31, 1983; Item 3(b) is
      incorporated by reference to Exhibit 3 to the Company's annual report on
      Form 10-K for the fiscal year ended March 31, 1981).
 
      (a) McDermott Incorporated's Restated Articles of Incorporation

      (b) McDermott Incorporated's By-Laws

  4   Indentures with respect to certain of McDermott Incorporated's long-term
      debt are not filed as exhibits hereto inasmuch as the securities
      authorized under any such Indenture do not exceed 10% of McDermott
      Incorporated's total assets.  McDermott Incorporated agrees to furnish a
      copy of each such Indenture to the Securities and Exchange Commission upon
      request.

  10  Material Contracts (Exhibit 10(b) is incorporated by reference to Exhibit
      10 to McDermott Incorporated's annual report on Form 10-K for the fiscal
      year ended March 31, 1981; Exhibit 10(c) is incorporated by reference to
      Exhibit 10 to McDermott Incorporated's annual report on Form 10-K, as
      amended, for the fiscal year ended March 31, 1983; and Exhibit 10(d) is
      incorporated by reference to Exhibit 10 to McDermott Incorporated's annual
      report on Form 10-K, as amended, for the fiscal year ended March 31, 1987;
      Exhibit 10(e) is incorporated by reference to Exhibit 10 to McDermott
      Incorporated's annual report on Form 10-K for the fiscal year ended March
      31, 1990).
 
      (a) Supplemental Executive Retirement Plan

      (b) Restoration of Retirement Income Plan for Certain Participants in the
          Retirement Plan for Employees of McDermott Incorporated
 
      (c) Intercompany Agreement

      (d) Trust for Supplemental Executive Retirement Plan

      (e) Variable Supplemental Compensation Plan

  21  Significant Subsidiaries of the Registrant

  23  Consent of Independent Auditors

  27  Financial Data Schedule