UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


(Mark One)
þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2007
or
o		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 001-16857

HORIZON OFFSHORE, INC.

(Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		76-0487309 (I.R.S. Employer Identification No.)

2500 CityWest Boulevard, Suite 2200		77042
Houston, Texas (Address of principal executive offices)		(Zip Code)

(713) 361-2600

(Registrant’s telephone number, including area code)

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 þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

The number of shares of the registrant’s common stock, $0.00001 par value per share, outstanding as of October 30, 2007 was 32,614,215.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended September 30, 2007


Description			Page

PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements		3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		26
	Item 4.	Controls and Procedures		27

PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings		27
	Item 1A.	Risk Factors		27
	Item 6.	Exhibits		28
		Signatures		29
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906

PART I. FINANCIAL INFORMATION


Item 1.	*Financial Statements*

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


	September 30,			December 31,
	2007			2006
	(Unaudited)
	(In thousands, except share data)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	94,154		$	96,890
Short-term investments		6,225			—
Restricted cash		—			9,325
Accounts receivable —
Contract receivables		135,195			72,231
Costs in excess of billings		75,395			112,836
Other		4,034			2,773
Income tax receivable		4,540			5,040
Other current assets		6,646			8,140

Total current assets		326,189			307,235
PROPERTY AND EQUIPMENT, net		194,408			197,409
CONTRACT RECEIVABLES, long-term		14,328			—
OTHER ASSETS, net		14,113			18,375

	$	549,038		$	523,019


LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	12,096		$	15,160
Accrued liabilities		15,021			8,130
Accrued job costs		71,988			56,782
Billings in excess of costs		2,656			2,632
Current maturities of long-term debt		13,961			14,813
Current taxes payable		7,153			5,195

Total current liabilities		122,875			102,712
LONG-TERM DEBT, net of current maturities		74,919			85,495
SUBORDINATED NOTES		14,755			13,904
OTHER LIABILITIES		800			924
DEFERRED INCOME TAXES		22,979			22,649

Total liabilities		236,328			225,684
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.00001 par value, 5,000,000 shares authorized, none issued and outstanding		—			—
Common stock, $0.00001 par value, 100,000,000 shares authorized, 32,614,215 and 32,395,258 shares issued and outstanding, respectively		—			—
Additional paid-in capital		419,989			419,392
Accumulated deficit		(106,858	)		(121,766	)
Accumulated other comprehensive loss		(421	)		(291	)

Total stockholders’ equity		312,710			297,335

	$	549,038		$	523,019

The accompanying condensed notes are an integral part of these consolidated financial statements.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2007			2006			2007			2006
				(Unaudited)
	(In thousands, except share and per share data)

CONTRACT REVENUES	$	147,778		$	143,733		$	351,844		$	430,618
COST OF CONTRACT REVENUES		111,236			104,603			301,194			313,811

Gross profit		36,542			39,130			50,650			116,807
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		7,915			8,318			24,011			25,641
GAIN ON INSURANCE SETTLEMENT		—			—			—			(14,300	)
RESERVE FOR CLAIMS AND RECEIVABLES		—			—			—			18,458

Operating income		28,627			30,812			26,639			87,008
OTHER:
Interest expense		(2,816	)		(3,146	)		(8,521	)		(10,771	)
Interest income		886			894			2,654			1,686
Loss on debt extinguishment		—			—			—			(2,402	)
Other income (expense), net		(50	)		395			(35	)		358

INCOME BEFORE INCOME TAXES		26,647			28,955			20,737			75,879
INCOME TAX PROVISION		7,773			8,089			5,829			22,672

NET INCOME	$	18,874		$	20,866		$	14,908		$	53,207

EARNINGS PER SHARE — BASIC AND DILUTED:
Net income per share — basic	$	0.59		$	0.66		$	0.47		$	1.75

Net income per share — diluted	$	0.58		$	0.64		$	0.46		$	1.72

WEIGHTED AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE:
BASIC		32,169,115			31,814,060			32,003,633			30,334,235
DILUTED		32,387,538			32,370,209			32,131,845			30,882,186

The accompanying condensed notes are an integral part of these consolidated financial statements.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS


	Nine Months Ended
	September 30,
	2007			2006
	(Unaudited)
	(In thousands)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	14,908		$	53,207
Adjustments to reconcile net income to net cash provided by operating activities — Depreciation and amortization		18,570			20,101
Gain on insurance settlement		—			(14,300	)
Net gain on sale of assets		—			(25	)
Reserve for claims and receivables		—			18,458
Deferred income taxes		379			11,882
Paid in-kind interest on subordinated notes and related party term debt		851			1,109
Amortization of deferred loan fees recorded as interest expense		424			665
Stock-based compensation expense		2,961			6,676
Loss on debt extinguishment		—			2,402
Changes in operating assets and liabilities —
Restricted cash		9,325			2,712
Accounts receivable		(78,053	)		(60,201	)
Costs in excess of billings		37,441			(26,758	)
Billings in excess of costs		24			(1,201	)
Other assets		(1,233	)		(5,758	)
Accounts payable		(3,064	)		(2,749	)
Accrued and other liabilities		4,909			4,390
Accrued job costs		15,206			(2,780	)
Current taxes payable		1,958			2,261

Net cash provided by operating activities		24,606			10,091
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to property and equipment		(10,189	)		(18,269	)
Proceeds from casualty insurance claim		—			14,300
Proceeds from sale of assets		500			25
Purchases of short-term investments		(39,150	)		—
Sales of short-term investments		32,925			—

Net cash used in investing activities		(15,914	)		(3,944	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on term debt		(11,428	)		(25,819	)
Principal payments under related party term debt		—			(548	)
Deferred loan fees		—			(466	)
Proceeds from issuance of common stock, net		—			38,140
Stock option transactions		—			8

Net cash provided by (used in) financing activities		(11,428	)		11,315

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(2,736	)		17,462
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD		96,890			42,960

CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	94,154		$	60,422

SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	7,377		$	8,659
Cash paid for income taxes	$	7,238		$	8,597
Cash refund for income taxes	$	4,000		$	—
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures for property and equipment included in accrued liabilities	$	182		$	3,507
Repayment of debt and accrued interest with proceeds of additional debt	$	—		$	74,679
Purchase of vessel with long-term debt	$	—		$	11,000
Payment of deferred loan fees, closing costs and fees through issuance of term debt	$	—		$	2,721

The accompanying condensed notes are an integral part of these consolidated financial statements.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.	ORGANIZATION AND BASIS OF PRESENTATION:

Horizon Offshore, Inc., a Delaware corporation, and its subsidiaries (references to “Horizon”, “company,” “we,” “our” or “us” are intended to refer to Horizon Offshore, Inc. and its subsidiaries) provide marine construction services for the offshore oil and gas and other energy related industries. During the nine months ended September 30, 2007, we provided construction services domestically in the U.S. Gulf of Mexico and the Northeast U.S., and internationally in our Latin America, West Africa and Southeast Asia/Mediterranean geographic segments. These services primarily consist of laying, burying or repairing marine pipelines for the transportation of oil and gas; providing hook-up and commissioning services; and installing and salvaging production platforms and other marine structures. Our projects are performed on a fixed-price basis or a combination of a fixed-price and day-rate basis in the case of extra work to be performed under the contract. From time to time, we may also perform projects on a cost-reimbursement and/or day-rate basis.

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). In the opinion of management, the unaudited consolidated interim financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the company’s financial position as of September 30, 2007 and December 31, 2006, the statements of operations for the three and nine months ended September 30, 2007 and 2006, and the statements of cash flows for the nine months ended September 30, 2007 and 2006. Although management believes the unaudited interim disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in annual audited financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to the rules of the Securities and Exchange Commission (the “SEC”).

The results of operations for the three and nine months ended September 30, 2007 are not necessarily indicative of the results to be expected for the entire year. The unaudited consolidated interim financial statements included herein should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2006.

The consolidated financial statements include the accounts of Horizon and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Management must make significant judgments in this process. Among the factors, but not fully inclusive of all factors, that may be considered by management in these processes are: the range of accounting policies permitted by GAAP; management’s understanding of our business; expected rates of business and operational change; sensitivity and volatility associated with the assumptions used in developing estimates; and whether historical trends are expected to be representative of future trends. Among the most subjective judgments employed in the preparation of these financial statements are estimates of expected costs to complete construction projects, the collectibility of contract receivables and claims, the depreciable lives of and future cash flows to be provided by our equipment and long-lived assets, the amortization period of maintenance and repairs for dry-docking activity, estimates for the number and magnitude of self-insurance reserves needed for potential medical claims and Jones Act obligations, judgments regarding the outcomes of pending and potential litigation and claims and certain judgments regarding the nature of income and expenditures for tax purposes. We review all significant estimates on a recurring basis and record the effect of any necessary adjustments prior to publication of our financial statements. Adjustments made with respect to the use of estimates relate to improved information not previously available. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Proposed Merger

On June 11, 2007, we entered into a definitive agreement (the “Merger Agreement”) with Cal Dive International, Inc. (“Cal Dive”) under which Horizon has agreed to merge into Cal Dive Acquisition LLC, a wholly-owned subsidiary of Cal Dive, in exchange for cash and common stock of Cal Dive. As a result, Horizon would become a wholly-owned subsidiary of Cal Dive. Under the terms of the Merger Agreement, Horizon stockholders will receive 0.625 shares of Cal Dive common stock and $9.25 in cash for each share of Horizon common stock outstanding, plus additional cash for any fractional share.

The merger is conditioned upon, among other things, the approval of our stockholders, the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and other customary regulatory approvals. On August 29, 2007, Cal Dive re-filed its Hart-Scott-Rodino Notification and Report Form with the Antitrust Division of the Department of Justice and Federal Trade Commission. On September 28, 2007, Cal Dive and Horizon each received a request for additional information (commonly referred to as a “second request”) from the Antitrust Division of the U. S. Department of Justice, which had the effect of extending the waiting period for a period of 30 calendar days from the date of the parties’ substantial compliance with the request. Assuming we receive early termination of the waiting period from the Department of Justice, we expect to hold a special stockholders’ meeting to seek approval of the merger in early December 2007. Assuming stockholder approval, we expect to complete the merger promptly thereafter.

2. PEMEX CONTRACTS:

During the third quarter of 2007, we recognized a loss of approximately $(15.1) million on our Petróleos Mexicanos (“Pemex”) contracts in addition to the $(29.9) million loss recognized during the second quarter of 2007. For the nine months ended September 30, 2007, we have recognized an overall loss of $(32.2) million on our Pemex contracts. We were successful in recovering costs due to inefficiencies of third party subcontractors, which offset some of the deterioration during the third quarter. The additional losses for the third quarter of 2007 relate to delays and significant increases in estimated costs to complete these projects due to the combined effect of the factors below.


	•	Continued adverse weather conditions impeded the ability of our subcontracted diving support vessels to perform weather sensitive work.

	•	A subcontracted diving support vessel was in port for repairs for most of the third quarter, causing further project completion delays and additional third party costs.

	•	We engaged an additional third party dive support vessel to assist in completion of these projects and utilized our barge, the Canyon Horizon, which increased costs.

	•	Poor productivity of our barges and third party subcontracted vessels has also increased costs.

	•	We recorded additional penalties that we expect to incur for these delays.

The deteriorations in the estimated profit at completion for these two projects during the second quarter of 2007 relates to the combined effect of the following:


	•	delays in mobilization and mechanical downtime of the Texas Horizon,

	•	Pemex’s reduction in the original scope of work under our second contract,

	•	excessive non-compensable weather delays,

	•	poor productivity of diving subcontractors and delays due to excessive mechanical downtime of subcontracted diving equipment,

	•	Pemex’s dispute of change orders related to weather delays, client interference and extra work that had been recognized in prior periods, and

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


	•	completion penalties covering out-of-contract periods.

During October 2007, we completed the first Pemex project, and we continue to work with Pemex to obtain contract extensions for work that was completed outside the contract schedule due to delays caused by client interference and official port closures for adverse weather conditions and approved change orders for additional scope of work requested. We have, to date, obtained formal contract extensions on some milestones, with others pending agreement with Pemex. We will invoice the remaining $6.3 million of unbilled revenue when we receive these contract extensions and approved change orders. If we are unsuccessful in obtaining contract extensions under this contract, we could be subject to additional penalties up to $7 million. At September 30, 2007, unapproved change orders related to compensable weather delays and client interference and estimated recoverable contract penalties covering out-of-contract periods totaled approximately $5 million, all of which have effectively been recognized as revenue because we were almost 100% complete.

We have substantially completed the second Pemex project. We received contract extensions on this project through August 2007, and accordingly, in September 2007, we invoiced Pemex approximately $27.1 million related to work completed through August 2007. We will continue to work with Pemex to obtain additional contract extensions. Upon completion of this project and the receipt of contract extensions, we will invoice the remaining $32.2 million of unbilled revenue related to original scope of work. Unapproved change orders and recoverable penalties that we have included in estimated revenues at completion under this contract as of September 30, 2007 totaled approximately $15 million. However, we have recognized approximately $13.5 million of these estimated revenues because we are approximately 90% complete on this project at September 30, 2007.

We are working with Pemex to obtain approved change orders related to compensable weather delays, client interference and extra work and to recover contract penalties because we believe that our claims are valid under the Pemex contracts. Total unapproved change orders and claims at September 30, 2007 are approximately $20 million, of which approximately $18.5 million has been recognized as revenue and is included in costs in excess of billings in the accompanying consolidated balance sheet. Also, we could incur additional costs and losses on the Pemex projects if we experience further delays due to weather or poor productively that results in costs incurred in excess of the amounts currently estimated.

3. ACCOUNTS RECEIVABLE:

We have significant investments in billed and unbilled receivables as of September 30, 2007 and December 31, 2006. There was no allowance for doubtful accounts as of these balance sheet dates. The majority of these receivables relate to several large, longer duration contracts for projects outside of the U.S. Gulf of Mexico, where contracts are typically smaller and of shorter duration. As of September 30, 2007, we had approximately $135.2 million of contract receivables compared to $72.2 million at December 31, 2006. This increase is primarily due to activity on the Northeast Gateway Pipeline and Pemex projects. Long-term contract receivables of $14.3 million at September 30, 2007 represent retainage related to the West Africa Gas Pipeline project that we do not expect to collect within the next twelve months.

Unbilled receivables, which are included in costs in excess of billings in the accompanying consolidated financial statements, arise as revenues are recognized under the percentage-of-completion method. As of September 30, 2007, we had approximately $75.4 million of unbilled receivables compared to $112.8 million at December 31, 2006. These significant unbilled receivables primarily relate to our Pemex projects offshore Mexico and the West Africa Gas Pipeline project. Under the Pemex contracts, we have unbilled receivables of approximately $42.6 million, of which approximately $18.5 million relates to unapproved change orders and recoverable penalties recognized as revenue and the remaining amount relates to original scope of work. Pursuant to these contracts with Pemex, we must fully complete stated milestones before an invoice for the work performed can be issued. However, we have not been able to invoice the unbilled receivables due to delays in fully completing these milestones. Additionally, milestones completed outside the original timeframes of the Pemex contracts are subject to penalties for late completion, so we generally negotiate contract extensions before invoicing. Under the West Africa Gas Pipeline contract, we have

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

unbilled receivables of approximately $25.2 million, which have been recognized as revenue, primarily for unapproved change orders due to additional work scope, weather delays and repair work covered under the customer’s insurance policy. We will issue invoices for the extra work upon the receipt of approved change orders from Pemex and the West Africa Gas Pipeline Company.

As of September 30, 2007 and December 31, 2006, we had a total of three customers which accounted for 55% and 75%, respectively, of total billed and unbilled receivables. No other single customer accounted for more than 10% of accounts receivable as of September 30, 2007 and December 31, 2006.

On August 4, 2006, we received notification that an arbitral panel in Mexico rejected our Pemex EPC 64 contract claims from 2003. We reserved $18.5 million for the remaining carrying value of our outstanding claims against Pemex during the quarter ended June 30, 2006. During the quarter ended September 30, 2006, we wrote-off the total $51.6 million included in costs in excess of billings related to the Pemex claims against the allowance for doubtful accounts.

4. CERTAIN BALANCE SHEET ACCOUNTS:

Short-term Investments

Short-term investments are classified as available-for-sale instruments that we expect to realize in cash within one year. These investments are recorded at fair value. Any unrealized holding gains or losses are reported in comprehensive income (loss) until realized. Our short-term investments at September 30, 2007 consisted of municipal bonds and auction rate securities. We did not have any short-term investments at December 31, 2006. Although these instruments do not meet the definition of cash and cash equivalents, we have the ability to quickly liquidate these securities.

Restricted Cash

Total restricted cash of $9.3 million at December 31, 2006 represents $9.1 million cash used to secure a letter of credit under the completed Israel Electric Corporation (IEC) contract, plus interest received. The cash expended to secure the IEC letter of credit, plus interest, of $9.6 million was released in August 2007. Restricted cash is not considered as cash or cash equivalents for purposes of the accompanying consolidated balance sheets and statements of cash flows.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

5. NOTES PAYABLE:

Notes payable consist of the following (in thousands):


	September 30,		December 31,
	2007		2006

Term loan payable to CIT Group Equipment/Financing Inc., due March 9, 2011	$	56,204	$	64,304
Term loan payable to General Electric Credit Corporation of Tennessee, due January 1, 2011		23,388		25,000
Term loan payable to GE Capital Corporation, due January 1, 2012		5,395		6,246
Term loan payable to GE Capital Corporation, due June 29, 2011		3,893		4,758
8% Subordinated Notes, due March 31, 2010		14,755		13,904
$30 million revolving credit facility with PNC Bank, N.A., maturing April 28, 2011		—		—

Total debt	$	103,635	$	114,212

Current maturities of long-term debt	$	13,961	$	14,813

Long-term debt, net of current maturities	$	74,919	$	85,495

Subordinated notes	$	14,755	$	13,904

At September 30, 2007, we had no borrowings outstanding under our revolving credit facility. At September 30, 2007, $23.8 million of letters of credit were outstanding under the facility. Any outstanding letters of credit are deducted from the borrowing availability under the facility. Advances are obtained in accordance with a borrowing base, which is calculated as a percentage of accounts receivable balances and costs in excess of billings. Based upon the borrowing base calculation, we had $6.2 million of borrowing capacity available after utilizing the facility to support letters of credit.

At September 30, 2007, our average interest rate was 9.78% per annum. Interest rates for our outstanding debt vary from the one-month commercial paper rate plus 2.45% to a fixed rate of 9.99% (7.69% to 9.99%) at September 30, 2007. Our term-debt borrowings require approximately $1.2 million in total monthly principal payments.

Substantially all of our assets are pledged as collateral to secure our indebtedness. Our loans contain customary default and cross-default provisions, including change of control provisions, and covenants restricting our ability to issue additional capital stock, create additional liens, incur additional indebtedness, enter into affiliate transactions, dispose of assets, make investments and pay dividends. We are also required to maintain certain financial ratios at quarterly determination dates. At September 30, 2007, we were in compliance with all the financial covenants required by our loan and credit facilities.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

6. STOCKHOLDERS’ EQUITY:

Earnings Per Share

The following table presents information necessary to calculate earnings per share for the three and nine months ended September 30, 2007 and 2006 (in thousands, except per share amounts):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006

Net income	$	18,874	$	20,866	$	14,908	$	53,207
Average common shares outstanding		32,169		31,814		32,004		30,334

Basic earnings per share	$	0.59	$	0.66	$	0.47	$	1.75

Average common and dilutive potential common shares outstanding:
Average common shares outstanding		32,169		31,814		32,004		30,334
Unvested restricted stock and assumed exercise of stock options		219		556		128		548

		32,388		32,370		32,132		30,882

Diluted earnings per share	$	0.58	$	0.64	$	0.46	$	1.72

As of September 30, 2007, we had outstanding options covering an aggregate of 79,122 shares of common stock, of which all were exercisable, and we had 432,820 shares of unvested restricted stock. Restricted stock grants are legally considered issued and outstanding, but are included in both basic and diluted EPS only to the extent they are vested. Unvested shares are included in the computation of diluted EPS using the treasury stock method. Excluded from the computation of diluted EPS for the three and nine months ended September 30, 2007 are options to purchase 79,122 shares of common stock, at a weighted average price of $105.79, as the exercise price is greater than the average market price. Excluded from the computation of diluted EPS for the three and nine months ended September 30, 2006 are options to purchase 113,150 shares of common stock, at a weighted average price of $131.00, respectively, as the exercise price is greater than the average market price.

Stock Plans

Our Horizon Offshore, Inc. 2005 Stock Incentive Plan, as amended (the “2005 Incentive Plan”), provides for the issuance of 2.8 million shares of our common stock. The 2005 Incentive Plan will remain in effect until all awards granted thereunder have been satisfied. The 2005 Incentive Plan provides for grants of a variety of equity incentives, including stock options, restricted stock and stock appreciation rights, to officers, other employees and certain non-employee consultants. The compensation committee of the board of directors establishes the terms of the equity awards (including vesting schedules which is generally three years). At September 30, 2007, we had 1,361,942 shares of common stock remaining for issuance under the 2005 Incentive Plan. No additional grants will be made under previously existing stock-based compensation plans.

Our Horizon Offshore, Inc. 2006 Director Stock Plan (the “2006 Director Stock Plan”) provides for the issuance of 150,000 shares of our common stock. The 2006 Director Stock Plan will remain in effect until August 2, 2016. The 2006 Director Stock Plan provides for grants of stock to each of our four eligible non-employee directors, with or without restrictions, each having an aggregate value of up to $100,000 following each annual meeting of stockholders and upon joining our board if other than by election at an annual meeting of stockholders. The compensation committee of the board of directors establishes the terms of the stock awards (including vesting schedules which is generally one year). On May 24, 2007, the day following our annual meeting of stockholders held on May 23, 2007, we issued 4,529 shares of restricted stock to each of our independent directors. At

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

September 30, 2007, we had 111,884 shares of common stock remaining for issuance under the 2006 Director Stock Plan.

Stock-Based Compensation

Our pre-tax compensation cost for stock-based employee compensation was approximately $0.9 million and $3.0 million for the three and nine months ended September 30, 2007, respectively, and approximately $2.2 million and $6.7 million for the three and nine months ended September 30, 2006, respectively. The related tax benefits recognized for these costs for the three and nine months ended September 30, 2007 were approximately $0.3 million and $0.8 million, respectively, and for the three and nine months ended September 30, 2006 was approximately $0.6 million and $2.0 million, respectively. We recognized stock-based compensation cost included in the accompanying consolidated statements of operations as follows (in millions):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2007		2006		2007		2006

Cost of contract revenues	$	—	$	0.3	$	—	$	0.8
Selling, general and administrative expenses		0.9		1.9		3.0		5.9

	$	0.9	$	2.2	$	3.0	$	6.7

We recognized stock-based compensation related to our stock option awards of $0 and $235,000 for the three and nine months ended September 30, 2007 and $214,000 and $400,000 for the three and nine months ended September 30, 2006, respectively. We did not grant any stock options during the nine months ended September 30, 2007. There was no unrecognized compensation cost related to stock options as of September 30, 2007.

Stock-based compensation related to restricted stock was $0.9 million and $2.8 million for the three and nine months ended September 30, 2007 and $2.0 million and $6.3 million for the three and nine months ended September 30, 2006, respectively. At September 30, 2007, $2.5 million of total unrecognized compensation cost related to the unvested portion of the restricted stock awards is expected to be recognized over a weighted average period of nine months.


7.	GAIN ON INSURANCE SETTLEMENT:

On June 30, 2006, we settled our claims against the underwriters on the marine hull insurance policy covering physical damage to the Gulf Horizon, and we recorded a $14.3 million gain on the insurance settlement during the quarter ended June 30, 2006. Under the terms of the settlement, the underwriters paid us $14.3 million for all claims related to the suit on July 28, 2006.


8.	INCOME TAXES:

We use the liability method of accounting for income taxes. For the nine months ended September 30, 2007, we recorded an income tax provision of $5.8 million, at an effective rate of 28.1% on a pre-tax income from continuing operations of $20.7 million. For the nine months ended September 30, 2006, we recorded an income tax provision of $22.7 million, at an effective rate of 29.9% on pre-tax income from continuing operations of $75.9 million. The difference in the statutory rate and the effective rate for the nine months ended September 30, 2007 relates to income generated in foreign tax jurisdictions at lower tax rates and tax exempt interest income, offset by estimated state income tax expense expected to be paid on our work in the Northeast U.S. The difference in the statutory rate and the effective rate for the nine months ended September 30, 2006 relates to the impact of the settlement of the Gulf Horizon insurance claim on June 30, 2006 and a change in estimate for determining our Section 382 limitation of the tax code which limited the pre-change of control net operating losses we may utilize. Additionally, the reduction in our effective tax rate for the nine months ended September 30, 2006 is due to income earned in foreign tax jurisdictions with lower income tax rates.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

We do not provide for U.S. income taxes on foreign subsidiaries’ undistributed earnings intended to be permanently reinvested in foreign operations.

We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) as of January 1, 2007. We have not recorded any reserves for uncertain income tax positions pursuant to FIN 48. There were no unrecognized tax benefits as of September 30, 2007. We do not expect to recognize significant increases or decreases in unrecognized tax benefits during the year ended December 31, 2007. In accordance with our accounting policy, we will recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. This policy did not change as a result of the adoption of FIN 48. For the nine months ended September 30, 2007 and 2006, we did not accrue any tax related interest and penalties. Our 2003 through 2006 federal income tax returns are subject to audit by the Internal Revenue Service. Various state, local and foreign income tax returns are also subject to examination by taxing authorities. We do not believe that the outcome of any examination will have a material impact on our financial statements.


9.	COMMITMENTS AND CONTINGENCIES:

Litigation

As previously disclosed in Part II, Item I, “Legal Proceedings” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, two putative shareholder derivative lawsuits were filed in state district court in Harris County, Texas related to our proposed merger transaction with Cal Dive. These two lawsuits are substantially similar and are brought against the members of our board of directors and Cal Dive. Both also name Horizon as a “nominal defendant,” as is customary in putative derivative lawsuits. Only one of the lawsuits has actually been served upon Horizon or any of the other defendants. We have filed a response denying the allegations and asserting, among other things, that the plaintiffs did not have standing to bring this action. No hearing or trial has been set.

We are involved in various routine legal proceedings primarily involving claims for personal injury under the Jones Act and general maritime laws, which we believe are incidental to the conduct of our business. We believe that none of these proceedings, if adversely determined, would have a material adverse effect on our business or financial condition.

Contractual Disputes — Unasserted Claims for Penalties Resulting from Contract Delays

Many of our large international contracts contain specific completion schedule requirements that require us to pay penalties or liquidated damages in the event that the completion schedules are not met for reasons attributable to us and we may not be able to meet completion schedules. Our exposures under these penalty provisions are generally based on a percentage of the remaining contract value for work which will be completed outside of the completion schedule requirements, up to maximum amounts generally based on an agreed percentage of contract values.

We are currently working outside of the scheduled completion dates of our Pemex contracts. We are therefore potentially subject to late completion penalties unless contract extensions are obtained. Some penalties previously assessed may be recovered as a result of extensions approved subsequent to the assessment. Although we have received several formal extensions and others are pending, we reserved approximately $5 million for estimated potential penalties as of September 30, 2007. We believe that the likelihood of incurring penalties in excess of the amount reserved is remote.

Tax Assessment

During the fourth quarter of 2006, we received a tax assessment from the Servicio de Administracion Tributaria (“SAT”), the Mexican taxing authority, for approximately $23 million related to 2001, including penalties, interest and monetary correction. The SAT’s assessment claims unpaid taxes related to services performed among our subsidiaries. We believe under the Mexico and U.S. double taxation treaty that these

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

services are not taxable and that the tax assessment itself is invalid. We have filed a petition in Mexican court to set aside the assessment as invalid. We believe that our position is supported by law and intend to vigorously defend our position. However, the ultimate outcome of this litigation and our potential liability from this assessment, if any, cannot be determined at this time. Accordingly, no accrual has been recorded at September 30, 2007 in the accompanying consolidated financial statements.

Letters of Credit

At September 30, 2007, we utilized $23.8 million of our $30 million revolving credit facility to support outstanding letters of credit that secured performance bonds on existing Pemex contracts.

Capital Expenditures

Our estimated planned capital expenditures for the remainder of 2007 are less than $1 million.

Warranties

In the normal course of our business, we provide performance guarantees and warranties under our contracts. Historically, we have not had any significant warranty claims; however, we could be liable for substantial warranty liabilities, if any are incurred, on projects prior to the expiration of the warranty periods.


10.	RECENT ACCOUNTING PRONOUNCEMENTS:

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosure about fair value measurements. SFAS No. 157 also applies under other accounting standards that require or permit fair value measurements. Accordingly, SFAS No. 157 does not require any new fair value measurement. The provisions of SFAS No. 157 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the impact of adopting SFAS No. 157 on our financial statements.

In February 2007, the FASB issued SFAS 159, “The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115.” SFAS 159 permits all entities to choose to elect, at specified election dates, to measure eligible financial instruments at fair value, with changes in fair value recognized in earnings as they occur. SFAS 159 establishes presentation and disclosure requirements designed to improve comparability between entities that elect different measurement attributes for similar assets and liabilities. The provisions of SFAS 159 are effective as of the beginning of our 2008 fiscal year. We are currently evaluating the impact of adopting SFAS No. 159 on our financial statements.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued


11.	GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS:

Horizon operates in a single industry segment, the marine construction services industry. Our domestic geographic segment has primarily consisted of work in the U.S. Gulf of Mexico. We are currently performing a significant project in the Northeast U.S. offshore Massachusetts that began in 2007, which is included in our domestic geographic segment. Geographic information relating to Horizon’s operations follows (in millions):


							Nine Months
	Three Months Ended						Ended
	September 30,						September 30,
	2007			2006			2007			2006

Revenues:
Domestic	$	107.7		$	61.3		$	216.6		$	201.1
Latin America		16.8			66.1			74.4			146.3
West Africa		13.0			6.7			34.9			68.9
Southeast Asia/Mediterranean		10.3			9.6			25.9			14.3

Total	$	147.8		$	143.7		$	351.8		$	430.6

Gross Profit:
Domestic	$	42.1		$	21.7		$	66.4		$	75.5
Latin America		(9.2	)		19.3			(18.6	)		39.2
West Africa		(1.9	)		(7.5	)		(10.7	)		(5.7	)
Southeast Asia/Mediterranean		5.5			5.6			13.6			7.8

Total	$	36.5		$	39.1		$	50.7		$	116.8


	As of
	September 30,		December 31,
	2007		2006

Property and Equipment(1):
Domestic	$	144.4	$	121.1
Latin America		15.2		39.4
West Africa		0.3		0.3
Southeast Asia/Mediterranean		34.5		36.6

Total	$	194.4	$	197.4


(1)		Property and equipment includes vessels, property and related marine equipment. Amounts reflect the location of the assets at September 30, 2007 and December 31, 2006. Equipment location changes as necessary to meet working requirements. Other identifiable assets include inventory and other long-term assets, and are primarily located in the domestic region.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

Customers accounting for more than 10% of consolidated revenues for the three and nine months ended September 30, 2007 and 2006 are as follows:


							Nine Months
	Three Months Ended						Ended
	September 30,						September 30,
Customer	2007			2006			2007			2006

Customer A		52	%		—			39	%		—
Customer B		(1	)%		42	%		12	%		29	%
Customer C		9	%		5	%		10	%		16	%
Customer D		12	%		2	%		9	%		10	%
Customer E		12	%		—			5	%		—
Customer F		—			16	%		6	%		6	%
Customer G		—			13	%		1	%		8	%

The amount of revenue accounted for by a customer depends on the level of construction services we perform for the customer, which is based on the size of its capital expenditure budget and our ability to bid for and obtain the work. Consequently, customers who account for a significant portion of contract revenues in one period may represent an immaterial portion of contract revenues in subsequent periods. Our West Africa geographic segment revenues are currently derived from one customer, West Africa Gas Pipeline Company. We currently have no assets located in our West Africa geographic segment, and at this time, we do not have any future projects scheduled in West Africa. We generally derive the revenues associated with our Latin America geographic segment from our work offshore Mexico for Pemex, the Mexican national oil company. From time to time we also perform work for customers in other areas of Latin America. Our Southeast Asia/Mediterranean geographic segment revenues are currently derived from one customer, TL Offshore Sdn Bhd, in Southeast Asia.


Item 2.	*Management’s Discussion And Analysis Of Financial Condition And Results Of Operations*

You should read the following discussion and analysis together with our consolidated financial statements and notes thereto and the discussion “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part I, Item 1A, “Risk Factors” included in our 2006 Annual Report on Form 10-K. The following information contains forward-looking statements, which are subject to risks and uncertainties. Should one or more of these risks or uncertainties materialize, our actual results may differ from those expressed or implied by the forward-looking statements.

General

Horizon Offshore, Inc. and its subsidiaries (references to “Horizon”, “company,” “we,” “our” or “us” are intended to refer to Horizon Offshore, Inc. and its subsidiaries) provide marine construction services for the offshore oil and gas and energy industries.

Our primary services include:


	•	laying, burying or repairing marine pipelines;

	•	providing hook-up and commissioning services;

	•	installing production platforms and other structures; and

	•	disassembling and salvaging production platforms and other structures.

The demand for offshore construction services depends largely on the condition of the oil and gas industry and, in particular, the level of capital expenditures by oil and gas companies for developmental construction. These expenditures are influenced by:


	•	expectations and perception about future demand and the price of oil and gas;

	•	the ability of the oil and gas industry to access capital;

	•	the cost of exploring for, producing and developing oil and gas reserves;

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

	•	sale and expiration dates of offshore leases in the United States and abroad;

	•	local and international political and economic conditions;

	•	governmental regulations;

	•	the availability and cost of capital; and

	•	damage to structures and pipelines caused by hurricanes and severe weather conditions in the U.S. Gulf of Mexico and other areas.

The level of activity in the marine construction services industry depends primarily on the level of capital expenditures of oil and gas companies in connection with offshore oil and gas field developments. Factors affecting our profitability include the level of our construction activity, competition and its impact on contract pricing, equipment and labor productivity, contract estimating, weather conditions and other risks inherent in marine construction.

We currently provide services in the U.S. Gulf of Mexico, Northeast U.S., Latin America, Southeast Asia and West Africa. The areas of the world that we provide our services can change from year to year, depending on the demand for our services and the current location of our marine fleet.

The marine construction industry in the Gulf of Mexico historically has been highly seasonal with the greatest demand for these services during the period from May to September. The scheduling of much of our work is affected by weather conditions and many projects are performed within a relatively short period of time. Following the unprecedented high demand throughout 2006 for emergency hurricane-related repair work, the market for marine

construction services in the U.S. Gulf of Mexico has returned to more traditional seasonality in 2007; however, the demand for offshore exploration, development and construction activity in the U.S. Gulf of Mexico remains strong.

Proposed Merger

Overview

During the third quarter of 2007, we reported revenues of $147.8 million, gross profit of $36.5 million, operating income of $28.6 million, net income of $18.9 million and diluted earnings per share of $0.58. Our quarterly results reflect our continued work on a significant project in the Northeast U.S. that began during the second quarter of 2007. Good operating efficiency and productivity on this project in the Northeast U.S. are reflected in higher gross margins and strong performance by our domestic geographic operations for the third quarter. Our results for the quarter were also strong in Southeast Asia due to the charter of the Sea Horizon offshore Malaysia where we achieved 100% utilization of this vessel. In Latin America, most of the revenues and gross profit for the third quarter were derived from a project that we performed as a subcontractor offshore Veracruz, Mexico in the Marsopa field, which we began and completed during the third quarter of 2007.

Our results for the third quarter of 2007 were negatively impacted by our work on the projects for Petróleos Mexicanos (“Pemex”) offshore Mexico, which is reflected in our Latin America geographic segment. During the three months ended September 30, 2007, we recognized additional losses of approximately $(15.1) million on our Pemex contracts. We were successful in recovering costs due to inefficiencies of third party subcontractors, which offset some of the deterioration during the third quarter. These additional losses for the third quarter of 2007 relate to delays and significant increases in estimated costs to complete these projects due to the combined effect of the factors below.


	•	Continued adverse weather conditions impeded the ability of our subcontracted diving support vessels to perform weather sensitive work.

	•	A subcontracted diving support vessel was in port for repairs for most of the third quarter, causing further project completion delays and additional third party costs.

	•	We engaged an additional third party dive support vessel to assist in completion of these projects and utilized our barge, the Canyon Horizon, which increased costs.

	•	Poor productivity of our barges and third party subcontracted vessels has also increased costs.

	•	We recorded additional penalties that we expect to incur for these delays.

If we are unsuccessful in recovering all of our unapproved change orders and claims with Pemex, we could incur additional losses up to $20 million, of which $18.5 million has been recognized as revenue at September 30,

2007. Also, we could incur additional costs and losses on the Pemex projects if we experience further delays due to weather or poor productively that results in costs incurred in excess of the amounts currently estimated.

We also incurred additional losses of $(1.9) million during the third quarter of 2007 on the West Africa Gas Pipeline project in our West Africa geographic segment due to additional operating costs incurred to complete the final stages of the pipeline installation and tie-in work of the lateral lines that approach shore that was performed by subcontracted vessels. We could experience additional losses on the West Africa Gas Pipeline project if we incur additional costs in excess of the estimated costs to complete this project related to delays and lack of available equipment in this region.

Results of Operations

Information relating to Horizon’s operations follows (in millions):


	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2007			2006			2007			2006

Revenues:
Domestic	$	107.7		$	61.3		$	216.6		$	201.1
Latin America		16.8			66.1			74.4			146.3
West Africa		13.0			6.7			34.9			68.9
Southeast Asia/Mediterranean		10.3			9.6			25.9			14.3

Total	$	147.8		$	143.7		$	351.8		$	430.6

Gross Profit:
Domestic	$	42.1		$	21.7		$	66.4		$	75.5
Latin America		(9.2	)		19.3			(18.6	)		39.2
West Africa		(1.9	)		(7.5	)		(10.7	)		(5.7	)
Southeast Asia/Mediterranean		5.5			5.6			13.6			7.8

Total	$	36.5		$	39.1		$	50.7		$	116.8

Quarter Ended September 30, 2007 Compared to the Quarter Ended September 30, 2006

Contract Revenues. For the quarter ended September 30, 2007, contract revenues increased $4.1 million, or 2.8%, to $147.8 million compared to $143.7 million for the quarter ended September 30, 2006. Domestic revenues increased significantly during the third quarter due to work on our project in the Northeast U.S. This increase was offset by a decrease in our Latin America operations as we continue to experience delays in completing our projects for Pemex.

Domestically, we completed the pipeline installation and burial portions of the Northeast Gateway Deepwater Port project offshore Massachusetts during the third quarter of 2007 using two of our construction vessels, the Atlantic Horizon and the Lonestar Horizon. We also mobilized the Texas Horizon, a dive support vessel, during August 2007 to complete the final stages of the construction portion of the project. High vessel utilization and significant third party subcontracted services on this project resulted in higher revenues for the third quarter of 2007. We expect to complete this project in November 2007. Also, work in the U.S. Gulf of Mexico during the third quarter of 2007 related to recovery and removal of damaged pipe and several platform installations provided high utilization of two of our four vessels located in this region. During 2006, the majority of our projects in our domestic geographic segment were in the U.S. Gulf of Mexico for hurricane-related emergency pipeline repair work, which has now been completed.

In Latin America, most of the revenues were derived from the project that we performed as a subcontractor offshore Veracruz, Mexico in the Marsopa field. The contractor’s customer was Pemex. However, revenues from the second Pemex project we are currently working on were negative under the percentage-of-completion method for

the third quarter of 2007 due to increases in the estimated costs to complete the contract resulting in a lower percentage completion than reported in the second quarter of 2007. We were unable to complete the work on this project for Pemex during the third quarter of 2007 due to the delays discussed in the “Overview” section above. Revenues for the same period of 2006 related solely to work on our two current Pemex projects.

Revenues for West Africa during the quarter ended September 30, 2007 primarily relate to repair work on a large section of the West Africa Gas Pipeline project that was damaged by a third party vessel during the first quarter of 2007. This repair work is covered under the customer’s insurance policy and was completed during the third quarter. We have also completed the final phases of the shore approaches in Ghana under the original contract, which was performed by subcontracted vessels. Revenues for the third quarter of 2006 also related to this project.

Southeast Asia/Mediterranean revenues for the third quarter of 2007 related to a charter for the Sea Horizon offshore Malaysia that began in February 2007 and is expected to last through November 2007. Revenues for the third quarter of 2006 also related to a charter of the Sea Horizon offshore Malaysia that was performed during 2006.

Gross Profit. Gross profit was $36.5 million (24.7% of contract revenues) for the quarter ended September 30, 2007, compared to $39.1 million (27.2% of contract revenues) for the quarter ended September 30, 2006. Gross profit for our domestic geographic segment improved due to higher utilization of our larger construction vessels for the execution of our significant project in the Northeast U.S. Two of these larger vessels worked primarily in our Latin America geographic segment during 2006. We also recorded strong results in our domestic geographic segment due to work in the U.S. Gulf of Mexico. In Latin America, we successfully executed and completed a project offshore Veracruz, Mexico as a subcontractor. The profit recognized on this project was offset by a loss on our two Pemex projects of approximately $(15.1) million during the third quarter of 2007. In West Africa, we incurred additional costs for the completion of the shore approaches of the lateral lines of the West Africa Gas Pipeline project. The gross profit for our Southeast Asia/Mediterranean geographic segment reflects 100% utilization of the Sea Horizon under charter in that region.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $7.9 million (5.4% of contract revenues) for the third quarter of 2007, compared to $8.3 million (5.8% of contract revenues) for the third quarter of 2006. Selling, general and administrative expenses decreased by $403,000 compared to the same quarter last year due to decreased stock-based compensation expense for the third quarter of 2007 compared to last year. This decrease was offset by increases in labor costs for the third quarter of 2007 and merger related costs in connection with the proposed merger with Cal Dive.

Interest Expense. For the three months ended September 30, 2007, interest expense was $2.8 million, compared to $3.1 million for the three months ended September 30, 2006, as follows (in millions):


	Three Months
	Ended September 30,
	2007		2006

Cash paid for interest	$	2.4	$	2.3
Interest paid in-kind		0.3		0.3
Other non-cash charges, net		0.1		0.5

	$	2.8	$	3.1

Other non-cash charges to interest expense primarily consist of amortization of deferred loan fees and accrued and unpaid interest, net. Our total outstanding debt was $103.6 million at September 30, 2007, compared to $118.9 million at September 30, 2006. Cash paid for interest also includes interest charges related to the letters of credit issued under our revolving credit facility.

Interest Income. Interest income includes interest from cash and short-term investments for the three months ended September 30, 2007 and 2006 of $886,000 and $894,000, respectively. Cash and cash equivalents consist of interest bearing demand deposits and short-term money market investment accounts. Short-term investments consist primarily of municipal bonds and auction rate securities.

Other Income (Expense), Net. Other income (expense) for the quarter ended September 30, 2007 primarily consisted of approximately $(65,000) of foreign currency loss and $15,000 of net other miscellaneous income generated during the quarter ended September 30, 2007. Other income (expense) for the quarter ended September 30, 2006 primarily consisted of approximately $347,000 of foreign currency gain and $48,000 of net other miscellaneous income generated during the quarter ended September 30, 2006. The foreign currency gains and losses are primarily due to revaluation of foreign currency denominated assets and liabilities and the conversion of Mexican pesos to U.S. dollars received on our Pemex receivables.

Income Taxes. We use the liability method of accounting for income taxes. For the quarter ended September 30, 2007, we recorded an income tax provision of $7.8 million at an effective rate of 29.2% on pre-tax income from continuing operations of $26.6 million. For the quarter ended September 30, 2006, we recorded an income tax provision of $8.1 million at an effective rate of 27.9% on pre-tax income of $29.0 million. The difference in the statutory rate and the effective rate for the quarter ended September 30, 2007 relates to income generated in foreign tax jurisdictions at lower tax rates and tax exempt interest income, offset by estimated state income tax expense related to our work in the Northeast U.S. The difference in the statutory rate and the effective rate for the quarter ended September 30, 2006 relates to the impact of the settlement of the Gulf Horizon insurance claim on June 30, 2006 and a change in estimate for determining our Section 382 limitation of the tax code which limited the pre-change of control net operating losses we may utilize. Accordingly, we released valuation allowances of approximately $3 million against our deferred tax asset related to our pre-change of control net operating losses. Additionally, the reduction in our effective tax rate for the third quarter of 2006 is due to income earned in foreign tax jurisdictions with lower income tax rates.

Nine Months Ended September 30, 2007 Compared to the Nine Months Ended September 30, 2006

Contract Revenues. Contract revenues were $351.8 million for the nine months ended September 30, 2007, compared to $430.6 million for the nine months ended September 30, 2006. The decrease in revenues compared to the same period last year is due to a reduction in revenues earned on our two significant projects for Pemex during the first nine months of 2007. During the first nine months of 2007, we continued to incur delays in completing these two projects. Also, Pemex reduced the original scope of work under our second contract, disputed change orders related to weather delays, client interference and extra work that had been recognized in prior periods, and assessed completion penalties covering out-of-contract periods. We reduced estimated revenues and increased estimated costs to complete the two Pemex projects resulting in negative revenues under the percentage-of-completion method on the first Pemex project for the nine months ended September 30, 2007.

The majority of revenues for the first nine months of 2007 in our domestic geographic segment relates to our work on a significant project in the Northeast U.S. compared to revenues for the first nine months of 2006 for work performed on the unprecedented amount of emergency hurricane-related repair work in the U.S. Gulf of Mexico. Our revenues for West Africa relate to pipeline damage repair work and the remaining work on the final phases of the West Africa Gas Pipeline project compared to the revenues earned on this project for the first nine months of 2006 for construction of the main trunk line. Revenues for Southeast Asia/Mediterranean relate to a charter of the Sea Horizon that began in February 2007 and is ongoing. We did not have assets in Southeast Asia last year until the Sea Horizon was re-deployed to Southeast Asia during the second quarter of 2006 and worked under a charter offshore Malaysia during the third quarter of 2006.

Gross Profit. Gross profit was $50.7 million (14.4% of contract revenues) for the nine months ended September 30, 2007, compared to $116.8 million (27.1% of contract revenues) for the nine months ended September 30, 2006. The decrease in gross profit is primarily due to the overall loss of $(32.2) million on our Pemex contracts for the nine months ended September 30, 2007. This loss is a result of the adjustments to estimated revenue on our two Pemex projects related to disputed change orders and claims and penalties and to the significant deteriorations in the estimated profit at completion during the second and third quarters of 2007. The deterioration was caused by the combined effect of delays in mobilization and mechanical downtime of the Texas Horizon, excessive non-compensable adverse weather conditions, and poor productivity of diving subcontractors and delays due to excessive mechanical downtime of diving subcontractors. We also recorded a $(10.7) million loss during the first nine months of 2007 on the West Africa Gas Pipeline contract due to additional costs incurred related to the

replacement of a subcontractor that was not able to complete their work and the completion of the shore approaches of the lateral lines.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $24.0 million (6.8% of contract revenues) for the nine months ended September 30, 2007, compared with $25.6 million (6.0% of contract revenues) for the first nine months of 2006. Selling, general and administrative expenses decreased by $(1.6) million compared to the first nine months of last year because legal expenses were lower due to the settlement of two significant claims in 2006, and stock-based compensation decreased compared to the nine months ended September 30, 2006. These decreases were partially offset by increases in labor costs and merger related costs.

Gain on Insurance Settlement. On June 30, 2006, we settled our claims against the underwriters on the marine hull insurance policy covering physical damage to the Gulf Horizon, and we recorded a $14.3 million gain on the insurance settlement.

Reserves for claims and receivables. On August 4, 2006, we received notice that the arbitral panel in Mexico handling our Pemex EPC 64 contract claims ruled that the contract precludes recovery for weather related interruptions incurred in connection with the project. We reserved $18.5 million for the remaining carrying value of these claims during the second quarter of 2006.

Interest Expense. Interest expense was $8.5 million for the nine months ended September 30, 2007 and $10.8 million for the nine months ended September 30, 2006, as follows (in millions):


	Nine Months
	Ended September 30,
	2007		2006

Cash paid for interest	$	7.4	$	8.7
Interest paid in-kind		0.9		1.1
Other non-cash charges, net		0.2		1.0

	$	8.5	$	10.8

Other non-cash charges to interest expense primarily consist of amortization of deferred loan fees, and accrued and unpaid interest, net. Our total outstanding debt was $103.6 million at September 30, 2007, compared to $118.9 million at September 30, 2006. Cash paid for interest also includes interest charges related to the letters of credit issued under our revolving credit facility.

Interest Income. Interest income on cash investments for the nine months ended September 30, 2007 was $2.7 million compared to $1.7 million for the nine months ended September 30, 2006. Cash and cash equivalents consist of interest bearing demand deposits and short-term money market investment accounts. Short-term investments consist primarily of municipal bonds and auction rate securities. Interest income increased due to higher average cash, cash investment and short-term investment balances invested at higher interest rates during the first nine months of 2007.

Loss on Debt Extinguishment. There was no loss on debt extinguishment for the nine months ended September 30, 2007. Loss on debt extinguishment was $2.4 million during the first nine months of 2006 and was related to the write-off of the unamortized portion of deferred loan fees and a prepayment penalty on our former senior secured term loans prepaid on March 9, 2006.

Other Income (Expense), Net. Other income (expense) for the nine months ended September 30, 2007, primarily consisted of $(119,000) of net foreign currency loss, offset by $84,000 of other miscellaneous income generated during the first nine months of 2007. Other income (expense) for the nine months ended September 30, 2006 primarily consisted of $149,000 of net foreign currency gain, a $25,000 gain on sale of assets and $184,000 of other miscellaneous income generated during the first nine months of 2006. The foreign currency gains and losses are primarily due to revaluation of foreign currency denominated assets and liabilities and the conversion of Mexican pesos to U.S. dollars received on our Pemex receivables.

Income Taxes. We use the liability method of accounting for income taxes. For the nine months ended September 30, 2007, we recorded an income tax provision of $5.8 million, at an effective rate of 28.1% on pre-tax income from continuing operations of $20.7 million. For the nine months ended September 30, 2006, we recorded an income tax provision of $22.7 million, at an effective rate of 29.9% on pre-tax income from continuing operations of $75.9 million. The difference in the statutory rate and the effective rate for the nine months ended September 30, 2007 relates to income generated in foreign tax jurisdictions at lower tax rates and tax exempt interest income, offset by estimated state income tax expense expected to be paid on our work in the Northeast U.S. The difference in the statutory rate and the effective rate for the nine months ended September 30, 2006 relates to the impact of the settlement of the Gulf Horizon insurance claim on June 30, 2006 and a change in estimate for determining our Section 382 limitation of the tax code which limited the pre-change of control net operating losses we may utilize. Accordingly, we released valuation allowance of approximately $3 million against our deferred tax asset related to our pre-change of control net operating losses. Additionally, the reduction in our effective tax rate for the nine months ended September 2006 is due to income earned in foreign tax jurisdictions with lower income tax rates.

Liquidity and Capital Resources

General

At September 30, 2007, cash and short-term investments totaled approximately $100.4 million compared to approximately $96.9 million as of December 31, 2006. Additionally, we have a $30 million revolving credit facility with PNC Bank, National Association (“PNC Bank”). At September 30, 2007, $23.8 million of the facility was utilized to support letters of credit to secure performance bonds on existing Pemex contracts. At September 30, 2007, we had no borrowings outstanding under our revolving credit facility, and based upon the borrowing base calculation, we had approximately $6.2 million of additional borrowing capacity available after utilizing the facility to support letters of credit. We believe that our liquidity should be sufficient to meet our capital and operating requirements.

Our cash requirements are greatest at the start-up of new projects because we incur mobilization expenses and other start-up costs. We also require substantial cash to complete all or a substantial portion of the majority of our projects before receiving payment from the customer and may require cash to collateralize performance bonds before commencing work on international contracts. The timing of start-up costs incurred and progress billings on large contracts in accordance with contract terms and milestones and the collections of the related contract receivables may increase our working capital requirements. Additionally, our future capital requirements will depend primarily on the demand for offshore construction services by the oil and gas industry based on the continued need for repair and salvage work and the level of capital expenditures by oil and gas companies for developmental construction.

Working Capital

As of September 30, 2007, we had working capital of $203.3 million, compared to $204.5 million of working capital at December 31, 2006. As of September 30, 2007, we had approximately $135.2 million of contract receivables compared to $72.2 million at December 31, 2006. This increase is primarily due to activity on the Northeast Gateway Pipeline and Pemex projects.

invoiced any additional amounts under our Pemex contracts during October 2007. Under the West Africa Gas Pipeline contract, we have unbilled receivables of approximately $25.2 million, which have been recognized as revenue, primarily for unapproved change orders due to additional work scope, weather delays and repair work covered under the customer’s insurance policy. We have invoiced approximately $17.4 million under the West Africa Gas Pipeline contract during October 2007. We will issue invoices for the extra work upon the receipt of approved change orders from Pemex and the West Africa Gas Pipeline Company.

Indebtedness

At September 30, 2007, we had approximately $103.6 million of total outstanding debt. The outstanding debt at September 30, 2007 represents a decrease of approximately $10.6 million from the amounts outstanding at December 31, 2006 as a result of scheduled debt payments. At September 30, 2007, $14.0 million of our debt is classified as current because of payments due within the next twelve months. Interest rates for our outstanding debt vary from the one-month commercial paper rate plus 2.45% to a fixed rate of 9.99% (7.69% to 9.99%) at September 30, 2007, and our average interest rate at September 30, 2007 was 9.78% per annum.

Our outstanding debt consists of $88.9 million under four term loan facilities and $14.7 million of 8% Subordinated Notes. We also had $23.8 million of letters of credit outstanding under our $30 million revolving credit facility with PNC Bank at September 30, 2007. Our debt matures beginning March 31, 2010 through January 1, 2012. Our term-debt borrowings require approximately $1.2 million in total monthly principal payments.

Cash Flows

Cash provided by operations was $24.6 million for the nine months ended September 30, 2007 compared to cash provided by operations of $10.1 million for the nine months ended September 30, 2006. Cash provided by operations is primarily attributable to net income for the nine months ended September 30, 2007 and to the release of $9.3 million of restricted cash at December 31, 2006 upon the termination of our obligations under a letter of credit. Cash provided by operations for the nine months ended September 30, 2006 is primarily attributable to net income of $53.2 million offset by increases in accounts receivable and costs in excess of billings related to the increase in our marine construction activities in 2006 because of the substantial amount of hurricane-related repair work.

Cash used in investing activities was $(15.9) million for the nine months ended September 30, 2007 compared to cash used in investing activities of $(3.9) million for the nine months ended September 30, 2006. Cash flows used in investing activities for the nine months ended September 30, 2007 includes $(10.2) million of additions primarily for vessel upgrades to the Atlantic Horizon and marine equipment and $(6.2) million of net purchases of short-term investments. Cash used in investing activities for the first nine months of 2006 is attributable to the acquisition of the Texas Horizon in February 2006 offset by proceeds received from an insurance settlement.

Cash used in financing activities was $(11.4) million for the nine months ended September 30, 2007 compared to cash provided by financing activities of $11.3 million for the nine months ended September 30, 2006. Cash used in financing activities for the nine months ended September 30, 2007 related to recurring principal payments on our outstanding debt. Cash provided by financing activities for the nine months ended September 30, 2006 related to the net proceeds received from the public offering of our common stock completed on June 28, 2006. The cash provided by financing activities was offset by the monthly installment payments of our term debt and the prepayment of term debt.

Contractual Disputes — Unasserted Claims for Penalties Resulting from Contract Delays

Many of our large international contracts contain specific completion schedule requirements that require us to pay penalties in the event that the completion schedules are not met for reasons attributable to us and we may not be able to meet completion schedules. Our exposures under these penalty provisions are generally based on a percentage of the remaining contract value for work which will be completed outside of the completion schedule requirements, up to maximum amounts generally based on an agreed percentage of contract values.

Off-Balance Sheet Arrangements

We have entered into off-balance sheet arrangements in the normal course of business with customers, vendors and others, which include bank letters of credit to secure performance bonds, performance warranties and operating leases. At September 30, 2007, $23.8 million of our $30 million revolving credit facility with PNC Bank was utilized to support letters of credit to secure performance bonds on existing Pemex contracts.

Contractual Obligations and Capital Expenditures

We have fixed debt service and lease payment obligations under notes payable and operating leases for which we have material contractual cash obligations. Interest rates on our debt vary from the one-month commercial paper rate plus 2.45% to a fixed rate of 9.99% (7.69% to 9.99%) at September 30, 2007, and our average interest rate at September 30, 2007, was 9.78%. The following table summarizes our long-term material contractual cash obligations, including interest payments calculated at the effective interest rate at September 30, 2007, on variable rate debt and the interest rate on our fixed rate debt (in thousands):


	Remainder
	of 2007		2008		2009		2010		2011		Thereafter		Total

Principal and interest payments on debt	$	7,165	$	19,508	$	18,092	$	35,285	$	47,942	$	697	$	128,689
Operating leases		653		2,361		769		1,879		1,838		7,017		14,517

	$	7,818	$	21,869	$	18,861	$	37,164	$	49,780	$	7,714	$	143,206

Our estimated planned capital expenditures for the remainder of 2007 are less than $1 million.

New Accounting Pronouncements

See Note 10 of our consolidated financial statements included elsewhere in this report.

Critical Accounting Policies and Estimates

Our accounting policies are described in the notes to our audited consolidated financial statements included in our 2006 Annual Report on Form 10-K. We prepare our financial statements in conformity with GAAP. Our results of operations and financial condition, as reflected in our financial statements and related notes, are subject to management’s evaluation and interpretation of business conditions, changing capital market conditions and other factors that could affect the ongoing viability of our business and our customers. We believe the most critical accounting policies in this regard are those described in our 2006 Annual Report on Form 10-K. While these issues require us to make judgments that are somewhat subjective, they are generally based on a significant amount of

historical data and current market data. There have been no material changes or developments in authoritative accounting pronouncements or in our evaluation of the accounting estimates and the underlying assumptions or methodologies that we believe to be critical accounting policies and estimates as disclosed in our 2006 Annual Report on Form 10-K.

Forward-Looking Statements

We operate in a rapidly changing business environment that involves substantial risk and uncertainty. All phases of our operations are subject to a number of uncertainties, risks and other factors, many of which are beyond our control. Any one or a combination of such factors could materially affect the results of our operations and the accuracy of forward-looking statements made by us. If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. Some important factors that could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements include the following:


	•	our business is highly cyclical;

	•	oil and gas prices are volatile and price declines may affect us;

	•	the highly competitive nature of the marine construction business;

	•	seasonality of the offshore construction industry in the U.S. Gulf of Mexico;

	•	operating hazards, including the unpredictable effect of natural occurrences on operations, such as hurricanes and other hazards associated with maritime activities, and the significant possibility of accidents resulting in personal injury and property damage;

	•	risks involved in the expansion of our operations into international offshore oil and gas producing areas;

	•	our ability to obtain and retain highly skilled personnel;

	•	extreme weather conditions may adversely impact our operations;

	•	contract bidding risks, including those involved in performing projects on a fixed-price basis and extra work performed outside the original scope of work, and the successful negotiation and collection of contract claims for such extra work;

	•	our dependence on continued strong working relationships with significant customers operating in the Gulf of Mexico;

	•	percentage-of-completion accounting;

	•	estimates and assumptions that we use to prepare our financial statements;

	•	the continued active participation of our executive officers and key operating personnel;

	•	the effect on our performance from regulatory programs and environmental matters;

	•	our international operations are subject to the U.S. Foreign Corrupt Practices Act;

	•	our ability to fund working capital requirements;

	•	limitations on our operating and financial flexibility because of restrictive covenants in our debt instruments;

	•	our ability to obtain performance bonds and letters of credit if required to secure our performance under new international contracts;

	•	the potential impairment of our assets in the future; and

	•	a possible terrorist attack or armed conflict.

These and other uncertainties related to the business are described in detail under the heading Part I, Item 1A, “Risk Factors” in our 2006 Form 10-K.


Item 3.	*Quantitative and Qualitative Disclosures about Market Risk*

We are exposed to market risk related to interest rates, concentration of credit and foreign currency exchange rates for our construction services. There were no material changes during the quarter ended September 30, 2007 to the disclosures made in Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk” of our 2006 Form 10-K. Our exposure to market risk includes “forward-looking statements” and represents estimates of possible changes in fair values, future earnings or cash flows that would occur, assuming hypothetical future movements in interest rates or foreign currency exchange rates.


Item 4.	*Controls and Procedures*

As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), our management, including our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the principal executive officer and the principal financial officer have concluded that our disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective in ensuring that the information required to be included in reports we file or submit to the Securities and Exchange Commission (the “SEC”) under the Exchange Act is recorded, processed, summarized and reported to timely alert them to material information relating to us. There has been no change in our internal controls over financial reporting during the quarter ended September 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements.

PART II. OTHER INFORMATION


Item 1.	*Legal Proceedings*

As previously disclosed, two putative shareholder derivative lawsuits were filed in state district court in Harris County, Texas related to our proposed merger transaction with Cal Dive. These two lawsuits are substantially similar and are brought against the members of our board of directors and Cal Dive. Both also name Horizon as a “nominal defendant,” as is customary in putative derivative lawsuits. Only one of the lawsuits has actually been served upon Horizon or any of the other defendants. We have filed a response denying the allegations and asserting, among other things, that the plaintiffs did not have standing to bring this action. No hearing or trial has been set.

Except as noted above, there have been no material developments in legal proceedings. For a description of previously reported legal proceedings refer to Part II, Item 1, “Legal Proceedings” of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 and Part I, Item 3, “Legal Proceedings” of our 2006 Form 10-K.


Item 1A.	*Risk Factors*

There have been no material changes from the risk factors in Part I, Item 1A, “Risk Factors” of our 2006 Form 10-K, which includes a detailed discussion of our risk factors. The information in this report should be read in conjunction with the risk factors and information disclosed in our 2006 Form 10-K.


Item 6.	*Exhibits*


Exhibits

	3	.1	Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to the Company’s Current Report on Form 8-K filed September 19, 2005)
	3	.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to the Company’s Current Report on Form 8-K filed April 18, 2006)
	3	.3	Bylaws of the Company (Incorporated by reference to the Company’s Current Report on Form 8-K filed September 19, 2005)
	4	.1	Specimen of Common Stock Certificate (Incorporated by reference to the Company’s Current Report on Form 8-K filed April 18, 2006)
	31	.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
	31	.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
	32	.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
	32	.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

SIGNATURES

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.

HORIZON OFFSHORE, INC.


	By:	/s/ Ronald D. Mogel

Ronald D. Mogel

Vice President and Chief Financial Officer

Date: November 1, 2007

INDEX TO EXHIBITS


Exhibit			Description

	3	.1	Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to the Company’s Current Report on Form 8-K filed September 19, 2005)
	3	.2	Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company (Incorporated by reference to the Company’s Current Report on Form 8-K filed April 18, 2006)
	3	.3	Bylaws of the Company (Incorporated by reference to the Company’s Current Report on Form 8-K filed September 19, 2005)
	4	.1	Specimen of Common Stock Certificate (Incorporated by reference to the Company’s Current Report on Form 8-K filed April 18, 2006)
	31	.1	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
	31	.2	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
	32	.1	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
	32	.2	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

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HORIZON OFFSHORE INC 10-Q