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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the period ended September 30, 2004



OR



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



For the transition period from  to



Commission File Number 000-24263



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CONRAD INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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|                                                                  |  |                                    
|----------------------------------------------------------------- |  | -----------------------------------
|Delaware                                                          |  | 72-1416999                         
|(State of other jurisdiction ofincorporation or organization)     |  | (I.R.S. EmployerIdentification No.)
|                                                                  | 
|1100 Brashear Ave., Suite 200 P.O. Box 790 Morgan City, Louisiana |  | 70381                              
|(Address of principal executive offices)                          |  | (Zip Code)                         



Registrants
telephone number, including area code: (985) 702-0195



---



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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).    Yes ̈No  x



Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date.



As of November 10, 2004, 7,235,954 shares of the registrants Common Stock were outstanding.



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##### Table of Contents

FORM 10-Q



CONRAD INDUSTRIES, INC. AND
SUBSIDIARIES



Table of Contents



|                              |  |                                                                                                |  |     
|----------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                |  | Page
|Part I. Financial Information |  |                                                                                               
|                              |  |                                                                                               
|                              |  | Item 1. Financial Statements (Unaudited)                                                       |  |     
|                              |  | Consolidated Balance Sheets, September 30, 2004 and December 31, 2003                          |  | 3   
|                              |  | Consolidated Statements of Operations, Three and Nine Months Ended September 30, 2004 and 2003 |  | 4   
|                              |  | Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2004 and 2003           |  | 5   
|                              |  | Notes to the Consolidated Financial Statements                                                 |  | 6   
|                              |  |                                                                                               
|                              |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations  |  | 14  
|                              |  |                                                                                               
|                              |  | Item 3. Quantitative and Qualitative Disclosures about Market Risk                             |  | 23  
|                              |  |                                                                                               
|                              |  | Item 4. Controls and Procedures                                                                |  | 23  
|                              | 
|Part II. Other Information    |  |                                                                                               
|                              |  |                                                                                               
|                              |  | Item 1. Legal Proceedings                                                                      |  | 24  
|                              |  |                                                                                               
|                              |  | Item 6. Exhibits and Reports on Form 8-K                                                       |  | 24  
|                              | 
|Signature                     |  | 26                                                                                            



FORWARD-LOOKING-STATEMENTS



In this Form 10-Q and in the normal course of business,
we, in an effort to help keep our stockholders and the public informed about our operations, may from time to time issue or make certain statements, either in writing or orally, that are or contain forward looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements contained herein, other than statements of historical fact, are forward looking statements. When used in this Form 10-Q, the
words anticipate, believe, estimate and expect and similar expressions are intended to identify forward looking statements. Such statements reflect our current views with respect to future events and
are subject to certain risks, uncertainties and assumptions, including our reliance on cyclical industries, our reliance on principal customers and government contracts, our ability to perform contracts at costs consistent with estimated costs
utilized in bidding for the projects covered by such contracts, variations in quarterly revenues and earnings resulting from the percentage of completion accounting method, the possible termination of contracts included in our backlog at the option
of customers, operating risks, competition for marine vessel contracts, our ability to retain key management personnel and to continue to attract and retain skilled workers, state and federal regulations, the availability and cost of capital, and
general industry and economic conditions. These and other risks and assumptions are discussed in more detail in our Form 10-K. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual
results may vary materially from those anticipated, believed, estimated or expected. We do not intend to update these forward looking statements. Although we believe that the expectations reflected in such forward looking statements are reasonable,
no assurance can be given that such expectations will prove correct.



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PART I. FINANCIAL INFORMATION



Item 1: Financial Statements (Unaudited)



CONRAD INDUSTRIES, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)



|                                                                                       |  |                    |        |   |                   |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | - | ------ | -
|                                                                                       |  | September 30, 2004 |        |   | December 31, 2003 |  
|ASSETS                                                                                 |  |                    |        |   |                   |   |        |  
|CURRENT ASSETS:                                                                        |  |                    |        |   |                   |   |        |  
|Cash and cash equivalents                                                              |  | $                  | 1,765  |   |                   | $ | 4,412  |  
|Accounts receivable, net                                                               |  |                    | 4,363  |   |                   |   | 3,683  |  
|Costs and estimated earnings, net in excess of billings on uncompleted contracts       |  |                    | 3,907  |   |                   |   | 2,951  |  
|Inventories                                                                            |  |                    | 298    |   |                   |   | 820    |  
|Other receivables                                                                      |  |                    | 830    |   |                   |   | 1,551  |  
|Other current assets                                                                   |  |                    | 1,148  |   |                   |   | 1,222  |  
|                                                                                       |  |                    |        |   |                   |   |        |  
|Total current assets                                                                   |  |                    | 12,311 |   |                   |   | 14,639 |  
|                                                                                       |  |                   
|PROPERTY, PLANT AND EQUIPMENT, net                                                     |  |                    | 33,289 |   |                   |   | 34,156 |  
|                                                                                       |  |                   
|GOODWILL                                                                               |  |                    | 4,101  |   |                   |   | 4,101  |  
|                                                                                       |  |                   
|OTHER ASSETS                                                                           |  |                    | 182    |   |                   |   | 1,020  |  
|                                                                                       |  |                    |        |   |                   |   |        |  
|TOTAL ASSETS                                                                           |  | $                  | 49,883 |   |                   | $ | 53,916 |  
|                                                                                       |  |                    |        |   |                   |   |        |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                   |  |                    |        |   |                   |   |        |  
|CURRENT LIABILITIES:                                                                   |  |                    |        |   |                   |   |        |  
|Accounts payable                                                                       |  | $                  | 4,535  |   |                   | $ | 3,506  |  
|Accrued employee costs                                                                 |  |                    | 660    |   |                   |   | 574    |  
|Accrued expenses                                                                       |  |                    | 1,392  |   |                   |   | 824    |  
|Current maturities of long-term debt                                                   |  |                    | 2,247  |   |                   |   | 2,247  |  
|Billings in excess of costs and estimated earnings, net on uncompleted contracts       |  |                    | 1,051  |   |                   |   | 2,464  |  
|                                                                                       |  |                    |        |   |                   |   |        |  
|Total current liabilities                                                              |  |                    | 9,885  |   |                   |   | 9,615  |  
|                                                                                       |  |                   
|LONG-TERM DEBT, less current maturities                                                |  |                    | 12,703 |   |                   |   | 14,259 |  
|                                                                                       |  |                   
|DEFERRED INCOME TAXES                                                                  |  |                    | 2,288  |   |                   |   | 3,203  |  
|                                                                                       |  |                   
|OTHER NON-CURRENT LIABILITIES                                                          |  |                    | 1,500  |   |                   |   | 1,447  |  
|                                                                                       |  |                    |        |   |                   |   |        |  
|Total liabilities                                                                      |  |                    | 26,376 |   |                   |   | 28,524 |  
|                                                                                       |  |                    |        |   |                   |   |        |  
|COMMITMENTS AND CONTINGENCIES (Note 9)                                                 |  |                    |        |   |                   |   |        |  
|                                                                                       |  |                   
|SHAREHOLDERS EQUITY:                                                                  |  |                    |        |   |                   |   |        |  
|Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued        |  |                    |       |   |                   |   |       |  
|Common stock, $0.01 par value 20,000,000 shares authorized, 7,276,437 in 2004 and 2003 |  |                    | 73     |   |                   |   | 73     |  
|Additional paid-in capital                                                             |  |                    | 29,000 |   |                   |   | 29,000 |  
|Treasury stock at cost, 40,483 shares in 2004 and 2003                                 |  |                    | (211   | ) |                   |   | (211   | )
|Accumulated deficit                                                                    |  |                    | (5,355 | ) |                   |   | (3,470 | )
|                                                                                       |  |                    |        |   |                   |   |        |  
|Total shareholders equity                                                             |  |                    | 23,507 |   |                   |   | 25,392 |  
|                                                                                       |  |                    |        |   |                   |   |        |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                             |  | $                  | 49,883 |   |                   | $ | 53,916 |  
|                                                                                       |  |                    |        |   |                   |   |        |  



See notes to unaudited
consolidated financial statements.



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CONRAD INDUSTRIES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)



|                                                             |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                             |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                             |  | 2004                             |        |   | 2003                            |   |        | 2004 |  |   | 2003   |  
|REVENUE                                                      |  | $                                | 8,142  |   |                                 | $ | 6,722  |      |  | $ | 28,861 |   |  | $ | 26,534 |  
|COST OF REVENUE                                              |  |                                  | 8,913  |   |                                 |   | 6,729  |      |  |   | 28,267 |   |  |   | 25,793 |  
|                                                             |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|GROSS PROFIT (LOSS)                                          |  |                                  | (771   | ) |                                 |   | (7     | )    |  |   | 594    |   |  |   | 741    |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                 |  |                                  | 907    |   |                                 |   | 1,157  |      |  |   | 3,188  |   |  |   | 3,344  |  
|                                                             |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|LOSS FROM OPERATIONS                                         |  |                                  | (1,678 | ) |                                 |   | (1,164 | )    |  |   | (2,594 | ) |  |   | (2,603 | )
|INTEREST EXPENSE                                             |  |                                  | (149   | ) |                                 |   | (132   | )    |  |   | (411   | ) |  |   | (305   | )
|OTHER INCOME, NET                                            |  |                                  | 1      |   |                                 |   | 22     |      |  |   | 79     |   |  |   | 34     |  
|                                                             |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|LOSS BEFORE INCOME TAXES                                     |  |                                  | (1,826 | ) |                                 |   | (1,274 | )    |  |   | (2,926 | ) |  |   | (2,874 | )
|BENEFIT FOR INCOME TAXES                                     |  |                                  | (649   | ) |                                 |   | (447   | )    |  |   | (1,041 | ) |  |   | (1,000 | )
|                                                             |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|NET LOSS                                                     |  | $                                | (1,177 | ) |                                 | $ | (827   | )    |  | $ | (1,885 | ) |  | $ | (1,874 | )
|                                                             |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted loss per share                             |  | $                                | (0.16  | ) |                                 | $ | (0.11  | )    |  | $ | (0.26  | ) |  | $ | (0.26  | )
|                                                             |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|Basic and diluted weighted average common shares outstanding |  |                                  | 7,236  |   |                                 |   | 7,233  |      |  |   | 7,236  |   |  |   | 7,233  |  
|                                                             |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  



See notes to unaudited
consolidated financial statements.



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CONRAD INDUSTRIES, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                          |  |                                 |        |   |      |   |        |  
|----------------------------------------------------------------------------------------- |  | ------------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                          |  | Nine Months Ended September 30, |       
|                                                                                          |  | 2004                            |        |   | 2003 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                                 |        |   |      |   |        |  
|Net loss                                                                                  |  | $                               | (1,885 | ) |      | $ | (1,874 | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                                 |        |   |      |   |        |  
|Depreciation and amortization                                                             |  |                                 | 1,859  |   |      |   | 1,613  |  
|Deferred income tax benefit                                                               |  |                                 | (994   | ) |      |   | (84    | )
|Gain on sale of assets                                                                    |  |                                 | (69    | ) |      |   | (23    | )
|Changes in assets and liabilities:                                                        |  |                                 |        |   |      |   |        |  
|Accounts receivable                                                                       |  |                                 | (680   | ) |      |   | 2,521  |  
|Net change in billings related to cost and estimated earnings on uncompleted contracts    |  |                                 | (2,369 | ) |      |   | 1,111  |  
|Inventory and other assets                                                                |  |                                 | 1,081  |   |      |   | (1,844 | )
|Accounts payable, accrued expenses and other liabilities                                  |  |                                 | 1,683  |   |      |   | 492    |  
|                                                                                          |  |                                 |        |   |      |   |        |  
|Net cash (used in) provided by operating activities                                       |  |                                 | (1,374 | ) |      |   | 1,912  |  
|                                                                                          |  |                                 |        |   |      |   |        |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                                 |        |   |      |   |        |  
|Capital expenditures for plant and equipment                                              |  |                                 | (1,060 | ) |      |   | (5,181 | )
|Draw of project funds, net                                                                |  |                                 | 832    |   |      |   | (2,658 | )
|Proceeds from sale of assets                                                              |  |                                 | 148    |   |      |   | 25     |  
|                                                                                          |  |                                 |        |   |      |   |        |  
|Net cash used in investing activities                                                     |  |                                 | (80    | ) |      |   | (7,814 | )
|                                                                                          |  |                                 |        |   |      |   |        |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                                 |        |   |      |   |        |  
|Principal repayments of debt                                                              |  |                                 | (1,556 | ) |      |   | (1,333 | )
|Proceeds from issuance of debt                                                            |  |                                 |       |   |      |   | 5,200  |  
|Proceeds from grant from State of Louisiana                                               |  |                                 | 363    |   |      |   |       |  
|Financing costs                                                                           |  |                                 |       |   |      |   | (76    | )
|                                                                                          |  |                                 |        |   |      |   |        |  
|Net cash (used in) provided by financing activities                                       |  |                                 | (1,193 | ) |      |   | 3,791  |  
|                                                                                          |  |                                 |        |   |      |   |        |  
|NET DECREASE IN CASH AND CASH EQUIVALENTS                                                 |  |                                 | (2,647 | ) |      |   | (2,111 | )
|                                                                                          |  |                                
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                            |  |                                 | 4,412  |   |      |   | 6,427  |  
|                                                                                          |  |                                 |        |   |      |   |        |  
|CASH AND CASH EQUIVALENTS, END OF PERIOD                                                  |  | $                               | 1,765  |   |      | $ | 4,316  |  
|                                                                                          |  |                                 |        |   |      |   |        |  
|SUPPLEMENTAL DISCLOSURES CASH FLOW INFORMATION:                                           |  |                                 |        |   |      |   |        |  
|Interest paid, net of capitalized interest                                                |  | $                               | 399    |   |      | $ | 295    |  
|                                                                                          |  |                                 |        |   |      |   |        |  
|Taxes paid                                                                                |  | $                               |       |   |      | $ |       |  
|                                                                                          |  |                                 |        |   |      |   |        |  
|NON-CASH ACTIVITIES:                                                                      |  |                                 |        |   |      |   |        |  
|Grant from State of Louisiana                                                             |  | $                               |       |   |      | $ | 1,129  |  
|                                                                                          |  |                                 |        |   |      |   |        |  



See notes to unaudited
consolidated financial statements.



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CONRAD INDUSTRIES, INC. AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



|1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
|-- | ------------------------------------------------



The accompanying unaudited consolidated financial statements include the accounts of Conrad Industries, Inc. and its wholly-owned subsidiaries (the
Company) which are primarily engaged in the construction, conversion and repair of a variety of marine vessels for commercial and government customers. The Company was incorporated in March 1998 to serve as the holding company for Conrad
Shipyard, L.L.C. (Conrad) and Orange Shipbuilding Company, Inc. (Orange Shipbuilding). In addition, during the second quarter of 2003, Conrad Aluminum, L.L.C., a wholly owned subsidiary of Conrad, was organized as a vehicle
to accommodate the Companys expansion into aluminum marine fabrication, repair and conversion services. New construction work and some repair work is performed on a fixed-price basis. The Company performs the majority of repair work under
cost-plus-fee agreements. All significant intercompany transactions have been eliminated. In the opinion of the management of the Company, the interim consolidated financial statements included herein have been prepared in accordance with generally
accepted accounting principles and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of
management, all adjustments (such adjustments consisting only of a normal recurring nature) considered necessary for a fair presentation have been included in the interim consolidated financial statements. These interim consolidated financial
statements should be read in conjunction with the Companys audited 2003 consolidated financial statements and related notes filed on Form 10-K for the year ended December 31, 2003.



The results of operations for the three and nine-month periods ended September 30, 2004 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2004.



|2. | TRADE RECEIVABLES
|-- | -----------------



Receivables consisted of the following at September 30, 2004 and December 31, 2003 (in thousands):



|                                                               |  |      |       |      |   |      
|-------------------------------------------------------------- |  | ---- | ----- | ---- | - | -----
|                                                               |  | 2004 |       | 2003
|U.S. Government:                                               |  |      |       |      |   |      
|Amounts billed                                                 |  | $    | 1,513 |      | $ | 1,723
|Unbilled costs and estimated earnings on uncompleted contracts |  |      | 2,023 |      |   | 852  
|                                                               |  |      |       |      |   |      
|                                                               |  |      | 3,536 |      |   | 2,575
|Commercial:                                                    |  |      |       |      |   |      
|Amounts billed                                                 |  |      | 2,850 |      |   | 1,960
|Unbilled costs and estimated earnings on uncompleted contracts |  |      | 1,884 |      |   | 2,099
|                                                               |  |      |       |      |   |      
|Total                                                          |  | $    | 8,270 |      | $ | 6,634
|                                                               |  |      |       |      |   |      



Included above in
amounts billed is an allowance for doubtful accounts of $17,000 and $16,000 at September 30, 2004 and December 31, 2003, respectively. During 2004, we wrote-off $28,000 related to receivables deemed uncollectible with certain commercial repair
customers. During 2003, there were no significant transactions recorded in the allowance for doubtful accounts.



Unbilled costs and estimated earnings on uncompleted contracts were not billable to customers at the balance sheet dates under terms of the respective
contracts. Of the unbilled costs and estimated earnings at September 30, 2004, substantially all is expected to be collected within the next twelve months.



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Information with respect to uncompleted contracts as of September 30, 2004 and December 31, 2003 is as
follows (in thousands):



|                                        |  |      |         |   |      |   |         |  
|--------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                        |  | 2004 |         |   | 2003 |  
|Costs incurred on uncompleted contracts |  | $    | 42,739  |   |      | $ | 20,946  |  
|Estimated earnings, net                 |  |      | 690     |   |      |   | 1,416   |  
|                                        |  |      |         |   |      |   |         |  
|                                        |  |      | 43,429  |   |      |   | 22,362  |  
|Less billings to date                   |  |      | (40,573 | ) |      |   | (21,875 | )
|                                        |  |      |         |   |      |   |         |  
|                                        |  | $    | 2,856   |   |      | $ | 487     |  
|                                        |  |      |         |   |      |   |         |  



The above amounts are included in the
accompanying balance sheets under the following captions (in thousands):



|                                                                                 |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                 |  | 2004 |        |   | 2003 |  
|Costs and estimated earnings, net in excess of billings on uncompleted contracts |  | $    | 3,907  |   |      | $ | 2,951  |  
|Billings in excess of cost and estimated earnings, net on uncompleted contracts  |  |      | (1,051 | ) |      |   | (2,464 | )
|                                                                                 |  |      |        |   |      |   |        |  
|Total                                                                            |  | $    | 2,856  |   |      | $ | 487    |  
|                                                                                 |  |      |        |   |      |   |        |  



We recorded charges
of approximately $1,012,000 in the third quarter of 2004, $260,000 in the second quarter of 2004 and $97,000 in fiscal year 2003 to reflect revised estimates related to anticipated losses on certain uncompleted vessels in progress. As of September
30, 2004 and December 31, 2003, approximately $1,066,000 and $50,000, respectively, of this provision is included in costs and estimated earnings, net in excess of billings on uncompleted contracts.



|3. | INVENTORIES
|-- | -----------



Inventories consist of excess job related materials and supplies. They are stated at the lower of cost (first-in, first-out basis) or market. Inventories
at December 31, 2003, also included $624,000 of costs related to vessels in progress not under customer contract. As of September 30, 2004, no such amounts were outstanding.



|4. | OTHER RECEIVABLES
|-- | -----------------



Other receivables consisted of the following at September 30, 2004 and December 31, 2003 (in thousands):



|                                          |  |      |     |      |   |      
|----------------------------------------- |  | ---- | --- | ---- | - | -----
|                                          |  | 2004 |     | 2003
|Grants receivable from State of Louisiana |  | $    | 93  |      | $ | 403  
|Income tax receivable                     |  |      | 405 |      |   | 1,006
|Other                                     |  |      | 332 |      |   | 142  
|                                          |  |      |     |      |   |      
|Total                                     |  | $    | 830 |      | $ | 1,551
|                                          |  |      |     |      |   |      



Substantially all of
these amounts at September 30, 2004, are expected to be collected within the next twelve months.



|5. | GOODWILL
|-- | --------



In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. SFAS No. 142 changed the accounting for goodwill from an amortization method to an impairment-only approach. Amortization of goodwill, including goodwill recorded in past business combinations,
ceased upon adoption of this statement. In accordance with SFAS No. 142, the Company discontinued the amortization of goodwill upon the adoption of this statement on January 1, 2002.



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During the first quarter of 2003, we completed our annual update of the impairment test as prescribed in
SFAS No. 142 with respect to existing goodwill. The first step of the goodwill impairment test indicated that the fair value of each of our reporting units exceeded its respective carrying amount. As no impairment was indicated, the second step of
the test, as defined under SFAS No. 142, was not required to be performed.



As a result of deteriorating market conditions, rising steel prices and a reduction in the committed future funding of the U.S. Army ST Tug program, operating profits and cash flows were lower than expected in the
latter half of 2003. Based on these trends, the future earnings forecast was revised and, in December 2003, a non-cash goodwill impairment charge of $4.0 million was recognized in the Orange Shipbuilding reporting unit. The fair value of the
reporting unit was estimated using the expected present value of future cash flows. As required by SFAS No. 142, the $4.0 million charge was reflected in our income/(loss) from operations during the fourth quarter of 2003. There was no income tax
effect on the impairment charge as the charge related to non-deductible goodwill.



During the first quarter of 2004, we completed our annual update of the impairment test as prescribed in SFAS No. 142 with respect to existing goodwill. The first step of the goodwill impairment test indicated that
the fair value of each of our reporting units exceeded its respective carrying amount. As no impairment was indicated, the second step of the test, as defined under SFAS No. 142, was not required to be performed.



The carrying amount of goodwill of $4.1 million as of September 30, 2004 and
December 31, 2003 relates entirely to the Orange Shipbuilding reporting unit, which is part of our vessel construction segment.



|6. | LONG-TERM DEBT
|-- | --------------



Long-term debt consisted of the following at September 30, 2004 and December 31, 2003 (in thousands):



|                                                                                                                     |  |      |        |   |      |   |        |  
|-------------------------------------------------------------------------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                                                                                                     |  | 2004 |        |   | 2003 |  
|Term loan - Bank, variable interest rate (3.45% at September 30, 2004), due May 31, 2007                             |  | $    | 5,583  |   |      | $ | 6,439  |  
|Development loan - Bank, variable interest rate (3.86% at September 30, 2004), due May 31, 2007                      |  |      | 5,656  |   |      |   | 6,178  |  
|Industrial revenue bonds - St. Mary Parish, variable interest rate (3.92% at September 30, 2004), due August 1, 2018 |  |      | 3,711  |   |      |   | 3,889  |  
|                                                                                                                     |  |      |        |   |      |   |        |  
|                                                                                                                     |  |      | 14,950 |   |      |   | 16,506 |  
|Less current maturities                                                                                              |  |      | (2,247 | ) |      |   | (2,247 | )
|                                                                                                                     |  |      |        |   |      |   |        |  
|                                                                                                                     |  | $    | 12,703 |   |      | $ | 14,259 |  
|                                                                                                                     |  |      |        |   |      |   |        |  



The Revolving Credit
Facility permits us to borrow up to $10.0 million for working capital and other general corporate purposes, including the funding of acquisitions and matures on May 31, 2005. As of September 30, 2004 we could borrow up to $2.7 million under the
facility, pursuant to the financial covenant restrictions. As of September 30, 2004 and December 31, 2003, no amounts were outstanding on the Revolving Credit Facility.



We have a Loan Agreement with a commercial bank, which specifies the terms of the Term Loan, the Development Loan and the
Revolving Credit Facility. The interest rates are variable, and interest accrues at our option either at the JPMorgan Chase prime rate plus 0.5% or LIBOR plus 2.75%. The Loan Agreement is secured by substantially all of our assets, contains
customary restrictive covenants and requires the maintenance of certain financial ratios which could limit our use of available capacity under the Revolving Credit Facility. In addition, the Loan Agreement prohibits us from paying dividends without
the consent of the lender and restricts our ability to incur additional indebtedness. At September 30, 2004, the Company was in compliance with these covenants. On November 11, 2004 the Loan Agreement was further amended to relax one of the
financial covenants. The amendment is filed as an exhibit in this report. The Company is in discussions with the lender to extend the maturity of the Revolving Credit Facility to May 31, 2006.



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The Term Loan has a maturity date of May 31, 2007 and is payable in 31 remaining monthly principal
payments of $107,000 plus interest, with a final payment of $2.3 million. Interest accrues at 3.45% until November 1, 2004, and thereafter at our option at either the JPMorgan Chase prime rate plus 0.5% or LIBOR plus 2.75%. At September 30, 2004 and
December 31, 2003, the Term Loan balance outstanding was $5.6 million and $6.4 million, respectively.



On July 18, 2002, we entered into the Development Loan which provided financing totaling $6.7 million to fund the development of Conrad Deepwater. The
Development Loan included a revolver that converted to a term loan. Payments under the revolver were interest only until March 31, 2003, at which time it converted to a term loan to be repaid in 49 monthly principal payments of $58,000 plus interest
with a final payment of $3.9 million due on May 31, 2007. Interest accrues at 3.86% from July 1, 2004 until September 30, 2004, at 4.77% until December 31, 2004, and thereafter at our option either at the JPMorgan Chase prime rate plus 0.5% or LIBOR
plus 2.75%. At September 30, 2004 and December 31, 2003, the Development Loan outstanding was $5.7 million and $6.2 million, respectively.



In July 2003, we completed the financing for our expansion into the aluminum marine fabrication, repair and construction business. The expansion is part
of a $5.5 million investment in our original facility in Amelia, Louisiana (Amelia Topside), through our subsidiary Conrad Aluminum, L.L.C. The financing of this expansion includes a $1.5 million grant by the State of Louisiana through
the Economic Development Award Program (EDAP) and $4.0 million of industrial revenue bonds issued by the St. Mary Parish Industrial Development Board. In connection with the issuance of the bonds, Conrad subsidiary Conrad Aluminum, L.L.C.
contributed to the Industrial Development Board the land and buildings at the Amelia Topside yard and is leasing them back along with the items to be purchased with the bond proceeds, with a right to repurchase or extend. The transaction is being
accounted for as a financing and thus the original cost of the property less accumulated depreciation remains reflected in our property, plant and equipment. The lease payments will be used to pay principal and interest on the bonds. Conrad and its
subsidiaries have guaranteed the bonds. The bonds have a 15 year term and monthly principal payments of $22,222 plus interest. Interest accrues at 3.92% until November 12, 2004 and thereafter, at our option, at either the JPMorgan Chase prime rate
or the higher of (a) 30, 60 or 90-day LIBOR plus two percent or (b) the prime rate minus one percent. At September 30, 2004 and December 31, 2003, the industrial revenue bond balance outstanding was $3.7 million and $3.9 million, respectively.



As of September 30, 2004 and December 31, 2003, remaining
industrial revenue bond proceeds of approximately $105,000 and $937,000, respectively, restricted for use on the aluminum facility expansion are included under the caption Other Assets.



The $1.5 million EDAP grant requires us to create a total of 224 new jobs by
December 31, 2006 and sustain that level through December 31, 2012. If we fail to meet the job creation objectives, the state may recover related portions of the grant. As of September 30, 2004 and December 31, 2003, approximately $1.5 million and
$1.4 million, respectively, of equipment had been purchased with grant proceeds. Accordingly, as of September 30, 2004 and December 31, 2003, a $1.5 million and $1.4 million liability, respectively, was included under the caption Other
Non-Current Liabilities. This amount will be amortized into income in future periods over the estimated useful lives of the related equipment and as the specified performance objectives are achieved. The equipment purchased with the grant
proceeds is owned by St. Mary Parish and is being leased by us with an option to purchase. The transaction is being accounted for as a financing and thus the assets are included in our property, plant and equipment.



|7. | SHAREHOLDERS EQUITY
|-- | --------------------



Income (Loss) per Share



The calculation of basic earnings per share excludes any dilutive effect of stock options, while diluted earnings per share includes the dilutive effect
of stock options. The number of weighted average shares outstanding for basic and diluted income (loss) per share was 7,235,954 for the three and nine months ended September 30, 2004 and 7,233,481 and 7,233,463 for the three
and nine months ended September 30, 2003, respectively.



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Stock-Based Compensation



We use the intrinsic value method of accounting for employee-based compensation prescribed by Accounting Principles Board
(APB) Opinion No. 25 and, accordingly, follow the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 encourages the use
of a fair value based method of accounting for compensation expense associated with stock option and similar plans. However, SFAS No. 123 permits the continued use of the intrinsic value based method prescribed by Opinion No. 25 but requires
additional disclosures, including pro forma calculations of net earnings and earnings per share as if the fair value method of accounting prescribed by SFAS No.123 had been applied.



Had compensation cost for our stock plans been determined based on the fair value at the grant dates consistent with the
method of SFAS No. 123, net (loss) income and net (loss) income per share amounts would have approximated the following pro forma amounts (in thousands, except per share data):



|                                                                                                                                            |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | -------------------------- | - | ----- | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                                            |  | Three Months EndedSeptember |        |   | Nine Months EndedSeptember |  
|                                                                                                                                            |  | 2004                        |        |   | 2003                       |   |       | 2004 |  |   | 2003   |  
|Net loss, as reported                                                                                                                       |  | $                           | (1,177 | ) |                            | $ | (827  | )    |  | $ | (1,885 | ) |  | $ | (1,874 | )
|Add: Total stock-based employee compensation expense included in reported net loss net of related tax effects                               |  |                             |       |   |                            |   | 1     |      |  |   |       |   |  |   | 4      |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (18    | ) |                            |   | (18   | )    |  |   | (56    | ) |  |   | (67    | )
|                                                                                                                                            |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Pro forma, net loss                                                                                                                         |  | $                           | (1,195 | ) |                            | $ | (844  | )    |  | $ | (1,941 | ) |  | $ | (1,937 | )
|                                                                                                                                            |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Loss per share:                                                                                                                             |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Basic and diluted - as reported                                                                                                             |  | $                           | (0.16  | ) |                            | $ | (0.11 | )    |  | $ | (0.26  | ) |  | $ | (0.26  | )
|                                                                                                                                            |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Basic and diluted - pro forma                                                                                                               |  | $                           | (0.17  | ) |                            | $ | (0.12 | )    |  | $ | (0.27  | ) |  | $ | (0.27  | )
|                                                                                                                                            |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Weighted average fair value of grants                                                                                                       |  |                             | N/A    |   |                            |   | N/A   |      |  | $ | 1.05   |   |  | $ | 1.38   |  
|                                                                                                                                            |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Black-Scholes option pricing model assumptions:                                                                                             |  |                             |        |   |                            |   |       |      |  |   |        |   |  |   |        |  
|Risk-free interest rate                                                                                                                     |  |                             | 3.37   | % |                            |   | 3.26  | %    |  |   | 3.37   | % |  |   | 3.26   | %
|Expected life (years)                                                                                                                       |  |                             | 3.0    |   |                            |   | 3.0   |      |  |   | 3.0    |   |  |   | 3.0    |  
|Volatility                                                                                                                                  |  |                             | 70.3   | % |                            |   | 74.6  | %    |  |   | 70.3   | % |  |   | 74.6   | %
|Dividend yield                                                                                                                              |  |                             |       |   |                            |   |      |      |  |   |       |   |  |   |       |  



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|8. | SEGMENT AND RELATED INFORMATION
|-- | -------------------------------



We classify our business into two segments:



Vessel Construction



We construct a variety of marine vessels, including large and small deck barges, single and double hull tank barges, ferries, lift boats, push boats,
offshore tug boats, offshore support vessels and aluminum vessels.



Repair and Conversions



Our conversion
projects primarily consist of lengthening the midbodies of vessels, modifying vessels to permit their use for a different type of activity and other modifications to increase the capacity or functionality of a vessel. We also derive a significant
amount of revenue from repairs made as a result of periodic inspections required by the U.S. Coast Guard, the American Bureau of Shipping and other regulatory agencies.



We evaluate the performance of our segments based upon gross profit. Selling, general and administrative expenses, interest
expense, other income, net, and income taxes are not allocated to the segments. Accounting policies are the same as those described in Note 1, Summary of Significant Accounting Policies in our Form 10-K for the year ended December 31,
2003. Intersegment sales and transfers are not significant.



Selected information as to our operations by segment is as follows (in thousands):



|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|-------------------------------------------- |  | ------------------------------- | ------ | - | ------------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                             |  | Three Months EndedSeptember 30, |        |   | Nine Months EndedSeptember 30, |  
|                                             |  | 2004                            |        |   | 2003                           |   |        | 2004 |  |   | 2003   |  
|Revenue:                                     |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Vessel construction                          |  | $                               | 5,527  |   |                                | $ | 4,493  |      |  | $ | 18,781 |   |  | $ | 17,765 |  
|Repair and conversions                       |  |                                 | 2,615  |   |                                |   | 2,229  |      |  |   | 10,080 |   |  |   | 8,769  |  
|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total revenue                                |  |                                 | 8,142  |   |                                |   | 6,722  |      |  |   | 28,861 |   |  |   | 26,534 |  
|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenue:                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Vessel construction                          |  |                                 | 6,472  |   |                                |   | 4,597  |      |  |   | 19,402 |   |  |   | 17,640 |  
|Repair and conversions                       |  |                                 | 2,441  |   |                                |   | 2,132  |      |  |   | 8,865  |   |  |   | 8,153  |  
|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total cost of revenue                        |  |                                 | 8,913  |   |                                |   | 6,729  |      |  |   | 28,267 |   |  |   | 25,793 |  
|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Gross profit (loss):                         |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Vessel construction                          |  |                                 | (945   | ) |                                |   | (104   | )    |  |   | (621   | ) |  |   | 125    |  
|Repair and conversions                       |  |                                 | 174    |   |                                |   | 97     |      |  |   | 1,215  |   |  |   | 616    |  
|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Total gross profit (loss)                    |  |                                 | (771   | ) |                                |   | (7     | )    |  |   | 594    |   |  |   | 741    |  
|Selling, general and administrative expenses |  |                                 | 907    |   |                                |   | 1,157  |      |  |   | 3,188  |   |  |   | 3,344  |  
|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Loss from operations                         |  |                                 | (1,678 | ) |                                |   | (1,164 | )    |  |   | (2,594 | ) |  |   | (2,603 | )
|Interest expense                             |  |                                 | (149   | ) |                                |   | (132   | )    |  |   | (411   | ) |  |   | (305   | )
|Other income, net                            |  |                                 | 1      |   |                                |   | 22     |      |  |   | 79     |   |  |   | 34     |  
|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Loss before income taxes                     |  |                                 | (1,826 | ) |                                |   | (1,274 | )    |  |   | (2,926 | ) |  |   | (2,874 | )
|Benefit for income taxes                     |  |                                 | (649   | ) |                                |   | (447   | )    |  |   | (1,041 | ) |  |   | (1,000 | )
|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  
|Net loss                                     |  | $                               | (1,177 | ) |                                | $ | (827   | )    |  | $ | (1,885 | ) |  | $ | (1,874 | )
|                                             |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   |        |  



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Certain other financial information by segment is as follows (in thousands):



|                                                         |  |                                 |     |                                |   |       |  |      |       |  |   |      
|-------------------------------------------------------- |  | ------------------------------- | --- | ------------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                                         |  | Three Months EndedSeptember 30, |     | Nine Months EndedSeptember 30,
|                                                         |  | 2004                            |     | 2003                           |   | 2004  |  | 2003
|Depreciation and amortization expense:                   |  |                                 |     |                                |   |       |  |      |       |  |   |      
|Vessel construction                                      |  | $                               | 235 |                                | $ | 224   |  | $    | 745   |  | $ | 667  
|Repair and conversions                                   |  |                                 | 299 |                                |   | 235   |  |      | 840   |  |   | 657  
|Included in selling, general and administrative expenses |  |                                 | 90  |                                |   | 94    |  |      | 274   |  |   | 289  
|                                                         |  |                                 |     |                                |   |       |  |      |       |  |   |      
|Total depreciation and amortization expense              |  | $                               | 624 |                                | $ | 553   |  | $    | 1,859 |  | $ | 1,613
|                                                         |  |                                 |     |                                |   |       |  |      |       |  |   |      
|Capital expenditures:                                    |  |                                 |     |                                |   |       |  |      |       |  |   |      
|Vessel construction                                      |  | $                               | 24  |                                | $ | 746   |  | $    | 995   |  | $ | 1,011
|Repair and conversions                                   |  |                                 |    |                                |   | 1,597 |  |      | 51    |  |   | 3,862
|Other                                                    |  |                                 | 5   |                                |   | 273   |  |      | 14    |  |   | 308  
|                                                         |  |                                 |     |                                |   |       |  |      |       |  |   |      
|Total capital expenditures                               |  | $                               | 29  |                                | $ | 2,616 |  | $    | 1,060 |  | $ | 5,181
|                                                         |  |                                 |     |                                |   |       |  |      |       |  |   |      



Total assets by
segment is as follows as of September 30, 2004 and December 31, 2003 (in thousands):



|                       |  |      |        |      |   |       
|---------------------- |  | ---- | ------ | ---- | - | ------
|                       |  | 2004 |        | 2003
|Total assets:          |  |      |        |      |   |       
|Vessel construction    |  | $    | 22,828 |      | $ | 22,946
|Repair and conversions |  |      | 21,012 |      |   | 20,604
|Other                  |  |      | 6,043  |      |   | 10,366
|                       |  |      |        |      |   |       
|Total assets           |  | $    | 49,883 |      | $ | 53,916
|                       |  |      |        |      |   |       



Certain assets,
including cash and cash equivalents, and capital expenditures are allocated to corporate and are included in the Other caption.



Revenues included in our consolidated financial statements are derived exclusively from customers domiciled in the United States and Puerto Rico. All of
our assets are located in the United States.



|9. | COMMITMENTS AND CONTINGENCIES
|-- | -----------------------------



Legal Matters In February 2004, Swiftships Shipbuilders, LLC and two affiliates (collectively, Swiftships) brought suit
against us, alleging that various of our actions in connection with our expansion into the aluminum marine fabrication and repair business breached in bad faith a confidentiality agreement we entered into when we were considering acquiring
Swiftships. The suit also alleges that we conspired with one of our employees who is a former Swiftships employee to breach a confidentiality agreement the employee had with Swiftships as a result of his employment with them. The suit also alleges
violations of the Louisiana Uniform Trade Secrets Act, unfair trade practices and fraud. The suit seeks unspecified damages and asks for injunctive relief to prevent further alleged breaches of the confidentiality agreements and misappropriation of
trade secrets. The action is in its early stages, no formal discovery or depositions have taken place, nor has a trial date been set at this time. Conrad has answered Swiftships petition, denying any and all responsibility for the claims
asserted. Moreover, Conrad has filed a reconventional demand against Swiftships to recover monies Conrad unnecessarily expended in evaluating Swiftships true financial condition, which Conrad submits was negligently misrepresented to Conrad by
Swiftships. Swiftships has answered Conrads reconventional demand, denying any and all responsibility for such expenses.



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We are a party to various routine legal proceedings primarily involving commercial claims and
workers compensation claims. While the outcome of these routine claims and legal proceedings cannot be predicted with certainty, management believes that the outcome of such proceedings in the aggregate, even if determined adversely, would not
have a material adverse effect on our consolidated financial position, results of operation or liquidity.



Employment Agreements  We have employment agreements with certain of our executive officers which provide for employment of the
officers through December 31, 2005, and provide for extensions at the end of the term, subject to the parties mutual agreement. As of September 30, 2004, the minimum annual total compensation under these agreements was $360,000.



In April 2004, we entered into a separation agreement with Kenneth G. Myers,
Jr., our former President and Chief Executive Officer. Subject to the terms of this agreement, Mr. Myers resigned from all of the positions he held with the Company and will be paid a total of $218,500, payable in substantially equal installments
over a one-year period, and six months of COBRA continuation coverage. As a result, Mr. Myers benefits from the Separation agreement were accrued in the second quarter of 2004.



In August 2004, we entered into an employment agreement with Cecil A. Hernandez providing for employment as our Executive
Vice President and Chief Operating Officer through December 31, 2005 and annual extensions thereafter, subject to the parties mutual agreement. The minimum annual total compensation under the agreement is $150,000.



In addition, our former Chief Financial Officer, Lewis Derbes, Jr. resigned
as CFO effective September 3, 2004 to pursue other business opportunities. The Board has initiated a comprehensive search for a successor. Cecil Hernandez is serving as interim CFO.



Letters of Credit and Bonds In the normal course of our business, we are required to provide letters of
credit to secure the payment of workers compensation obligations. Additionally, under certain contracts we may be required to provide letters of credit and bonds to secure our performance and payment obligations. Outstanding letters of credit
and bonds relating to these business activities amounted to $59.5 million and $46.3 million at September 30, 2004 and December 31, 2003, respectively.



******



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Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations



The following discussion and analysis should be read in conjunction with the Unaudited Consolidated Financial Statements and the Notes to Unaudited Consolidated Financial
Statements included elsewhere in this Form 10-Q as well as our annual report on Form 10-K for the year ended December 31, 2003.



Overview



We specialize in the construction, conversion and repair of a wide variety of steel and aluminum marine vessels for commercial and government customers. These vessels include tugboats, ferries, liftboats, barges,
aluminum crew/supply vessels and other offshore support vessels. We operate four shipyards: one in Morgan City, Louisiana, two in Amelia, Louisiana and one in Orange, Texas. During the first nine months of 2004, our new construction segment
accounted for 65.1% of our total revenue and our repair and conversion segment accounted for 34.9% of our total revenue.



During 2003, we expanded into the aluminum marine fabrication and repair business after transforming one of our existing repair yards in Amelia, Louisiana into a facility
specifically designed to handle aluminum marine fabrication and repair. We refer to this facility as Conrad Aluminum. In the fourth quarter of 2003, we began aluminum operations at this facility and announced our first new aluminum
vessel construction contract for an aluminum crew/supply boat.



In the first
quarter of 2003, we opened a new steel marine vessel repair and conversion yard at our second location in Amelia, Louisiana. We refer to this facility as Conrad Deepwater. During 2002 and 2003, we invested approximately $7.0 million
developing the site, which we purchased in 2000. For additional information regarding our internal expansion activities, please refer to our Annual Report on Form 10-K for the year ended December 31, 2003 under the heading Overview - Internal
Expansion, in Part I, Item I.



The demand for our products and services
is dependent upon a number of factors, including the economic condition of our customers and markets, the age and state of repair of the vessels operated by our customers and the relative cost to construct a new vessel as compared with repairing an
older vessel. A significant portion of our historical revenues has been derived from customers in the Gulf of Mexico oil and gas industry. Accordingly, demand for our products and services has been adversely impacted since the latter part of 1998 by
decreased activity in that industry. This decreased demand has adversely affected our revenues, margins and profits, particularly in our repair and conversion segment, but also in our new construction segment. Although oil and gas prices have been
relatively high for the last several years, there has not been a corresponding increase in exploration, drilling or production activity in the Gulf of Mexico. We cannot predict whether or when these activities in the Gulf of Mexico will increase.



Although there has been a decline in new construction opportunities in the
Gulf of Mexico oil and gas industry, we have been successful in securing backlog in our vessel construction segment primarily from government customers. Government contracts accounted for approximately 24.9% of our backlog at December 31, 2000 and
92.6% at September 30, 2004. Our backlog was $43.8 million at September 30, 2004 as compared to $43.6 million at December 31, 2003 and $36.3 million at September 30, 2003. During the third quarter, we were awarded an $8.9 million contract by the
United States Army Corps of Engineers for the design and construction of a 144-foot, 3300 HP, ABS-Classed welded steel towboat. After an extended design phase, production is scheduled to begin in the first half of 2005. We were also awarded a $2.8
million contract to build a 90x25x116 Multi-Purpose High Speed Patrol and Firefighting vessel for the Plaquemines Port, Harbor & Terminal District in Plaquemines Parish, Louisiana. We began production of this triple screw
vessel during the fourth quarter of 2004 at the Conrad Aluminum facility in Amelia, Louisiana. Additionally, we were awarded a $5.6 million contract to build a 95x30x129 Fish Stocking and Assessment Vessel for the U.S. Fish
and Wildlife Service of the Department of the Interior. This self-propelled vessel is intended to serve in the Great Lakes. Production is scheduled to begin during the fourth quarter of 2004.



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The depressed conditions in the Gulf of Mexico oil and gas industry continue to adversely affect our financial
performance. Our repair business has high fixed costs primarily associated with depreciation of facilities, floating drydocks and the marine travel lift. As a result, our margins and profits are adversely affected when the volume of our work
declines. These fixed costs have been increased by our expansion into the aluminum business and the opening of our new Conrad Deepwater repair yard. The reduced demand and resulting increased competition have led us to bid some work from time to
time at margins lower than we would have been willing to accept historically. In addition, we have experienced inefficiencies associated with the shift in the nature of our backlog to primarily government work which requires more administrative
functions than our traditional commercial customers.



We have responded to
these challenges by, among other things, aggressively reducing our costs, pursuing new business opportunities, and seeking to operate more efficiently. In September 2003, we implemented an aggressive cost reduction plan, designed to achieve
approximately $1 million in savings on an annualized basis. This plan includes among other items a 5% salary reduction for management and an increase in employee contributions for health insurance. In addition, we were able to obtain better rates on
some of our insurance programs, and have also increased the deductible on our workers compensation program to take advantage of our excellent safety performance. In addition, effective March 1, 2004, we amended our employment agreements with
our executive officers. The amended agreements extend employment of the officers through December 31, 2005 and further reduce the salaries of the Co-Chairmen of the Board. We will continue to seek out other opportunities to reduce costs.



In April 2004, we entered into a separation agreement with Kenneth G. Myers, Jr., our
former President and Chief Executive Officer, and appointed John P. Conrad, Jr., our Co-Chairman, as President and Chief Executive Officer. Under the terms of the separation agreement, Mr. Myers resigned from all of the positions he held with the
Company and will be paid a total of $218,500, payable in substantially equal installments over a one-year period, and six months of COBRA continuation coverage. As a result, Mr. Myers benefits from the separation agreement were accrued in the
second quarter of 2004.



In August 2004, we entered into an employment
agreement with Cecil A. Hernandez providing for employment as our Executive Vice President and Chief Operating Officer through December 31, 2005 and annual extensions thereafter, subject to the parties mutual agreement. The minimum annual
total compensation under the agreement is $150,000.



In addition, our former
Chief Financial Officer, Lewis Derbes, Jr. resigned as CFO effective September 3, 2004 to pursue other business opportunities. The Board has initiated a comprehensive search for a successor. Cecil Hernandez is serving as interim CFO.



Our new construction projects generally range from one month to twelve months in duration. We
use the percentage-of-completion method of accounting and therefore take into account the estimated costs, estimated earnings and revenue to date on fixed-price contracts not yet completed. The amount of revenue recognized is based on the portion of
the total contract price that the labor hours incurred to date bears to the estimated total labor hours, based on current estimates to complete the project. This method is used because management considers expended labor hours to be the best
available measure of progress on these contracts. Revenues from cost-plus-fee contracts are recognized on the basis of cost incurred during the period plus the fee earned.



Most of the contracts we enter into for new vessel construction, whether commercial or governmental, are fixed-price contracts under which
we retain all cost savings on completed contracts but are liable for all cost overruns. We develop our bids for a fixed price project by estimating the amount of labor hours and the cost of materials necessary to complete the project and then bid
the projects in order to achieve a sufficient profit margin to justify the allocation of our resources to such project. Our revenues therefore may fluctuate from period to period based on, among other things, the aggregate amount of materials used
in projects during a period and whether the customer provides materials and equipment. We perform many of our conversion and repair services on a time and materials basis pursuant to which the customer pays a negotiated labor rate for labor hours
spent on the project as well as the cost of materials plus a margin on materials purchased. Repair projects may take a few days to a few weeks, although some extend for a longer period.



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The continued consolidation of the domestic steel industry and an increased demand from China have put a strain on the
worldwide supply of raw materials required to produce steel. As a result, beginning in late 2003, the price of steel and steel delivery times began to increase substantially. In addition, the weak U.S. dollar together with the growing global demand
has allowed U.S. steel mills to increase prices. To cover the increased cost of the raw materials, steel companies are adding surcharges on steel and passing them on to their customers. During 2004, the rising cost of steel has increased our costs
thereby adversely impacting our gross profit margins. Higher steel prices may also be causing customers to defer projects. Sustained higher or further increased steel prices could materially increase our costs and adversely affect our margins and
profits and could affect the availability of steel thereby impacting our ability to adhere to delivery schedules. We have not engaged, and currently do not intend to engage, in hedging transactions for our steel purchase requirements.



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Results of Operations



The following table sets forth certain of our historical data and percentage of revenues for the periods presented (in thousands):



Conrad Industries, Inc. Summary Results of Operations

(In thousands)



|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|--------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | ----- | - | ---- | - | ------ | ---- |  | ----- | - |  | - | ------ | - |  | ----- | - |  | - | ------ | - |  | ----- | -
|                                                    |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |      
|                                                    |  | 2004                             |        |   | 2003                            |       |   | 2004 |   |        | 2003 | 
|Financial Data:                                     |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Revenue                                             |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Vessel construction                                 |  | $                                | 5,527  |   |                                 | 67.9  | % |      | $ | 4,493  |      |  | 66.8  | % |  | $ | 18,781 |   |  | 65.1  | % |  | $ | 17,765 |   |  | 67.0  | %
|Repair and conversions                              |  |                                  | 2,615  |   |                                 | 32.1  | % |      |   | 2,229  |      |  | 33.2  | % |  |   | 10,080 |   |  | 34.9  | % |  |   | 8,769  |   |  | 33.0  | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Total revenue                                       |  |                                  | 8,142  |   |                                 | 100.0 | % |      |   | 6,722  |      |  | 100.0 | % |  |   | 28,861 |   |  | 100.0 | % |  |   | 26,534 |   |  | 100.0 | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Cost of revenue                                     |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Vessel construction                                 |  |                                  | 6,472  |   |                                 | 117.1 | % |      |   | 4,597  |      |  | 102.3 | % |  |   | 19,402 |   |  | 103.3 | % |  |   | 17,640 |   |  | 99.3  | %
|Repair and conversions                              |  |                                  | 2,441  |   |                                 | 93.3  | % |      |   | 2,132  |      |  | 95.6  | % |  |   | 8,865  |   |  | 87.9  | % |  |   | 8,153  |   |  | 93.0  | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Total cost of revenue                               |  |                                  | 8,913  |   |                                 | 109.5 | % |      |   | 6,729  |      |  | 100.1 | % |  |   | 28,267 |   |  | 97.9  | % |  |   | 25,793 |   |  | 97.2  | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Gross (loss) profit                                 |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Vessel construction                                 |  |                                  | (945   | ) |                                 | -17.1 | % |      |   | (104   | )    |  | -2.3  | % |  |   | (621   | ) |  | -3.3  | % |  |   | 125    |   |  | 0.7   | %
|Repair and conversions                              |  |                                  | 174    |   |                                 | 6.7   | % |      |   | 97     |      |  | 4.4   | % |  |   | 1,215  |   |  | 12.1  | % |  |   | 616    |   |  | 7.0   | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Total gross (loss) profit                           |  |                                  | (771   | ) |                                 | -9.5  | % |      |   | (7     | )    |  | -0.1  | % |  |   | 594    |   |  | 2.1   | % |  |   | 741    |   |  | 2.8   | %
|S G & A expenses                                    |  |                                  | 907    |   |                                 | 11.1  | % |      |   | 1,157  |      |  | 17.2  | % |  |   | 3,188  |   |  | 11.0  | % |  |   | 3,344  |   |  | 12.6  | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Loss from operations                                |  |                                  | (1,678 | ) |                                 | -20.6 | % |      |   | (1,164 | )    |  | -17.3 | % |  |   | (2,594 | ) |  | -9.0  | % |  |   | (2,603 | ) |  | -9.8  | %
|Interest expense                                    |  |                                  | 149    |   |                                 | 1.8   | % |      |   | 132    |      |  | 2.0   | % |  |   | 411    |   |  | 1.4   | % |  |   | 305    |   |  | 1.1   | %
|Other income, net                                   |  |                                  | (1     | ) |                                 | 0.0   | % |      |   | (22    | )    |  | -0.3  | % |  |   | (79    | ) |  | -0.3  | % |  |   | (34    | ) |  | -0.1  | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Loss before income taxes                            |  |                                  | (1,826 | ) |                                 | -22.4 | % |      |   | (1,274 | )    |  | -19.0 | % |  |   | (2,926 | ) |  | -10.1 | % |  |   | (2,874 | ) |  | -10.8 | %
|Income tax benefit                                  |  |                                  | (649   | ) |                                 | -8.0  | % |      |   | (447   | )    |  | -6.6  | % |  |   | (1,041 | ) |  | -3.6  | % |  |   | (1,000 | ) |  | -3.8  | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Net loss                                            |  | $                                | (1,177 | ) |                                 | -14.5 | % |      | $ | (827   | )    |  | -12.3 | % |  | $ | (1,885 | ) |  | -6.5  | % |  | $ | (1,874 | ) |  | -7.1  | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|                                                    |  |                                  |        |   |                                 |       |   |     
|EBITDA (1)                                          |  | $                                | (1,053 | ) |                                 | -12.9 | % |      | $ | (589   | )    |  | -8.8  | % |  | $ | (656   | ) |  | -2.3  | % |  | $ | (956   | ) |  | -3.6  | %
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|                                                    |  |                                  |        |   |                                 |       |   |     
|Net cash (used in) provided by operating activities |  | $                                | (3,734 | ) |                                 |       |   |      | $ | 1,164  |      |  |       |   |  | $ | (1,374 | ) |  |       |   |  | $ | 1,912  |   |  |       |  
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Net cash used in investing activities               |  | $                                | (29    | ) |                                 |       |   |      | $ | (5,249 | )    |  |       |   |  | $ | (80    | ) |  |       |   |  | $ | (7,814 | ) |  |       |  
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Net cash (used in) provided by financing activities |  | $                                | (562   | ) |                                 |       |   |      | $ | 3,407  |      |  |       |   |  | $ | (1,193 | ) |  |       |   |  | $ | 3,791  |   |  |       |  
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  
|Operating Data: Labor hours                         |  |                                  | 122    |   |                                 |       |   |      |   | 82     |      |  |       |   |  |   | 387    |   |  |       |   |  |   | 337    |   |  |       |  
|                                                    |  |                                  |        |   |                                 |       |   |      |   |        |      |  |       |   |  |   |        |   |  |       |   |  |   |        |   |  |       |  



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---

|(1) | Represents earnings before deduction of interest, taxes, depreciation and amortization. EBITDA is not a measure of cash flow, operating results or liquidity as determined by
generally accepted accounting principles. We have included information concerning EBITDA as supplemental disclosure because management believes that EBITDA provides meaningful information regarding a companys historical ability to incur and
service debt. EBITDA as defined and measured by us may not be comparable to similarly titled measures reported by other companies. EBITDA should not be considered in isolation or as an alternative to, or more meaningful than, net income or cash flow
provided by operations as determined in accordance with generally accepted accounting principles as an indicator of our profitability or liquidity.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table sets forth a reconciliation of net cash (used in) provided by operating activities to EBITDA for the
periods presented (in thousands):



|                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|--------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                    |  | Three months ended September 30, |        |   | Nine months ended September 30, |  
|                                                    |  | 2004                             |        |   | 2003                            |   |        | 2004 |  |   | 2003   |  
|Net cash (used in) provided by operating activities |  | $                                | (3,734 | ) |                                 | $ | 1,164  |      |  | $ | (1,374 | ) |  | $ | 1,912  |  
|Interest expense                                    |  |                                  | 149    |   |                                 |   | 132    |      |  |   | 411    |   |  |   | 305    |  
|Benefit for income taxes                            |  |                                  | (649   | ) |                                 |   | (447   | )    |  |   | (1,041 | ) |  |   | (1,000 | )
|Deferred income tax benefit                         |  |                                  | 555    |   |                                 |   | 17     |      |  |   | 994    |   |  |   | 84     |  
|Gain on sale of assets                              |  |                                  |       |   |                                 |   | 23     |      |  |   | 69     |   |  |   | 23     |  
|Changes in operating assets and liabilities         |  |                                  | 2,626  |   |                                 |   | (1,478 | )    |  |   | 285    |   |  |   | (2,280 | )
|                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  
|EBITDA                                              |  | $                                | (1,053 | ) |                                 | $ | (589   | )    |  | $ | (656   | ) |  | $ | (956   | )
|                                                    |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   |        |  



Revenue for the third quarter of 2004
increased $1.4 million, or 21.1%, to $8.1 million compared to $6.7 million for the third quarter of 2003 while revenue for the first nine months of 2004 reflected an increase of $2.3 million, or 8.8%, compared to the same period in the prior year.
Vessel construction revenue increased $1.0 million, or 23.0%, and $1.0 million, or 5.7% for the third quarter and first nine months of 2004 compared to the same periods in 2003. Repair and conversion revenue increased $386,000 for the third quarter
of 2004, or 17.3%, compared to the same period of the prior year, while repair and conversion revenue increased $1.3 million, or 15.0%, for the first nine months of 2004 compared to the same period in 2003. The increase in revenue in the current
quarter is primarily a result of the overall increase in production hours due to (1) the entry into the aluminum business, (2) repair and conversion activity, and (3) the execution of our new construction backlog. The increase in revenue in the nine
month period is primarily a result of an increase in production hours due to (1) the entry into the aluminum business, (2) repair and conversion activity and (3) the sale of barges in inventory at the end of 2003. Vessel construction hours for the
third quarter and first nine months of 2004 increased 68.2% and 17.2%, respectively, as compared to the same periods in 2003. Repair and conversion hours for the third quarter and first nine months of 2004 increased 25.7% and 11.9%, respectively, as
compared to the same periods in 2003.



Gross profit for the third quarter and
first nine months of 2004 decreased $764,000, and $147,000, or 19.8%, respectively, compared to the same periods of the prior year. Vessel construction gross profit decreased $841,000, or 808.7%, and $746,000, or 596.8% for the third quarter and
first nine months of 2004 compared to the same period in 2003. Repair and conversion gross profit increased $77,000, or 79.4%, and $599,000, or 97.2%, for the third quarter and first nine months of 2004 compared to the same periods of the prior
year.



Vessel construction gross profit was depressed primarily as a result of
(1) continuing delays in transitioning from design to production on a major project for four vessels in our backlog and the corresponding lack of overhead absorption, resulting in additional charges of $544,000 recorded in the third quarter of 2004,
(2) an additional charge of $468,000 recorded in the third quarter of 2004 related to anticipated losses on a commercial contract for the first aluminum vessel at the new aluminum facility which is expected to deliver in the fourth quarter of 2004,
and (3) the continued upward pressures on the price of steel.



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During the second and third quarters of 2004, we recorded charges totaling $641,000 on the first two vessels of four
vessel project. The delay in design approval on the project, which we believe was caused primarily by the customer, caused our overhead rates to rise because we could not take on additional work while we waited for the notice to proceed from the
customer. In addition, delays caused us to incur additional costs to purchase steel and other material for this project as a result of the surging prices of steel and other price increases. We are engaged in discussions with this customer for
recovery of these additional costs. We are optimistic that we will not experience further delays on the project; however, more unanticipated delays could cause us to realize additional losses on the project if we are unable to secure other work to
absorb our overhead during the delay.



In addition, we only had one new
construction project at our aluminum facility in production during the third quarter and the first nine months ended September 30, 2004, which is absorbing all of the construction overhead at that facility. That along with increases in the estimated
costs of completion caused us to realize an additional charge in the third quarter of 2004 of approximately $468,000 related to anticipated losses on that commercial contract. As we previously disclosed, we recorded charges of $163,000 during the
second quarter of 2004 related to this contract. We added a new aluminum project to our backlog during the third quarter but actual construction did not commence until the fourth quarter of 2004. If we are not successful in obtaining new
construction work for the aluminum facility in the near future, the new project may be required to absorb additional overhead thereby leading to a loss on the new project. Management is focused on pursuing all types of vessel construction projects
to add to our backlog in order to alleviate some of the upward pressure on our overhead rates.



Repair and conversion gross profit for the current year periods improved primarily as a result of the overhead absorption benefits associated with a single, large, low margin fixed price repair job, as well as the
disruptive impact in early 2003 associated with the transition and relocation of the our core repair and conversion operations to Conrad Deepwater. In addition, the gross margins were depressed in the prior year period as a result of increases in
the estimated costs at completion on a single significant fixed price repair and conversion contract that was scheduled for delivery during this transition period.



Selling, general and administrative expenses (SG&A) decreased $250,000, or 21.6%, for the third quarter of 2004 and
$156,000, or 4.7%, for the first nine months of 2004, respectively, compared to the same periods in 2003. The decrease in SG&A for the current year periods was primarily associated with the implementation of the cost reduction program which was
partly offset by our accrual during the second quarter of 2004 of all of the benefits under the separation agreement entered into with our former President and Chief Executive Officer during April of 2004.



Interest expense increased $17,000, or 12.9%, for the third quarter of 2004, and $106,000, or
34.8%, for the first nine months of 2004 compared to the same periods in the prior year. The increase is primarily the result of an increase in the average outstanding loan balance associated with our expansion into aluminum marine fabrication and
repair and the development of Conrad Deepwater and the capitalization of interest related to the development of Conrad Deepwater in the prior year period. The increase is also a result of an increase in the variable interest rates on the Term and
Development Loans, described in Liquidity and Capital Resources, which we expect to continue to cause interest expense in 2004 to be higher than 2003.



The Company had an income tax benefit of $649,000 for the third quarter of 2004 compared to an income tax benefit of $447,000 in the same
period of 2003. The Company had income tax benefits of $1.0 for the nine months ended September 30, 2004 and 2003. The income tax benefits are primarily attributable to the losses from operations as discussed above.



Liquidity and Capital Resources



Net cash used by operating activities was $1.4 million for the first nine months of 2004
compared to net cash provided by operating activities of $1.9 for the prior year period. The decrease is due to net increases in billings related to costs and estimated earnings on uncompleted contracts and in accounts receivable, offset by a
decrease in inventory and other assets and an increase in accounts payable. Our working capital position was $2.4 million at September 30, 2004 compared to $5.0 million at December 31, 2003. The decrease in working capital was primarily a result of
the loss from operations.



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Our capital requirements historically have been primarily for expansion and improvements to our facilities and equipment.
Our net cash used in investing activities of $80,000 for the nine months ended September 30, 2004 reflected capital expenditures of approximately $876,000 for the development of Conrad Aluminum and approximately $184,000 for improvements to
facilities and equipment, partially offset by a draw of project funds for the development of Conrad Aluminum of $832,000 and proceeds from the sale of assets of $148,000. For 2004, the Board of Directors has approved approximately $638,000 in
capital expenditures for the repair and upgrade of existing facilities in addition to the completion of the aluminum facility expansion. Accordingly, we expect capital expenditures for the remainder of 2004 to be no more than approximately $454,000.



Net cash used in financing activities was $1.2 million for the nine months
ended September 30, 2004 which included the repayment of $1.6 million of debt, partially offset by proceeds from the grant from the State of Louisiana of $363,000.



The Revolving Credit Facility permits us to borrow up to $10.0 million for working capital and other general corporate purposes, including
the funding of acquisitions and matures on May 31, 2005. As of September 30, 2004 we could borrow up to $2.7 million under the facility, pursuant to the financial covenant restrictions. As of September 30, 2004 and December 31, 2003, no amounts were
outstanding on the Revolving Credit Facility.



We have a Loan Agreement with a
commercial bank, which specifies the terms of the Term Loan, the Development Loan and the Revolving Credit Facility. The interest rates are variable, and interest accrues at our option either at the JPMorgan Chase prime rate plus 0.5% or LIBOR plus
2.75%. The Loan Agreement is secured by substantially all of our assets, contains customary restrictive covenants and requires the maintenance of certain financial ratios which could limit our use of available capacity under the Revolving Credit
Facility. In addition, the Loan Agreement prohibits us from paying dividends without the consent of the lender and restricts our ability to incur additional indebtedness. At September 30, 2004, the Company was in compliance with these covenants. On
November 11, 2004 the Loan Agreement was further amended to relax one of the financial covenants. The amendment is filed as an exhibit in this report. The Company is in discussions with the lender to extend the maturity of the Revolving Credit
Facility to May 31, 2006.



The Term Loan has a maturity date of May 31, 2007
and is payable in 31 remaining monthly principal payments of $107,000 plus interest, with a final payment of $2.3 million. Interest accrues at 3.45% until November 1, 2004, and thereafter at our option at either the JPMorgan Chase prime rate plus
0.5% or LIBOR plus 2.75%. At September 30, 2004 and December 31, 2003, the Term Loan balance outstanding was $5.6 million and $6.4 million, respectively.



On July 18, 2002, we entered into the Development Loan which provided financing totaling $6.7 million to fund the development of Conrad Deepwater. The Development Loan
included a revolver that converted to a term loan. Payments under the revolver were interest only until March 31, 2003, at which time it converted to a term loan to be repaid in 49 monthly principal payments of $58,000 plus interest with a final
payment of $3.9 million due on May 31, 2007. Interest accrues at 3.86% from July 1, 2004 until September 30, 2004, at 4.77% until December 31, 2004, and thereafter at our option either at the JPMorgan Chase prime rate plus 0.5% or LIBOR plus 2.75%.
At September 30, 2004 and December 31, 2003, the Development Loan outstanding was $5.7 million and $6.2 million, respectively.



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In July 2003, we completed the financing for our expansion into the aluminum marine fabrication, repair and construction
business. The expansion is part of a $5.5 million investment in our original facility in Amelia, Louisiana (Amelia Topside), through our subsidiary Conrad Aluminum, L.L.C. The financing of this expansion includes a $1.5 million grant by
the State of Louisiana through the Economic Development Award Program (EDAP) and $4.0 million of industrial revenue bonds issued by the St. Mary Parish Industrial Development Board. In connection with the issuance of the bonds, Conrad subsidiary
Conrad Aluminum, L.L.C. contributed to the Industrial Development Board the land and buildings at the Amelia Topside yard and is leasing them back along with the items to be purchased with the bond proceeds, with a right to repurchase or extend. The
transaction is being accounted for as a financing and thus the original cost of the property less accumulated depreciation remains reflected in our property, plant and equipment. The lease payments will be used to pay principal and interest on the
bonds. Conrad and its subsidiaries have guaranteed the bonds. The bonds have a 15 year term and monthly principal payments of $22,222 plus interest. Interest accrues at 3.92% until November 12, 2004 and thereafter, at our option, at either the
JPMorgan Chase prime rate or the higher of (a) 30, 60 or 90-day LIBOR plus two percent or (b) the prime rate minus one percent. At September 30, 2004 and December 31, 2003, the industrial revenue bond balance outstanding was $3.7 million and $3.9
million, respectively.



As of September 30, 2004 and December 31, 2003,
remaining industrial revenue bond proceeds of approximately $105,000 and $937,000, respectively, restricted for use on the aluminum facility expansion are included under the caption Other Assets.



The $1.5 million EDAP grant requires us to create a total of 224 new jobs by December 31,
2006 and sustain that level through December 31, 2012. If we fail to meet the job creation objectives, the state may recover related portions of the grant. As of September 30, 2004 and December 31, 2003, approximately $1.5 million and $1.4 million,
respectively, of equipment had been purchased with grant proceeds. Accordingly, as of September 30, 2004 and December 31, 2003, a $1.5 million and $1.4 million liability, respectively, was included under the caption Other Non-Current
Liabilities. This amount will be amortized into income in future periods over the estimated useful lives of the related equipment and as the specified performance objectives are achieved. The equipment purchased with the grant proceeds is
owned by St. Mary Parish and is being leased by us with an option to purchase. The transaction is being accounted for as a financing and thus the assets are included in our property, plant and equipment.



In the normal course of our business, we are required to provide letters of credit as
security for our workers compensation insurance programs. Additionally, under certain contracts we may be required to provide letters of credit and bonds to secure our performance and payment obligations. At September 30, 2004, outstanding letters
of credit and bonds amounted to $59.5 million. We believe that general industry conditions have led customers to require performance bonds more often than in the past. Although we believe that we will be able to obtain contract bid and performance
bonds, letters of credit, and similar obligations on terms we regard as acceptable, there can be no assurance we will be successful in doing so. In addition, the cost of obtaining such bonds, letters of credit and similar obligations has increased
and may continue to increase.



Our backlog was $43.8 million at September 30,
2004 as compared to $43.6 million at December 31, 2003 and $36.3 million at September 30, 2003. During the third quarter, we were awarded an $8.9 million contract by the United States Army Corps of Engineers for the design and construction of a
144-foot, 3300 HP, ABS-Classed welded steel towboat. After an extended design phase, production is scheduled to begin in the first half of 2005. We were also awarded a $2.8 million contract to build a 90x25x116 Multi-Purpose
High Speed Patrol and Firefighting vessel for the Plaquemines Port, Harbor & Terminal District in Plaquemines Parish, Louisiana. We began production of this triple screw vessel during the fourth quarter of 2004 at the Conrad Aluminum facility in
Amelia, Louisiana. Additionally, we were awarded a $5.6 million contract to build a 95 x 30 x 129 Fish Stocking and Assessment Vessel for the U.S. Fish and Wildlife Service of the Department of the Interior. This
self-propelled vessel is intended to serve in the Great Lakes. Production is scheduled to begin during the fourth quarter of 2004.



Management believes that our existing working capital, cash flows from operations and bank commitments will be adequate to meet our working capital needs for operations
and capital expenditures through 2004. We believe that



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our ability to continue to do so thereafter will depend primarily on whether we are able to execute on our existing
backlog profitably, and on whether we are able to secure additional profitable backlog. Our revolving line of credit expires in May 2005, and we believe access to a revolving line of credit is an important part of our available cash resources. We
are currently in discussions with our lender to extend the maturity of the Revolving Credit Facility to May 31, 2006. In addition, we have large principal payments becoming due on our long-term debt in 2007 and believe that we may need to refinance
some or all of those amounts. Our ability to extend our revolving line of credit and refinance our long-term debt will depend in large part on our financial condition and the condition of the credit markets at the time.



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Item 3: Quantitative and Qualitative Disclosures About Market Risk



We are exposed to the risk of changing interest rates. Interest on all of our long-term debt including current maturities, amounting to $15.0 million with an average interest rate of 3.39% at September 30, 2004, was
variable based on short-term market rates. Thus a general increase of 1.0% in short-term market interest rates would result in additional interest cost of $150,000 per year if we were to maintain the same debt level and structure.



Item 4: Controls and Procedures



We evaluated the
effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2004. The evaluation was carried out under the supervision of and with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer. Based on our evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information relating to our
company, including our consolidated subsidiaries, required to be included in reports we file with or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934. There have been no changes in our internal control over
financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



Swiftships
Shipbuilders, LLC, et. al. vs. Conrad Industries, Inc., 16th Judicial District Court for the Parish of St. Mary. In February 2004, Swiftships Shipbuilders, LLC and two affiliates (collectively, Swiftships) brought suit against us,
alleging that various of our actions in connection with our expansion into the aluminum marine fabrication and repair business breached in bad faith a confidentiality agreement we entered into when we were considering acquiring Swiftships. The suit
also alleges that we conspired with one of our employees who is a former Swiftships employee to breach a confidentiality agreement the employee had with Swiftships as a result of his employment with them. The suit also alleges violations of the
Louisiana Uniform Trade Secrets Act, unfair trade practices and fraud. The suit seeks unspecified damages and asks for injunctive relief to prevent further alleged breaches of the confidentiality agreements and misappropriation of trade secrets. The
action is in its early stages, no formal discovery or depositions have taken place, nor has a trial date been set at this time. Conrad has answered Swiftships petition, denying any and all responsibility for the claims asserted. Moreover,
Conrad has filed a reconventional demand against Swiftships to recover monies Conrad unnecessarily expended in evaluating Swiftships true financial condition, which Conrad submits was negligently misrepresented to Conrad by Swiftships.
Swiftships has answered Conrads reconventional demand, denying any and all responsibility for such expenses.



We are a party to various routine legal proceedings primarily involving commercial claims and workers compensation claims. While the outcome of these routine claims
and legal proceedings cannot be predicted with certainty, management believes that the outcome of such proceedings in the aggregate, even if determined adversely, would not have a material adverse effect on our consolidated financial position,
results of operations or liquidity.



Item 6. Exhibits and Reports on Form 8-K



(a) Exhibits



|     |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
|---- |  | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|3.1  |  |  |  | Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1 to our Annual Report on Form 10-K for year ended December 31, 1998 and incorporated by reference
herein).                                                                                                                                                                                                                                                                                                    
|     |  |  
|3.2  |  |  |  | Amended and Restated Bylaws (filed as Exhibit 3.2 to our Annual Report on Form 10-K for year ended December 31, 1998 and incorporated by reference herein).                                                                                                                                                                                                                                                                                                                          
|     |  |  
|4.1  |  |  |  | Specimen Common Stock Certificate (filed as Exhibit 4 to our Registration Statement on Form 8-A filed May 14, 1998 and incorporated by reference herein).                                                                                                                                                                                                                                                                                                                            
|     |  |  
|4.2  |  |  |  | Registration Rights Agreement by and among Conrad Industries, Inc., J. Parker Conrad, John P. Conrad, Jr., Katherine C. Court, The John P. Conrad, Jr. Trust, The Daniel T. Conrad Trust, The
Glen Alan Conrad Trust, The Kenneth C. Conrad Trust, The Katherine C. Court Trust, The James P. Court Trust, William H. Hidalgo, and Cecil A. Hernandez (filed as Exhibit 4.2 to our Annual Report on Form 10-K for year ended December 31, 1998 and
incorporated by reference herein).
|     |  |  
|4.3  |  |  |  | Rights Agreement dated May 23, 2002 between Conrad Industries, Inc. and American Stock Transfer & Trust Company (filed as Exhibits 1, 2, 3 and 4 to our Registration Statement on Form 8-A
filed May 29, 2002 and incorporated by reference herein).                                                                                                                                                                                                                                 
|     |  |  
|10.1 |  |  |  | Seventh Amendment to the Third Amended and Restated Loan Agreement by and among Whitney National Bank, Conrad Shipyard, L.L.C., Orange Shipbuilding Company, Inc. and Conrad Industries dated
August 11, 2004 (filed as Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 and incorporated by reference herein).                                                                                                                                 
|     |  |  
|10.2 |  |  |  | Employment Agreement effective August 16, 2004, between Conrad Industries, Inc. and Cecil A. Hernandez (filed as Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June
30, 2004 and incorporated by reference herein).                                                                                                                                                                                                                                        
|     |  |  
|10.3 |  |  |  | Eighth Amendment to the Third Amended and Restated Loan Agreement by and among Whitney National Bank, Conrad Shipyard, L.L.C., Orange Shipbuilding Company, Inc. and Conrad Industries dated
November 11, 2004.                                                                                                                                                                                                                                                                      



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|     |  |   |  |                                                                                                                                        
|---- |  | - |  | ---------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  |  |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                
|     |  |  
|31.2 |  |  |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                
|     |  |  
|32.1 |  |  |  | Certification of the Chief Executive Officer and the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



(b) Reports on Form
8-K



On August 4, 2004, we filed a report on
Form 8-K to report our second quarter 2004 results.



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SIGNATURE



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



Date: November 12, 2004



CONRAD INDUSTRIES, INC.By:

/s/ CECIL A. HERNANDEZ.Cecil A. HernandezVice President and Chief Financial Officer




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