CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

The following information should be read in conjunction with the unaudited condensed consolidated financial statements and the notes thereto included under Item 1 and the audited consolidated financial statements and the related notes and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our annual report on Form 10-K for the year ended December 31, 2008.

In this quarterly report on Form 10-Q, unless the context otherwise indicates, "we," "us" and "our" mean MII and its consolidated subsidiaries.

We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect our company and to take advantage of the "safe harbor" protection for forward-looking statements that applicable federal securities law affords.

From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These statements may include projections and estimates concerning the timing and success of specific projects and our future backlog, revenues, income and capital spending. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "plan," "goal" or other words that convey the uncertainty of future events or outcomes. In addition, sometimes we will specifically describe a statement as being a forward-looking statement and refer to this cautionary statement.

In addition, various statements in this quarterly report on Form 10-Q, including those that express a belief, expectation or intention, as well as those that are not statements of historical fact, are forward-looking statements. These forward-looking statements speak only as of the date of this report; we disclaim any obligation to update these

statements unless required by securities law, and we caution you not to rely on them unduly. We have based these forward-looking statements on our current expectations and assumptions about future events. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. These risks, contingencies and uncertainties relate to, among other matters, the following:
· general economic and business conditions and industry trends;

· general developments in the industries in which we are involved;

· decisions about offshore developments to be made by oil and gas companies;

· decisions on spending by the U.S. Government and electric power generating companies;

· the highly competitive nature of most of our businesses;

· cancellations of and adjustments to backlog and the resulting impact from using backlog as an indicator of future earnings;

· the ability of our suppliers to deliver raw materials in sufficient quantities and in a timely manner;

· volatility and uncertainty of the credit markets;

· our ability to comply with covenants in our credit agreements and other debt instruments and availability, terms and deployment of capital;

· the continued availability of qualified personnel;

· the operating risks normally incident to our lines of business, including the potential impact of liquidated damages;

· changes in, or our failure or inability to comply with, government regulations;

· adverse outcomes from legal and regulatory proceedings;

· impact of potential regional, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future;

· changes in, and liabilities relating to, existing or future environmental regulatory matters;

· rapid technological changes;

· the realization of deferred tax assets, including through a reorganization we completed in December 2006;

· the consequences of significant changes in interest rates and currency exchange rates;

· difficulties we may encounter in obtaining regulatory or other necessary approvals of any strategic transactions;

· the risks of successfully integrating our acquisitions;

· social, political and economic situations in foreign countries where we do business, including countries in the Middle East and Asia Pacific and the former Soviet Union;

· the possibilities of war, other armed conflicts or terrorist attacks;

· the affects of asserted and unasserted claims;

· our ability to obtain surety bonds, letters of credit and financing;

· our ability to maintain builder's risk, liability, property and other insurance in amounts and on terms we consider adequate and at rates that we consider economical;

· the aggregated risks retained in our insurance captives; and

· the impact of the loss of certain insurance rights as part of the Chapter 11 Bankruptcy settlement.

We believe the items we have outlined above are important factors that could cause estimates in our financial statements to differ materially from actual results and those expressed in a forward-looking statement made in this report or elsewhere by us or on our behalf. We have discussed many of these factors in more detail elsewhere in this report and in our annual report on Form 10-K for the year ended December 31, 2008. These factors are not necessarily all the factors that could affect us. Unpredictable or unanticipated factors we have not discussed in this report could also have material adverse effects on actual results of matters that are the subject of our forward-looking statements. We do not intend to update our description of important factors each time a potential important factor arises, except as required by applicable securities laws and regulations. We advise our security holders that they should (1) be aware that factors not referred to above could affect the accuracy of our forward-looking statements and (2) use caution and common sense when considering our forward-looking statements.

GENERAL

In general, our business segments are composed of capital-intensive businesses that rely on large contracts for a substantial amount of their revenues. Each of our business segments is currently financed on a stand-alone basis. Our debt covenants limit using the financial resources of or the movement of excess cash from one segment for the benefit of the other. For further discussion, see "Liquidity and Capital Resources" below.

As of March 31, 2009, in accordance with the percentage-of-completion method of accounting, we have provided for our estimated costs to complete all of our ongoing contracts. However, it is possible that current estimates could change due to unforeseen events, which could result in adjustments to overall contract costs. The risk on fixed-priced contracts is that revenue from the customer does not rise to cover increases in our costs. It is possible that current estimates could materially change for various reasons, including, but not limited to, fluctuations in forecasted labor productivity, pipeline lay rates or steel and other raw material prices. In some instances, we guarantee completion dates related to our projects. Increases in costs on our fixed-price contracts could have a material adverse impact on our consolidated results of operations, financial condition and cash flows. Alternatively, reductions in overall contract costs at completion could materially improve our consolidated results of operations, financial condition and cash flows.

Some of our contracts contain penalty provisions that require us to pay liquidated damages if we are responsible for the failure to meet specified contractual milestone dates and the applicable customer asserts a claim under these provisions. These contracts define the conditions under which our customers may make claims against us for liquidated damages. In many cases in which we have had potential exposure for liquidated damages, such damages ultimately were not asserted by our customers. As of March 31, 2009, we had not accrued for approximately $110 million of potential liquidated damages that we believe we could incur based upon our current expectations of the time to complete certain projects in our Offshore Oil and Gas Construction segment. We do not believe any claims for these potential liquidated damages are probable of being assessed. The trigger dates for the majority of these potential liquidated damages occurred during the fourth quarter of 2008. We are in active discussions with our customers on the issues giving rise to delays in these projects, and we believe we will be successful in obtaining schedule extensions that should resolve the potential for liquidated damages being assessed. However, we may not achieve relief on some or all of the issues. For certain other projects in our Offshore Oil and Gas Construction segment, we have currently provided for approximately $23 million in liquidated damages in our estimates of revenues and gross profit, of which approximately $19 million has been recognized in our financial statements to date, as we believe, based on the individual facts and circumstances, that these liquidated damages are probable.

Offshore Oil and Gas Construction Segment Our Offshore Oil and Gas Construction segment's activity depends mainly on the capital expenditures for offshore construction services of oil and gas companies and foreign governments for construction of development projects in the regions in which we operate. This segment's operations are generally capital intensive, and a number of factors influence its activities, including:
· oil and gas prices, along with expectations about future prices;

· the cost of exploring for, producing and delivering oil and gas;

· the terms and conditions of offshore leases;

· the discovery rates of new oil and gas reserves in offshore areas;

· the ability of businesses in the oil and gas industry to raise capital; and

· local and international political and economic conditions.

Government Operations Segment
The revenues of our Government Operations segment are largely a function of defense spending by the U.S. Government. As a supplier of major nuclear components for certain U.S. Government programs, this segment is a significant participant in the defense industry. With its unique capability of full life-cycle management of special nuclear materials, facilities and technologies, our Government Operations segment is well positioned to continue to participate in the continuing cleanup, operation and management of the nuclear sites and weapons complexes maintained by the U.S. Department of Energy.

Power Generation Systems Segment
Our Power Generation Systems segment's overall activity depends mainly on the capital expenditures of electric power generating companies and other steam-using industries. Several factors influence these expenditures, including:
· prices for electricity, along with the cost of production and distribution;

· prices for coal and natural gas and other sources used to produce electricity;

· demand for electricity, paper and other end products of steam-generating facilities;

· availability of other sources of electricity, paper or other end products;

· requirements for environmental improvements;

· impact of potential regional, state, national and/or global requirements to significantly limit or reduce greenhouse gas emissions in the future;

· level of capacity utilization at operating power plants, paper mills and other steam-using facilities;

· requirements for maintenance and upkeep at operating power plants and paper mills to combat the accumulated effects of wear and tear;

· ability of electric generating companies and other steam users to raise capital; and

· relative prices of fuels used in boilers, compared to prices for fuels used in gas turbines and other alternative forms of generation.

For a summary of the critical accounting policies and estimates that we use in the preparation of our unaudited condensed consolidated financial statements, see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our annual report on Form 10-K for the year ended December 31, 2008. There have been no material changes to these policies during the three months ended March 31, 2009, except as disclosed in Note 1 of the notes to condensed consolidated financial statements included in this report.

RESULTS OF OPERATIONS - THREE MONTHS ENDED MARCH 31, 2009 VS. THREE MONTHS ENDED
MARCH 31, 2008

McDermott International, Inc. (Consolidated)

Revenues increased approximately 3%, or $42.9 million, to $1,493.3 million in the three months ended March 31, 2009 compared to $1,450.4 million for the corresponding period in 2008 due to increases from our Offshore Oil and Gas Construction and Government Operations segments, partially offset by declines in our Power Generation Systems segment. Our Offshore Oil and Gas Construction segment generated a $62.6 million, or 10%, increase in its revenues during the first quarter of 2009 compared to the first quarter of 2008. This increase was primarily attributable to increased activities in our Middle East region. Additionally, in the first quarter of 2009, as compared to the corresponding period in 2008, our Government Operations segment generated a $66.5 million, or 35%, increase in its revenues primarily attributable to our acquisition of Nuclear Fuel Services Inc. while our Power Generation Systems segment generated an $87.7 million, or 14%, decrease in its revenues primarily attributable to lower revenues from our utility steam and system fabrication business.

Segment operating income decreased $4.3 million to $140.7 million in the three months ended March 31, 2009 from $145.0 million for the corresponding period in 2008 due to our Offshore Oil and Gas Construction and Power Generation Systems segments, partially offset by our Government Operations segment. The segment operating income of our Offshore Oil and Gas Construction and Power Generation Systems segments decreased $4.7 million and $7.4 million, respectively, in 2009, while our Government Operations segment experienced an increase totaling $7.8 million in the first quarter of 2009, as compared to the corresponding period in 2008. We experienced a significant increase in our pension plan expense in the three months ended March 31, 2009 compared to the corresponding period of 2008 totaling approximately $21.8 million. This increase is primarily attributable to losses on pension plan assets experienced in the year ended 2008.

For purpose of this discussion and the discussions that follow, segment operating income is before equity in income (loss) of investees and gains (losses) on asset disposals - net.

Offshore Oil and Gas Construction

Revenues increased approximately 10% or $62.6 million to $708.5 million in the three months ended March 31, 2009 compared to $645.9 million in the corresponding period of 2008 primarily attributable to increased activities from our Middle East ($86.4 million) and Americas ($23.3 million) regions partially offset by decreased activities from our Caspian region ($30.8 million). Revenues from all other activities decreased by approximately $16.3 million in the three months ended March 31, 2009 compared to the corresponding period of 2008.

Segment operating income decreased $4.7 million from $51.9 million in the three months ended March 31, 2008 to $47.2 million for the corresponding period of 2009 primarily attributable to reduced profits on projects in our Middle East region, where we recognized approximately $214 million in revenues with little or no gross profit. In the three months ended March 31, 2009, we recognized approximately $5 million in net contract losses on these projects, which were largely a result of costs incurred in preparation for our offshore pipeline operations and increases in forecasted third party costs. We also experienced increases in the Americas, Asia Pacific and Caspian regions, primarily attributable to project close-outs and change orders. We realized total benefits from project close-outs and change orders totaling approximately $25 million in the three months ended March 31, 2009 compared to approximately $11 million in the corresponding period of 2008. We also experienced a decrease in general and

administrative expenses totaling $4.3 million for the three months ended March 31, 2009 compared to the corresponding period of 2008.

Gain (loss) on asset disposals and impairments - net decreased $2.8 million in the three months ended March 31, 2009. We recognized a loss totaling approximately $1.0 million in the three months ended March 31, 2009 attributable to the impairment of obsolete assets in our Asia Pacific region, and the sale of a vessel we acquired in our acquisition of Secunda International, Limited. We recognized a gain totaling approximately $1.8 million in the three months ended March 31, 2008 on the sale of cranes at our fabrication facility in Batam, Indonesia.

Equity in loss of investees increased $0.4 million to a loss totaling $1.1 million in the three months ended March 31, 2009, primarily attributable to our share of expenses in our FloaTEC LLC joint venture formed in late 2005.

Government Operations

Revenues increased approximately 35%, or $66.5 million, to $257.1 million in the three months ended March 31, 2009 compared to $190.6 million for the corresponding period of 2008, primarily attributable our acquisition of Nuclear Fuel Services, Inc. in Erwin, Tennessee ($42.1 million) and additional volume in the manufacture of nuclear components of certain U.S. Government programs and recovery work. In addition, we experienced higher volumes in the manufacture of components for a commercial uranium enrichment project ($8.8 million). These improvements were partially offset by lower revenues from our management and operating contracts at several government sites.

Segment operating income increased $7.8 million to $37.0 million in the three months ended March 31, 2009 compared to $29.2 million for the corresponding period of 2008, primarily attributable to additional volume in the manufacture of nuclear components of certain U.S. Government programs and recovery work. In addition, we experienced higher volumes related to a commercial uranium enrichment project . These improvements were partially offset by increased pension expense and lower revenues from our management and operating contracts at several government sites. We also experienced higher depreciation and amortization expense in the three months ended March 31, 2009 associated with our acquisition of Nuclear Fuel Services, Inc.

Power Generation Systems

Revenues decreased approximately 14%, or $87.7 million, to $528.6 million in the three months ended March 31, 2009, compared to $616.3 million for the corresponding period of 2008, primarily attributable to decreases in our utility steam and system fabrication business ($100.6 million), our replacement nuclear steam generator business ($10.6 million), our nuclear service business ($3.3 million), and our replacement parts business ($3.0 million). These decreases were partially offset by increased revenues from our fabrication, repair and retrofit of existing facilities business ($18.2 million), boiler auxiliary equipment business ($7.7 million), and our operations and maintenance business ($3.3 million).

Segment operating income decreased $7.4 million to $56.5 million in the three months ended March 31, 2009, compared to $63.9 million for the corresponding period of 2008, primarily attributable to lower volumes in our utility steam and system fabrication business, combined with lower volume and margins in our replacement nuclear steam generator and nuclear service businesses, and lower margins in our industrial boiler business. We also experienced higher qualified pension plan expense in the three months ended March 31, 2009 compared to the corresponding period in 2008. These items were partially offset by improved margins in our utility steam and system fabrication and operations and maintenance businesses. These increased margins resulted from favorable cost improvements on a preponderance of our contracts in the three months ended March 31, 2009. Other improvements included increased volume and margins in our fabrication, repair and retrofit of existing facilities, and boiler auxiliary equipment businesses.

Gains (losses) on asset disposals and impairments - net decreased by $9.6 million in the three months ended March 31, 2009 compared to the corresponding period of 2008 due to a 9.6 million gain on the sale of our Dumbarton facilities in 2008.

Equity in income of investees decreased $1.0 million in the three months ended March 31, 2009 compared to the corresponding period of 2008 primarily attributable to material cost increases at our joint venture in China.

Corporate

Unallocated corporate expenses increased $7.7 million to $17.7 million for the three months ended March 31, 2009, as compared to $10.0 million for the corresponding period in 2008, primarily attributable to increased qualified pension plan expense due to the negative returns realized by our pension plan assets in 2008 and higher salary expenses resulting primarily from an increased number of employees.

Other Income Statement Items

Interest income decreased $10.6 million to $2.8 million in the three months ended March 31, 2009, primarily due to decreases in average cash equivalents and investments and prevailing interest rates.

Interest expense decreased $1.9 million to $1.0 million in the three months ended March 31, 2009, primarily due to lower amortization of debt issuance costs on our credit facilities.

Other expense - net increased by $7.5 million to $11.5 million in the three months ended March 31, 2009 primarily due to losses incurred in the change in fair value of our foreign currency forward-exchange contracts attributable to mark-to-market adjustments and ineffectiveness totaling approximately $7.0 million in the three months ended March 31, 2009.

Provision for Income Taxes

For the three months ended March 31, 2009, the provision for income taxes increased $3.5 million to $43.9 million, while income before provision for income taxes decreased $42.0 million to $121.6 million. Our effective tax rate for the three months ended March 31, 2009 was approximately 36.1%, as compared to 24.7% for the three months ended March 31, 2008. The rate increase was attributable to a higher mix of U.S. versus non-U.S. income for the quarter and an unfavorable mix within our non-U.S. operations resulting in a larger proportion of the total book income being taxed at higher rates.

Income before provision for income taxes, provision for income taxes and effective tax rates for our U.S. and non-U.S. jurisdictions are as shown below:

                             Income                   Provision for
                      before Provision for           (Benefit from)
                          Income Taxes                Income Taxes            Effective Tax Rate
                                         For the three months ended March 31,
                       2009           2008          2009         2008          2009          2008
                         (In thousands)              (In thousands)

United States       $    76,925     $  62,145     $ 33,309     $ 23,961          43.30 %      38.56 %
Non-United States        44,645       101,425       10,569       16,419          23.67 %      16.19 %

Total               $   121,570     $ 163,570     $ 43,878     $ 40,380          36.09 %      24.69 %

We are subject to U.S. federal income tax at a rate of 35% on our U.S. operations, plus the applicable state income taxes on our profitable U.S. subsidiaries. Our non-U.S. earnings are subject to tax at various tax rates and different tax regimes, such as a deemed profits tax regime. These variances, along with variances in our mix of income from these jurisdictions, contribute to shifts in our effective tax rate.

Backlog

Backlog is not a measure recognized by generally accepted accounting principles.
It is possible that our methodology for determining backlog may not be
comparable to methods used by other companies. We generally include expected
revenue in our backlog when we receive written confirmation from our customers.
Backlog may not be indicative of future operating results, and projects in our
backlog may be cancelled, modified or otherwise altered by customers.

                                     March 31,      December 31,
                                       2009             2008
                                             (Unaudited)
                                            (In millions)
Offshore Oil and Gas Construction   $     5,044     $       4,457
Government Operations                     2,699             2,883
Power Generation Systems                  2,220             2,476

Total Backlog                       $     9,963     $       9,816

Of the March 31, 2009 backlog, we expect to recognize revenues as follows:

                                     2009        2010        Thereafter
                                                (Unaudited)
                                         (In approximate millions)
Offshore Oil and Gas Construction   $ 2,300     $ 1,925     $        819
Government Operations                   700         750            1,249
Power Generation Systems                940         580              700

Total Backlog                       $ 3,940     $ 3,255     $      2,768

At March 31, 2009, the Offshore Oil and Gas Construction backlog included approximately $865 million related to contracts in or near loss positions, which are estimated to recognize future revenues with approximately zero percent gross margins on average. It is possible that our estimates of gross profit could increase or decrease based on improved productivity, actual downtime and the resolution of change orders and claims with our customers.

At March 31, 2009, Government Operations' backlog with the U. S. Government was $2.6 billion, which was substantially fully funded. Only $5.9 million had not been funded as of March 31, 2009.

We believe the current worldwide credit and economic environment and short-term uncertainty regarding environmental regulations, has affected the electric utility industry more than our other customers. As these factors affect electrical consumption and customer demand, our bookings during the two most recent quarters have been lower than recent periods. While we have not experienced significant delays on existing projects in our Power Generation Systems' backlog, we have experienced increasing delays in expected bookings on new planned projects.

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