UNITED STATES SECURITIES AND EXCHANGE COMMISSION ~~Washington, D.C. 20549~~

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 March 31, 2007
		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 Houston, Texas (Address of principal executive offices)		77042 (Zip Code)
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)~~

(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 ~~May 3,~~ October 30, 2007 was 32,~~680~~614,~~703~~215.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended ~~March~~September 3130, 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		2017
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		2826
	Item 4.	Controls and Procedures		2927
PART II. OTHER INFORMATION
	Item 1A.	Risk Factors		29
	Item 1.	Legal Proceedings		27
	Item 6.	Exhibits		30
	Item 1A.	Risk Factors		27
		Signatures		31
	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

	March 31,			December 31,
	September 30,			December 31,
	2007			2006
	(Unaudited)
	(In thousands, except share data)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	7394,~~471~~154		$	96,890
Short-term investments		156,~~208~~225			—
Restricted cash		~~9,432~~—			9,325
Accounts receivable —
Contract receivables		48135,~~583~~195			72,231
Costs in excess of billings		~~130~~75,~~336~~395			112,836
Other		24,~~971~~034			2,773
Income tax receivable		14,~~040~~540			5,040
Other current assets		36,~~490~~646			8,140
Total current assets		~~284~~326,~~531~~189			307,235
PROPERTY AND EQUIPMENT, net		~~197~~194,~~958~~408			197,409
CONTRACT RECEIVABLES, long-term		1314,~~346~~328			—
OTHER ASSETS, net		1614,~~270~~113			18,375
	$	~~512~~549,~~105~~038		$	523,019
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	1312,~~384~~096		$	15,160
Accrued liabilities		815,~~347~~021			8,130
Accrued job costs		3971,~~957~~988			56,782
Billings in excess of costs		102,~~634~~656			2,632
Current maturities of long-term debt		1513,~~618~~961			14,813
Current taxes payable		67,~~559~~153			5,195
Total current liabilities		94122,~~499~~875			102,712
LONG-TERM DEBT, net of current maturities		8074,~~839~~919			85,495
SUBORDINATED NOTES		14,~~182~~755			13,904
OTHER LIABILITIES		~~893~~800			924
DEFERRED INCOME TAXES		2122,~~680~~979			22,649
Total liabilities		~~212~~236,~~093~~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, 32,680,703 and 32,395,258 shares issued and outstanding, respectively		—			—
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,~~846~~989			419,392
Accumulated deficit		(~~119~~106,~~497~~858	)		(121,766	)
Accumulated other comprehensive loss		(~~337~~421	)		(291	)
Total stockholders’ equity		~~300~~312,~~012~~710			297,335
	$	~~512~~549,~~105~~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
	March 31,
	September 30,						September 30,
	2007			2006			2007			2006
	~~(Unaudited)~~			(Unaudited)
	(In thousands, except share
	(In thousands, except share and per share data)
	and per share data)
CONTRACT REVENUES	$	147,778		$	143,733		$	351,844		$	430,618
CONTRACT REVENUES	$	86,715		$	129,945
COST OF CONTRACT REVENUES		111,236			104,603			301,194			313,811
COST OF CONTRACT REVENUES		73,529			91,554
Gross profit		36,542			39,130			50,650			116,807
Gross profit		13,186			38,391
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		7,915			8,318			24,011			25,641
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		7,829			8,258
GAIN ON INSURANCE SETTLEMENT		—			—			—			(14,300	)
Operating income		5,357			30,133
RESERVE FOR CLAIMS AND RECEIVABLES		—			—			—			18,458
OTHER:
Operating income		28,627			30,812			26,639			87,008
Interest expense		(2,696	)		(4,085	)
OTHER:
Interest income		886			393
Interest expense		(2,816	)		(3,146	)		(8,521	)		(10,771	)
Loss on debt extinguishment		—			(2,402	)
Interest income		886			894			2,654			1,686
Other income (expense), net		(259	)		(25	)
Loss on debt extinguishment		—			—			—			(2,402	)
NET INCOME BEFORE INCOME TAXES		3,288			24,014
Other income (expense), net		(50	)		395			(35	)		358
INCOME TAX PROVISION		1,019			8,543
INCOME BEFORE INCOME TAXES		26,647			28,955			20,737			75,879
NET INCOME	$	2,269		$	15,471
INCOME TAX PROVISION		7,773			8,089			5,829			22,672
EARNINGS PER SHARE — BASIC AND DILUTED:
NET INCOME	$	18,874		$	20,866		$	14,908		$	53,207
Net income per share — basic	$	0.07		$	0.52
EARNINGS PER SHARE — BASIC AND DILUTED:
Net income per share — diluted	$	0.07		$	0.51
Net income per share — basic	$	0.59		$	0.66		$	0.47		$	1.75
WEIGHTED AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE:
Net income per share — diluted	$	0.58		$	0.64		$	0.46		$	1.72
BASIC		31,856,906			29,559,869
WEIGHTED AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE:
DILUTED		32,446,006			30,375,132
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

	Three Months Ended
	Nine Months Ended
	March 31,
	September 30,
	2007			2006
	(Unaudited)
	(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	214,~~269~~908		$	1553,~~471~~207
Adjustments to reconcile net income to net cash used in operating activities —
Adjustments to reconcile net income to net cash provided by operating activities — Depreciation and amortization		18,570			20,101
Depreciation and amortization		5,602			6,326
Gain on insurance settlement		—			(14,300	)
Net gain on sale of assets		—			(1525	)
Deferred income taxes		(944	)		1,512
Reserve for claims and receivables		—			18,458
Paid in-kind interest on subordinated notes and related party term debt		278			580
Deferred income taxes		379			11,882
Amortization of deferred loan fees recorded as interest expense		139			351
Paid in-kind interest on subordinated notes and related party term debt		851			1,109
Stock-based compensation expense		1,140			2,049
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		~~(107~~9,325	)		2,~~435~~712
Accounts receivable		14(78,~~104~~053	)		(4360,~~205~~201	)
Costs in excess of billings		~~(17~~37,~~500~~441	)		11(26,~~759~~758	)
Billings in excess of costs		~~8,002~~24			(~~972~~1,201	)
Other assets		4(1,~~401~~233	)		(5,~~855~~758	)
Accounts payable		(13,~~776~~064	)		3(2,~~857~~749	)
Accrued and other liabilities		(14,~~025~~909	)		(14,~~524~~390	)
Accrued job costs		~~(16~~15,~~825~~206	)		(42,~~525~~780	)
Current taxes payable		1,~~364~~958			62,~~052~~261
Net cash used in operating activities		(878	)		(3,302	)
Net cash provided by operating activities		24,606			10,091
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases and additions to property and equipment		(310,~~982~~189	)		(1318,~~740~~269	)
Proceeds from sale of assets		500			15
Proceeds from casualty insurance claim		—			14,300
(Purchases) sales of short-term investments, net		(15,208	)		—
Proceeds from sale of assets		500			25
Net cash used in investing activities		(18,690	)		(13,725	)
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		(311,~~851~~428	)		(325,~~550~~819	)
Stock issuance costs		—			(12	)
Principal payments under related party term debt		—			(548	)
Deferred loan fees		—			(1466	)
Proceeds from issuance of common stock, net		—			38,140
Stock option transactions		—			8
Net cash used in financing activities		(3,851	)		(3,555	)
Net cash provided by (used in) financing activities		(11,428	)		11,315
NET DECREASE IN CASH AND CASH EQUIVALENTS		(23,419	)		(20,582	)
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	$	7394,~~471~~154		$	2260,~~378~~422
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest	$	27,~~501~~377		$	38,~~445~~659
Cash paid for income taxes	$	~~599~~7,238		$	~~980~~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	$	~~1,321~~182		$	23,~~238~~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 ~~SUMMARY~~BASIS OF ~~SIGNIFICANT ACCOUNTING POLICIES~~PRESENTATION:

Horizon Offshore, Inc., a Delaware corporation, and its ~~Organization~~subsidiaries (references to “Horizon”, “company,” “we,” “our” or “us” are intended to refer to Horizon Offshore, Inc. and ~~Basis~~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 ~~Presentation~~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.

~~Horizon~~The ~~Offshore,~~accompanying ~~Inc.,~~unaudited aconsolidated ~~Delaware~~interim ~~corporation, and its~~financial ~~subsidiaries~~statements ~~(references~~have tobeen ~~“Horizon”, “company,”~~prepared ~~“we”~~in oraccordance ~~“us”~~with ~~are~~generally ~~intended~~accepted toaccounting ~~refer~~principles toin ~~Horizon~~the ~~Offshore,~~United ~~Inc.~~States ~~and~~of ~~its~~America ~~subsidiaries~~(“GAAP”). ~~provide~~In ~~marine~~the ~~construction~~opinion ~~services~~of ~~for~~management, the unaudited ~~offshore~~consolidated ~~oil~~interim ~~and~~financial ~~gas~~statements ~~and~~include ~~other~~all adjustments, ~~energy~~consisting ~~related~~only ~~industries.~~of ~~During~~normal recurring adjustments, ~~the~~necessary ~~three~~for ~~months~~a ~~ended~~fair ~~March 31,~~presentation ~~2007,~~of wethe ~~provided~~company’s ~~construction~~financial ~~services~~position ~~domestically~~as inof ~~the U.S.~~September ~~Gulf~~30, of2007 and ~~Mexico~~December 31, ~~and~~2006, ~~internationally~~the instatements ~~our~~of ~~Latin~~operations ~~America,~~for ~~West Africa~~the three and ~~Southeast~~nine ~~Asia/Mediterranean~~months ~~geographic~~ended ~~segments.~~September 30, ~~These~~2007 and 2006, ~~services~~and ~~primarily~~the ~~consist~~statements of ~~laying,~~cash ~~burying~~flows ~~or repairing marine pipelines~~ for the ~~transportation~~nine ofmonths ~~oil and gas;~~ended ~~providing hook-up~~September 30, ~~and commissioning~~2007 ~~services;~~ and ~~installing~~2006. ~~and~~Although ~~salvaging~~management ~~production~~believes ~~platforms~~the ~~and~~unaudited ~~other~~interim ~~marine~~disclosures ~~structures.~~are ~~Our~~adequate ~~projects~~to ~~are~~make the ~~performed~~information onpresented anot ~~fixed-price~~misleading, ~~basis~~certain orinformation ~~a combination of a~~and ~~fixed-price~~footnote ~~and~~disclosures ~~day-rate~~normally ~~basis~~included in ~~the~~annual ~~case~~audited financial ofstatements ~~extra~~prepared ~~work~~in toaccordance bewith GAAP have been ~~performed~~condensed ~~under~~or ~~the~~omitted ~~contract.~~pursuant ~~From~~to ~~time~~the torules ~~time,~~of wethe ~~may~~Securities ~~also~~and ~~perform~~Exchange ~~projects~~Commission on(the ~~a cost-reimbursement or day-rate basis~~“SEC”).

The ~~accompanying~~results ~~unaudited consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States~~ of ~~America (GAAP).~~operations ~~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~~three ~~financial position as of March 31, 2007~~ and ~~December 31,~~nine ~~2006, the statements of operations for the three~~ months ended ~~March 31, 2007 and~~ ~~2006, and the statements of cash flows for the three months ended March~~September 3130, 2007 ~~and 2006. Although management believes the unaudited interim disclosures~~ are ~~adequate to make the information presented~~ not ~~misleading,~~necessarily ~~certain~~indicative ~~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 months ended March 31, 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.

Segment Information and Significant Customers

We have domestic and international operations in one industry segment, the marine construction services industry. We currently operate in four geographic segments. See Note 8 for geographic information. Customers accounting for more than 10% of consolidated revenues for the three months ended March 31, 2007 and 2006 are as follows:

	Three Months Ended
	March 31,
Customer	2007			2006
Customer A		52	%		8	%
Customer B		20	%		—
Customer C		7	%		33	%
Customer D		—			17	%
Customer E		—			13	%
Customer F		1	%		12	%

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

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

West Africa. We generally derive the revenues associated with our Latin America geographic segment from our work offshore Mexico for Petróleos Mexicanos (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.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents include interest bearing demand deposits and highly liquid investments with original maturities of three months or less. Short-term investments include municipal bonds and auction rate securities with maturities greater than three months. We control our exposure to credit risk associated with these instruments by placing our financial interests with credit-worthy financial institutions and generally performing services for national oil companies, major and independent oil and gas companies, energy companies and their affiliates. The concentration of customers in the energy industry may impact our overall credit exposure, either positively or negatively, because these customers may be similarly affected by changes in economic or other conditions. We had a total of three customers who accounted for 88% and 75% of total billed and unbilled receivables as of March 31, 2007 and December 31, 2006, respectively. No other single customer accounted for more than 10% of accounts receivable as of March 31, 2007 and December 31, 2006.

Principles of Consolidation

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.

~~Revenue~~ ~~Recognition~~6

ContractTable revenues are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to the total estimated costs for each construction contract. This percentage is applied to the estimated revenue at completion to calculate revenues earned to date. We consider the percentage-of-completion method to be the best available measure of progress on these contracts. We follow the guidance of American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 81-1, “Accounting for Performance Contents

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)

of• ~~Construction —~~completion ~~Type~~penalties ~~and~~covering ~~Certain Production — Type Contracts,” for our accounting policy relating to the use of the percentage~~out-of-~~completion method, estimated costs and claim recognition for construction contracts. Contract revenue reflects the original~~ contract ~~price adjusted for agreed upon change orders and unapproved claims~~periods. We recognize unapproved claims only when the collection is deemed probable and if the amount can be reasonably estimated for purposes of calculating total profit or loss on long-term contracts. We record revenue and the unbilled receivable for unapproved claims to the extent of costs incurred and to the extent we believe related collection is probable and include no profit on unapproved claims recorded. Changes in job performance, job conditions and estimated profitability, including those arising from final contract settlements, may result in revisions to costs and revenues and are recognized in the period in which the revisions are determined. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. The asset “Costs in excess of billings” represents costs and estimated earnings recognized as revenue in excess of amounts billed as determined on an individual contract basis. The liability “Billings in excess of costs” represents amounts billed in excess of costs and estimated earnings recognized as revenue on an individual contract basis.

During October 2007, we completed the first Pemex project, and ~~Interest~~we continue to work with Pemex to obtain contract extensions for ~~Expense~~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.

~~For~~We have substantially completed the ~~three~~second ~~months~~Pemex ~~ended~~project. ~~March 31~~We received contract extensions on this project through August 2007, and accordingly, in September 2007, ~~interest~~we ~~expense~~invoiced Pemex ~~includes~~approximately ~~charges~~$27.1 million related to ~~cost~~work ofcompleted through ~~capital~~August ~~and~~2007. ~~other~~We ~~financing charges~~will ~~related~~continue to ~~our~~work ~~outstanding~~with ~~debt,~~Pemex ~~amortization~~to obtain additional contract extensions. Upon completion of this ~~deferred~~project ~~loan~~and ~~fees~~the ~~over~~receipt of contract extensions, we will invoice the ~~term~~remaining $32.2 million of ~~the~~unbilled ~~respective~~revenue ~~debt,~~related to original scope of work. Unapproved change orders and recoverable ~~paid~~penalties that we have included in~~-kind~~ ~~interest~~estimated onrevenues ~~our~~at completion ~~subordinated~~under ~~notes~~this ~~due~~contract as of September 30, 2007 ~~March~~totaled approximately $15 31million. However, ~~2010~~we ~~(the~~have recognized 8approximately $13.5 million of these estimated revenues because we are approximately 90% complete on this project at September ~~Subordinated~~30, ~~Notes)~~2007.

~~Interest~~We ~~expense~~are ~~for~~working ~~the~~with ~~three~~Pemex ~~months~~to ~~ended~~obtain ~~March 31,~~approved ~~2006~~change orders ~~included charges~~ related to ~~cost~~compensable ofweather ~~capital~~delays, ~~and~~client ~~other~~interference ~~financing~~and ~~charges~~extra ~~related~~work and to ~~our~~recover ~~outstanding~~contract ~~debt,~~penalties ~~amortization~~because ofwe believe ~~deferred~~that ~~loan~~our ~~fees~~claims ~~over~~are valid under the ~~term~~Pemex ofcontracts. ~~the~~Total unapproved ~~respective~~change ~~debt,~~orders and claims at September 30, 2007 ~~paid~~are ~~in-kind~~approximately ~~interest~~$20 million, onof ~~our~~which 8%approximately $18.5 ~~Subordinated~~million ~~Notes~~has been recognized as revenue and ~~two~~is ~~secured~~included ~~term~~in ~~loans~~costs ~~originally~~in ~~due~~excess ~~March 31,~~of ~~2007~~billings (in the accompanying ~~Senior~~consolidated ~~Credit~~balance ~~Facilities)~~sheet. ~~prior~~Also, towe ~~their~~could ~~refinancing~~incur ~~during~~additional costs and losses on the Pemex projects if we experience further ~~first~~delays ~~quarter~~due to weather or poor productively that results in costs incurred in excess of ~~2006~~the amounts currently estimated.

~~Cash~~3. ACCOUNTS ~~and Cash Equivalents~~RECEIVABLE:

~~Cash~~We ~~and~~have ~~cash~~significant ~~equivalents~~investments ~~include~~in ~~interest~~billed ~~bearing~~and ~~demand~~unbilled ~~deposits~~receivables as of September 30, 2007 and ~~highly~~December 31, 2006. ~~liquid~~There ~~investments~~was ~~with~~no ~~original~~allowance ~~maturities~~for doubtful accounts as of these balance sheet dates. The majority of ~~three~~these ~~months~~receivables orrelate ~~less~~to several large, ~~and~~longer ~~are~~duration ~~carried~~contracts atfor ~~cost~~projects outside of the U.S. Gulf of Mexico, ~~which~~where contracts are typically ~~approximates~~smaller ~~fair~~and ~~value~~of shorter duration. As of ~~March~~September 3130, 2007, we ~~and~~had approximately $135.2 million of contract receivables compared to $72.2 million at December 31, 2006,. ~~cash~~This increase ~~held~~is inprimarily ~~foreign~~due ~~bank~~to ~~accounts~~activity on the Northeast Gateway ~~equaled~~Pipeline ~~approximately~~and $3Pemex projects.~~0 million~~ ~~and~~Long-term contract receivables of $114.3 million at September 30, 2007 represent ~~respectively~~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 ~~Short~~billings in the accompanying consolidated financial statements, arise as revenues are recognized under the percentage-~~Term~~of-completion method. As of September 30, 2007, ~~Investments~~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

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 March 31, 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 $9.4 million represents $9.1 million cash used to secure a letter of credit under the completed Israel Electric Corporation (IEC) contract, plus interest received. Upon official acceptance of this project, $1.1 million of the cash expended to secure the IEC letter of credit will be released. Although IEC has not provided official acceptance of the project, the project was completed and the 18 month warranty period began in February 2006. The remaining funds will be released 60 days after the end of the warranty period if no defect is discovered, and 24 months after the completion of the warranty work if a defect is discovered. The $9.1 million, plus interest received of $0.3 million, is classified as a current asset because we expect the warranty period will expire in

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~2007~~unbilled receivables of approximately $25.2 million, ~~and~~which have webeen ~~expect~~recognized ~~this~~as ~~entire~~revenue, ~~amount~~primarily for unapproved change orders due to beadditional ~~released~~work ~~during~~scope, weather delays and repair ~~2007.~~work ~~Restricted~~covered ~~cash~~under isthe ~~not~~customer’s ~~considered~~insurance aspolicy. ~~cash~~We ~~or cash~~will ~~equivalents~~issue invoices for ~~purposes~~the ofextra work upon the ~~accompanying~~receipt ~~consolidated~~of approved ~~balance~~change ~~sheets~~orders from Pemex and ~~statements~~the ofWest ~~cash~~Africa ~~flows~~Gas Pipeline Company.

As of September 30, 2007 and December 31, 2006, we had ~~Accounts~~a total of three customers which accounted for 55% and 75%, ~~Receivable~~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.

~~Accounts~~On ~~receivable are stated at the historical carrying value less write-offs and allowances for doubtful accounts. We have significant investments in billed and unbilled receivables as of March~~August 314, ~~2007 and December 31~~2006, ~~2006.~~we ~~Billed receivables~~received ~~represent~~notification ~~amounts~~that ~~billed upon the completion of~~an ~~small~~arbitral ~~contracts~~panel ~~and~~in ~~progress~~Mexico ~~billings~~rejected onour ~~large~~Pemex ~~contracts~~EPC in64 contract ~~accordance~~claims ~~with~~from ~~contract terms and milestones~~2003. ~~Contract receivables,~~We ~~long-term~~reserved of $1318.35 million atfor ~~March 31,~~the ~~2007~~remaining ~~represent~~carrying ~~retainage~~value ~~related~~of toour ~~the~~outstanding ~~West~~claims ~~Africa~~against ~~Gas Pipeline~~Pemex ~~project~~during ~~that we do not expect to collect within~~ the ~~next~~quarter ~~twelve months~~ended ~~due~~June 30, to2006. ~~delays~~During ~~in completion of~~ the ~~project. Unbilled~~quarter ~~receivables~~ended onSeptember 30, ~~fixed-price~~2006, ~~and~~we ~~day~~wrote-~~rate~~off ~~contracts,~~the ~~which are~~total $51.6 million included in costs in excess of billings~~, arise as revenues are~~ ~~recognized~~related ~~under~~to the ~~percentage-of-completion method.~~ ~~Unbilled~~Pemex ~~amounts~~claims onagainst ~~cost-reimbursement~~the ~~contracts represent~~allowance ~~recoverable~~for ~~costs and accrued profits not yet billed.~~doubtful ~~Revenue associated with these billings is recorded net of any sales tax and value added tax, if applicable~~accounts.

~~In establishing an allowance for doubtful accounts, we evaluate~~ our contract receivables and costs in excess of billings and thoroughly review historical collection experience, the financial condition of our customers, billing disputes and other factors4. ~~We write-off uncollectible accounts receivable against~~ CERTAIN ~~the~~BALANCE ~~allowance~~SHEET ~~for doubtful accounts if we determine that the~~ACCOUNTS: amounts will not be collected or if a settlement is reached. As of March 31, 2007 and December 31, 2006, there was no allowance for doubtful accounts. There were no reserves for contract receivables and costs in excess of billings or write-offs of receivables during the three months ended March 31, 2007 and 2006.

~~We negotiate change orders and unapproved claims with our~~ ~~customers. In particular, unsuccessful negotiations of~~Short-term ~~unapproved claims could result in the settlement or collection~~Investments of a receivable at an amount that is less than its carrying value, which would result in the recording of a loss. Successful claims negotiations could result in the recovery of previously recorded losses. Significant losses on receivables would adversely affect our financial position, results of operations and our overall liquidity.

AsShort-term ofinvestments ~~March 31,~~are ~~2007,~~classified weas ~~had approximately~~available-for-sale ~~$130.3 million~~instruments ofthat ~~unbilled~~we ~~receivables~~expect ~~compared~~ to ~~$112.8 million~~ atrealize ~~December 31, 2006, included~~ in ~~costs in~~cash ~~excess~~within ofone ~~billings in the accompanying consolidated balance sheets~~year. ~~We have significant unbilled receivables primarily~~ ~~because~~These ofinvestments ~~our~~are ~~Pemex~~recorded ~~projects~~at ~~offshore~~fair ~~Mexico and West Africa Gas Pipeline project~~value. ~~Under~~Any ~~our contracts with Pemex, we must~~unrealized ~~fully~~holding ~~complete~~gains ~~certain~~or ~~milestones~~losses ~~before~~are anreported ~~invoice for the work performed can be issued. However, changes~~ in ~~scheduling~~comprehensive ~~and work~~income ~~priorities~~(loss) byuntil Pemex and interference from other Pemex contractors in the area have resulted in delays in our ability to fully complete and invoice for certain milestones within the original contract schedulesrealized. ~~Delays~~Our ~~of this nature are remedied by contract extensions from Pemex that are agreed to on a case~~short-~~by-case basis.~~term ~~Pemex~~investments ~~has approved several contract extensions to date.~~at ~~Subsequent to March~~September 3130, 2007, weconsisted ~~received~~of ~~approved~~municipal ~~contract extensions~~bonds and ~~billed approximately $20 million. We are~~auction ~~currently~~rate ~~negotiating with Pemex to extend the contracts through our estimated completion date~~securities. We ~~will~~did ~~invoice~~not ~~for~~have ~~our~~any ~~work under~~short-term ~~the~~investments ~~Pemex contracts as milestones are fully completed and~~at ~~additional~~December 31, ~~contract~~2006. ~~extensions~~Although ~~are~~these ~~approved~~instruments bydo ~~Pemex.~~not ~~Unbilled~~meet ~~receivables also relate to extra work under~~ the ~~Pemex~~definition ~~contracts~~ of ~~approximately~~cash ~~$39.2 million for changes in work scope under the contracts, customer interferences~~ and ~~port~~cash ~~closures due to adverse weather conditions. Under the West Africa Gas Pipeline contract~~equivalents, we have ~~unbilled~~the ~~receivables of approximately~~ability ~~$22.5 million mostly for weather delays and costs incurred in connection with damage~~ to ~~the~~quickly ~~pipeline~~liquidate inthese ~~2006 for which the customer has sought recovery from builder’s risk insurers~~securities. ~~We will issue billings for the extra work upon the receipt of approved change orders from Pemex and the West Africa Gas Pipeline Company.~~

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)

~~Other~~5. NOTES ~~Long-Term Assets~~PAYABLE:

~~Other~~Notes ~~assets,~~payable ~~net of accumulated amortization of $18.2 million and $16.0 million at March 31, 2007 and December 31, 2006, respectively,~~ consist of the following (in thousands):

	March 31,		December 31,
	September 30,		December 31,
	2007		2006
Capitalized dry-dock costs	$	13,524	$	15,441
Term loan payable to CIT Group Equipment/Financing Inc., due March 9, 2011	$	56,204	$	64,304
Deferred loan fees		2,246		2,386
Term loan payable to General Electric Credit Corporation of Tennessee, due January 1, 2011		23,388		25,000
Deposits		202		311
Term loan payable to GE Capital Corporation, due January 1, 2012		5,395		6,246
Other		298		237
Term loan payable to GE Capital Corporation, due June 29, 2011		3,893		4,758
	$	16,270	$	18,375
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

~~Dry-dock~~At ~~costs~~September 30, ~~are~~2007, ~~direct~~we ~~costs~~had ~~associated~~no ~~with~~borrowings ~~scheduled major~~outstanding ~~maintenance~~under on our ~~marine~~revolving ~~construction~~credit ~~vessels~~facility. WeAt capitalize the costs incurred in connection with dry-dockings and amortize them on the straight-line method over a period ranging between thirty and sixty months until the next scheduled dry-docking. We incurred and capitalized dry-dock costs of $0.2September ~~million~~30, ~~and~~2007, $023.78 million ~~for~~of ~~the~~letters ~~three~~of ~~months~~credit ~~ended~~were ~~March 31,~~outstanding ~~2007~~under ~~and~~the ~~2006, respectively~~facility. ~~The~~Any ~~dry-dock~~outstanding ~~costs~~letters ~~capitalized~~of ~~for~~credit ~~the three~~are ~~months ended March 31, 2007 relate primarily to a~~deducted ~~dry-docking~~from ~~for~~ the ~~Texas~~borrowing ~~Horizon~~availability tounder ~~complete~~the ~~certain hull~~facility. ~~and~~Advances ~~machinery survey requirements to maintain its class~~are ~~certification.~~obtained ~~This~~in ~~dry-dock~~accordance ~~will~~with bea ~~completed~~borrowing ~~during~~base, ~~the~~which ~~second~~is ~~quarter~~calculated ofas ~~2007.~~a ~~The~~percentage ~~dry-dock costs capitalized for the first three months~~ of ~~2006~~accounts ~~related~~receivable ~~primarily~~balances ~~to surveys~~ and ~~inspections~~costs ~~performed~~in onexcess ~~the~~of ~~Pecos Horizon to maintain its class certification~~billings. WeBased ~~amortized~~upon ~~capitalized~~the ~~dry-dock~~borrowing ~~costs~~base ofcalculation, ~~$2.1 million~~we ~~and~~had $16.82 million ~~for~~of ~~the~~borrowing ~~three months~~capacity ~~ended~~available ~~March 31,~~after ~~2007~~utilizing ~~and~~the ~~2006,~~facility ~~respectively,~~to ~~which~~support ~~is included~~letters ~~in cost~~ of ~~contract revenues in the accompanying~~ ~~consolidated statements of operations~~credit.

~~Loan~~At ~~fees~~September 30, ~~paid~~2007, inour ~~connection~~average ~~with~~interest ~~new~~rate ~~loan~~was ~~facilities are deferred and amortized over the term of the respective loans~~9.78% ~~The~~per ~~amortization of the deferred loan fees is recorded as interest expense in the accompanying consolidated statements of operations~~annum. WeInterest ~~did~~rates ~~not~~for ~~incur~~our ~~any~~outstanding ~~loan~~debt ~~fees~~vary ~~during~~from the ~~three~~ ~~months~~one-month ~~ended~~commercial ~~March 31,~~paper ~~2007.~~rate Weplus ~~incurred and capitalized $~~2.~~1 million~~45% into ~~closing~~a ~~fees~~fixed inrate ~~connection with closing The~~of ~~CIT Group/Equipment Financing, Inc~~9.99% (~~the~~7.69% ~~CIT~~to ~~Group~~9.99%) ~~term~~at ~~loan on March~~September 930, ~~2006~~2007. ~~During~~Our ~~the first quarter of 2006, we wrote~~term-debt ~~off~~borrowings require approximately $1.82 million ofin ~~the unamortized portion of deferred~~total ~~loan~~monthly ~~fees~~principal ~~related to the repayment of the Senior Credit Facilities and other debt with proceeds from the CIT Group term loan~~payments.

~~Deposits~~Substantially ~~consist~~all ~~primarily~~of our assets are pledged as collateral to secure our indebtedness. Our loans contain customary default and cross-default provisions, including change of ~~security~~control provisions, ~~deposits~~and oncovenants ~~office~~restricting ~~leases~~our ability to issue asadditional capital stock, create additional liens, incur additional indebtedness, enter into affiliate transactions, dispose of ~~March 31~~assets, ~~2007~~make investments and ~~December~~pay dividends. We are also required to maintain certain financial ratios at quarterly determination dates. At September 3130, ~~2006~~2007, we were in compliance with all the financial covenants required by our loan and credit facilities.

Stock-Based Compensation

We account for stock-based compensation under the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004), “Share-Based Payment,” (SFAS No. 123(R)), which revises SFAS No. 123, “Accounting for Stock-Based Compensation,” (SFAS No. 123) and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25). SFAS No. 123(R) requires us to recognize expense related to the fair value of our stock-based compensation awards, including employee stock options.

The fair value of options granted is estimated on the date of grant using the Black-Scholes single option pricing model based on assumptions including, (i) expected option life (in years), (ii) expected volatility and (iii) risk-free interest rate. The expected term of the options is based on evaluations of historical and expected future employee exercise behavior. Expected volatility is based on the historical volatility of our stock. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at the grant date. We have not historically paid any dividends and do not expect to in the future.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~We recognize compensation cost for awards with graded vesting~~ ~~using the straight-line attribution method, with the amount of~~6. STOCKHOLDERS’ ~~compensation cost recognized at any date at least equal to the~~EQUITY: ~~portion of the grant-date value of the award that is vested at that date.~~

~~Compensation cost recognized in any period is impacted by the~~ ~~number of stock options granted and the vesting period, as well~~Earnings asPer ~~the underlying assumptions used in estimating the fair value~~Share ~~on the date of grant. This estimate is dependent upon a number of variables such as the number of options awarded, cancelled or exercised and fluctuations in our share price during the year.~~

~~SFAS No. 123(R)~~The ~~requires~~following ~~that~~table ~~cash~~presents ~~flows~~information ~~from~~necessary ~~the exercise~~to ~~of stock options resulting from tax benefits in excess~~calculate ofearnings ~~recognized~~per ~~cumulative~~share ~~compensation costs (excess tax benefits) be classified as financing cash flows. No such excess tax benefits were recorded~~ for the three and nine months ended ~~March~~September 3130, 2007 and 2006. (in thousands, except per share amounts):

Federal Income Taxes


	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

WeAs ~~account~~of ~~for income taxes in accordance with SFAS~~September ~~No. 109~~30, ~~“Accounting for Income Taxes~~2007,” ~~(SFAS No. 109). SFAS No. 109~~we ~~requires~~had ~~the~~outstanding ~~recognition of income tax~~options ~~expense~~covering ~~for~~an ~~the~~aggregate ~~amount~~ of ~~taxes~~79,122 shares ~~payable~~of orcommon ~~refundable~~stock, ~~for the~~of ~~current~~which ~~year~~all ~~and~~were ~~for~~exercisable, ~~deferred tax liabilities~~ and ~~assets~~we ~~for~~had ~~the future~~432,820 shares ~~tax consequences~~ of ~~events that have been recognized in~~ anunvested ~~entity’s~~restricted ~~financial~~stock. ~~statements~~Restricted orstock ~~tax~~grants ~~returns.~~are ~~We must~~legally ~~make~~considered ~~significant~~issued ~~assumptions, judgments~~ and ~~estimates~~outstanding, ~~to determine~~but ~~our~~are ~~current~~included ~~provision~~in ~~for income taxes, our deferred~~both ~~tax~~basic ~~assets~~ and ~~liabilities,~~diluted ~~and~~EPS ~~any~~only ~~valuation allowance~~ to ~~be recorded~~the ~~against~~extent ~~our~~they ~~net~~are ~~deferred tax asset~~vested. ~~The current~~ ~~provision~~Unvested ~~for~~shares ~~income~~are ~~tax~~included isin ~~based upon~~ the ~~current~~computation ~~tax~~of ~~laws~~diluted ~~and~~EPS ~~our~~using ~~interpretation~~the oftreasury ~~these~~stock ~~laws,~~method. asExcluded ~~well~~from as the ~~probable~~computation ~~outcomes~~ of ~~any~~diluted ~~foreign~~EPS orfor ~~domestic~~the ~~tax~~three ~~audits.~~and ~~The~~nine ~~value~~months ~~of any~~ended ~~net~~September 30, ~~deferred~~2007 ~~tax~~are ~~asset~~options ~~depends~~to ~~upon our estimates of the amount~~purchase ~~and~~79,122 shares ~~category~~ of ~~future~~common ~~taxable~~stock, ~~income~~at ~~reduced~~a byweighted ~~the~~average ~~amount of~~price ~~any~~of ~~tax~~$105.79, ~~benefits~~as ~~that~~the weexercise doprice ~~not~~is ~~expect~~greater tothan ~~realize. Actual operating results and~~ the ~~underlying amount and category of~~average ~~income~~market inprice. ~~future~~Excluded ~~years~~from ~~could~~the ~~render~~computation ~~our current assumptions, judgments and estimates~~ of ~~recoverable~~diluted ~~net~~EPS ~~deferred taxes~~for ~~inaccurate,~~the ~~thus~~three ~~impacting our financial position~~ and ~~results~~nine ~~of operations.~~months ~~Certain~~ended ~~past~~September 30, ~~changes~~2006 ~~in ownership have limited our~~are ~~ability~~options to ~~realize~~purchase ~~portions~~113,150 shares of ~~our~~common ~~net~~stock, ~~operating~~at ~~loss~~a ~~carryforwards.~~weighted Weaverage ~~compute~~price ~~deferred~~of ~~income taxes using the liability method~~$131.00, Werespectively, ~~provide~~as ~~for deferred income taxes on all temporary differences between~~ the ~~financial-reporting basis and~~exercise ~~the~~price ~~tax~~is ~~basis~~greater ofthan ~~our assets and liabilities by applying enacted statutory tax rates, applicable to future years. Allowable tax credits are applied currently as reductions to~~ the ~~provisions for~~average ~~income~~market ~~taxes~~price.

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

WeOur ~~adopted~~Horizon ~~FASB~~Offshore, ~~Interpretation No~~Inc. ~~48,~~ ~~“Accounting for~~2005 ~~Uncertainty~~Stock inIncentive ~~Income~~Plan, ~~Taxes —~~as ~~an interpretation of~~amended ~~FASB~~(the ~~Statement~~“2005 ~~No. 109”~~Incentive ~~(FIN 48~~Plan”) ~~as of January 1~~, ~~2007.~~provides Wefor ~~have~~the ~~not recorded any reserves for~~issuance ~~uncertain~~of ~~income~~2.8 million ~~tax~~shares ~~positions~~of ~~pursuant~~our tocommon ~~FIN 48~~stock. ~~There~~The 2005 ~~were~~Incentive noPlan ~~unrecognized~~will ~~tax~~remain ~~benefits~~in aseffect ofuntil ~~March 31,~~all ~~2007.~~awards Wegranted dothereunder ~~not~~have ~~expect~~been tosatisfied. ~~recognize~~The ~~significant~~2005 ~~increases~~Incentive orPlan ~~decreases in~~provides ~~unrecognized~~for ~~tax~~grants ~~benefits~~of ~~during~~a ~~the~~variety ~~year~~of ~~ended~~equity incentives, including stock ~~December 31~~options, ~~2007.~~restricted Instock ~~accordance~~and ~~with~~stock ~~our~~appreciation ~~accounting~~rights, to ~~policy~~officers, weother ~~will~~employees ~~recognize accrued interest~~ and ~~penalties~~certain ~~related~~non-employee consultants. toThe ~~unrecognized~~compensation ~~tax~~committee ~~benefits~~of asthe aboard ~~component~~ of ~~tax~~directors ~~expense. This~~establishes ~~policy~~the ~~did~~terms ~~not~~of ~~change~~the asequity aawards ~~result~~(including ofvesting ~~the adoption of~~schedules ~~FIN 48.~~which ~~For~~is ~~the~~generally three ~~months~~years). ~~ended~~At ~~March~~September 3130, 2007 ~~and 2006~~, we ~~did not accrue any tax related interest and penalties.~~ ~~Our~~had ~~2003~~1,361,942 shares ~~through~~of ~~2005~~common ~~federal~~stock ~~income~~remaining ~~tax~~for ~~returns are subject to~~issuance ~~audit~~under by the ~~Internal~~2005 ~~Revenue~~Incentive ~~Service (IRS)~~Plan. ~~Various~~No ~~state, local,~~additional ~~and~~grants ~~foreign~~will ~~income~~be ~~tax returns are also subject to~~made ~~examination~~under bypreviously ~~taxing~~existing ~~authorities.~~stock-based Wecompensation ~~do not believe that the outcome of any examination will have a material impact on our financial statements~~plans.

Our Horizon Offshore, Inc. 2006 Director Stock Plan (the ~~Foreign~~“2006 Director Stock Plan”) provides for the ~~Currency~~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

Foreign currency transaction gains and losses are a result of the effect of exchange rates on transactions denominated in currencies other than our functional currency, the U.S. dollar. Gains and losses on those foreign currency transactions are included in other income (expense) in the period of exchange. Foreign currency

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~transaction~~September 30, ~~losses were $(280~~2007,~~000)~~ ~~for~~we ~~the~~had ~~three~~111,884 shares ~~months~~of ~~ended~~common ~~March 31,~~stock ~~2007~~remaining ~~and~~for ~~$(80,000)~~issuance ~~for~~under the ~~three~~2006 Director ~~months ended~~Stock ~~March 31, 2006~~Plan.

~~Fair~~Stock-Based ~~Value of Financial Instruments~~Compensation

~~The~~Our ~~carrying~~pre-tax ~~values~~compensation ofcost ~~cash~~for stock-based employee compensation was approximately $0.9 million and $3.0 million for the three and nine months ended September 30, ~~investments~~2007, ~~receivables~~respectively, ~~accounts~~and approximately ~~payable~~$2.2 million and ~~accrued~~$6.7 million ~~liabilities~~for ~~approximate~~the ~~fair~~three ~~value~~and ~~due~~nine months toended September 30, 2006, respectively. The related tax benefits recognized for these costs for the ~~short~~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-~~term~~based ~~maturity~~compensation cost included in the accompanying consolidated statements of operations ~~those~~as ~~instruments.~~follows (in millions):

As of March 31, 2007, the carrying value of our debt, including accrued interest, was approximately $111.0 million. The fair value of this debt approximates the carrying value because the interest rates on our variable rate debt are based on floating rates established by reference to market rates and interest rates on our fixed rate debt approximate the rates at which we can currently borrow. Our average interest rate at March 31, 2007 was 9.78% per annum. We have $14.2 million aggregate principal amount of 8% Subordinated Notes at a fixed 8% interest rate and a $24.5 million term loan at a fixed 8.55% interest rate. We have also fixed approximately $30.8 million of our variable rate debt at 9.99% through an interest rate swap. A hypothetical 1% increase in the applicable floating interest rates as of March 31, 2007 would increase our annual interest expense by approximately $0.4 million.


	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 ~~Earnings~~option awards of $0 and $235,000 for the three and nine months ~~Per~~ended ~~Share~~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.

~~Earnings~~Stock-based ~~per~~compensation ~~share~~related ~~data~~to ~~for~~restricted ~~all~~stock ~~periods presented are computed~~was ~~pursuant~~$0.9 million toand ~~SFAS No~~$2.8 ~~128,~~million ~~“Earnings~~for ~~Per Share”~~the ~~(SFAS No. 128) that~~three ~~requires~~and anine ~~presentation~~months ofended ~~basic~~September 30, ~~earnings~~2007 ~~per~~and ~~share~~$2.0 million ~~(basic EPS)~~ and ~~diluted~~ ~~earnings~~$6.3 million ~~per~~for ~~share~~the ~~(diluted~~three ~~EPS).~~and ~~Basic~~nine ~~EPS~~months ~~excludes dilution~~ended ~~and~~September 30, is2006, ~~determined~~respectively. byAt ~~dividing income available to common~~September 30, ~~stockholders~~2007, by$2.5 million ~~the~~of ~~weighted~~total ~~average~~unrecognized ~~number~~compensation ~~of common shares~~cost ~~outstanding~~related ~~during~~to the ~~period.~~unvested ~~Diluted~~portion ~~EPS~~of ~~reflects~~ the ~~potential~~ ~~dilution~~restricted ~~that~~stock ~~could occur if securities and other~~awards ~~contracts~~is expected to ~~issue~~be ~~common~~recognized ~~stock~~over ~~were~~a ~~exercised~~weighted oraverage ~~converted~~period ~~into~~of ~~common~~nine ~~stock~~months.

~~Other Comprehensive~~7. ~~Income~~GAIN ~~(Loss)~~ ON INSURANCE SETTLEMENT:

~~Other~~On ~~than~~June 30, 2006, we settled our claims against the underwriters ~~interest~~on ~~rate~~the ~~swap~~marine ~~described~~hull ~~below~~insurance policy covering physical damage to the Gulf Horizon, and we ~~have~~recorded noa ~~items~~$14.3 million ~~representing~~gain ~~other~~on ~~comprehensive~~the ~~income~~insurance ~~(loss)~~settlement ~~under~~during the ~~SFAS~~quarter ended June ~~No. 130~~30, ~~“Reporting~~2006. ~~Comprehensive~~Under the terms of the ~~Income”~~settlement, the underwriters paid us $14.3 million for ~~the~~all claims ~~three~~related ~~months~~to ~~ended~~the ~~March~~suit on July 3128, ~~2007~~2006.

Interest Rate Swap — In May 2006, we entered into an interest rate swap agreement with PNC Bank, National Association (PNC Bank) to reduce our exposure to market risks from variable interest rates on a portion of our debt. We did not enter into this agreement for speculative or trading purposes. The interest rate swap effectively converts the variable interest rate on approximately $30.8 ~~million of our debt at March 31, 2007 into fixed rate debt with a 9~~.~~99%~~ ~~interest~~INCOME rate. The interest rate swap qualifies as a cash flow hedge in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS No. 133). Therefore, changes in the fair market value of the swap agreement are reflected in other comprehensive loss. Any differences paid or received on the interest rate swap agreement are recognized as an adjustment to interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying obligation. At March 31, 2007 and December 31, 2006, the fair value of the derivative instrument was negative and was recorded as a liability of approximately $337,000 and $291,000, net of tax benefits of $181,000 and $157,000, respectively, in accordance with SFAS No. 133. This liability is reflected in other liabilities in the accompanying consolidated balance sheets at March 31, 2007 and December 31, 2006. TAXES:

We use the liability method of accounting for income taxes. For ~~Reclassifications~~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.

Prior period amounts within the captions inventory and other assets in the cash flows used in operating activities have been reclassified to conform to the presentation shown in the consolidated statement of cash flows as of March 31, 2007.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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

InWe ~~July~~adopted ~~2006, the~~ FASB ~~issued~~Interpretation ~~FIN~~No. 48, ~~which clarifies the~~“Accounting ~~accounting~~ for ~~uncertainty~~Uncertainty in ~~tax~~Income ~~positions~~Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”) ~~requires~~as aof ~~recognition~~January 1, ~~threshold~~2007. ~~and~~We ahave ~~measurement~~not ~~attribute~~recorded ~~for~~any reserves ~~the~~for ~~financial~~uncertain ~~statement~~income ~~recognition and measurement of a~~ tax ~~position~~ ~~taken~~positions orpursuant ~~expected~~ to ~~be taken in a tax return.~~ FIN 48. There ~~also~~were ~~provides~~no ~~guidance~~unrecognized ontax ~~the~~benefits ~~related~~as ~~derecognition~~of September 30, ~~classification,~~2007. ~~interest~~We ~~and~~do ~~penalties,~~not ~~accounting~~expect ~~for~~to ~~interim periods,~~recognize ~~disclosure~~significant ~~and~~increases ~~transition~~or decreases ofin ~~uncertain~~unrecognized tax ~~positions. We~~benefits ~~adopted~~during ~~FIN 48~~the asyear ~~of January~~ended December 131, 2007. ~~and~~In ~~analyzed our~~accordance ~~filing~~with ~~positions~~our ~~in all of the federal and state~~accounting ~~jurisdictions~~policy, ~~where~~ we ~~are~~will ~~required~~recognize toaccrued ~~file~~interest ~~income~~and ~~tax~~penalties ~~returns,~~related asto ~~well~~unrecognized astax ~~all~~benefits ~~open~~as ~~tax~~a ~~years~~component inof ~~these~~tax ~~jurisdictions~~expense. ~~As a~~This ~~result~~policy ofdid ~~this~~not ~~review,~~change weas ~~believe~~a ~~that~~result ~~our~~of ~~income~~the ~~tax~~adoption ~~positions~~of ~~and~~FIN 48. ~~deductions~~For ~~meet~~ the ~~requirements~~nine ~~for~~months ~~financial~~ended ~~statement recognition~~September 30, 2007 and 2006, we dodid not ~~anticipate~~accrue any ~~adjustments~~tax ~~that~~related ~~would~~interest and ~~result~~penalties. inOur a2003 ~~material~~through ~~change~~2006 tofederal ~~our~~income ~~financial~~tax ~~statements;~~returns are ~~therefore,~~subject weto ~~have~~audit ~~not~~by ~~recorded~~the ~~any~~Internal ~~reserves~~Revenue ~~for~~Service. ~~uncertain~~Various state, ~~income~~local ~~tax~~and ~~positions~~foreign ~~pursuant~~income totax ~~FIN 48.~~returns ~~There~~are ~~were~~also nosubject to ~~unrecognized~~examination ~~tax~~by ~~benefits~~taxing ~~as of March 31, 2007~~authorities. We do not ~~expect~~ tobelieve ~~recognize~~that ~~significant~~the outcome ~~increases~~of orany ~~decreases~~examination ~~in unrecognized~~will ~~tax~~have ~~benefits~~a ~~during~~material ~~the~~impact ~~year~~on ~~ended~~our ~~December 31,~~financial ~~2007~~statements.

~~In September 2006, the FASB issued SFAS No~~9. ~~157, “Fair~~ ~~Value~~COMMITMENTS ~~Measurements” (SFAS No. 157).~~AND 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. CONTINGENCIES:

~~In February 2007, the FASB issued SFAS No. 159,~~ ~~“The Fair Value Option for Financial Assets and~~Litigation Financial Liabilities, including an amendment of FASB Statement No. 115” (SFAS No. 159). SFAS No. 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 No. 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 No. 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.

2 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. ~~PROPERTY~~These ~~AND~~two ~~EQUIPMENT:~~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.

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

	March 31,			December 31,
	2007			2006
Barges, vessels, and related equipment	$	257,183		$	253,585
Land and buildings		18,830			18,613
Machinery and equipment		245			245
Office furniture and equipment		7,278			7,175
Leasehold improvements		4,339			4,192
		287,875			283,810
Less — accumulated depreciation		(89,917	)		(86,401	)
Property and equipment, net	$	197,958		$	197,409

Contractual Disputes — Unasserted Claims for Penalties Resulting from Contract Delays

~~During~~Many ~~the~~of ~~three~~our ~~months~~large ~~ended~~international ~~March 31,~~contracts ~~2007,~~contain ~~we incurred~~specific ~~$4.6 million~~completion ofschedule ~~capital~~requirements ~~expenditures~~that ~~primarily~~require ~~related~~us to pay ~~vessel~~penalties ~~upgrades~~or toliquidated damages in the ~~Atlantic~~event ~~Horizon~~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 ~~purchase~~remaining contract value for work which will be completed outside of ~~support~~the ~~equipment~~completion schedule requirements, up to maximum amounts generally based on an agreed percentage of contract values.

~~Assets~~We are currently ~~not~~working ~~operational~~outside ~~are~~of ~~recorded~~the atscheduled ~~their fair~~completion ~~market~~dates ~~value~~of ~~and~~our ~~were~~Pemex $2contracts.~~0 million~~ ~~and~~We ~~$2.5 million~~are astherefore potentially ofsubject ~~March 31,~~to ~~2007~~late ~~and~~completion ~~December 31,~~penalties ~~2006,~~unless ~~respectively.~~contract extensions Weare ~~sold~~obtained. ~~equipment~~Some ~~with~~penalties previously assessed may be recovered as a ~~basis~~result of ~~$0.5 million~~extensions ~~during~~approved subsequent to the ~~three~~assessment. ~~months~~Although ~~ended~~we ~~March 31,~~have ~~2007,~~received several formal extensions and ~~there~~others ~~was~~are nopending, ~~gain~~we orreserved approximately ~~loss~~$5 million onfor ~~the~~estimated ~~sale~~potential penalties as of September 30, 2007. We ~~did~~believe ~~not~~that ~~have~~the ~~any~~likelihood ~~sales~~ of ~~non-operational~~ ~~assets~~incurring ~~during~~penalties ~~the~~in ~~three~~excess ~~months~~of ~~ended~~the ~~March 31,~~amount ~~2006~~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)

Weservices ~~use~~are ~~the units-of-production method~~not totaxable ~~calculate~~and ~~depreciation~~that onthe ~~our~~tax ~~major~~assessment ~~barges,~~itself ~~vessels~~is ~~and~~invalid. ~~related~~We ~~equipment~~have tofiled ~~approximate~~a ~~the~~petition ~~wear~~in ~~and~~Mexican ~~tear~~court ofto ~~normal~~set aside ~~use.~~the ~~The~~assessment ~~useful~~as ~~lives~~invalid. ofWe ~~our~~believe ~~major~~that ~~barges~~our ~~and~~position ~~vessels are~~is ~~18 years.~~supported ~~Major~~by ~~additions,~~law ~~including~~and ~~improvements~~intend ~~that significantly add~~ to ~~productive~~vigorously ~~capacity~~defend orour ~~extend useful life,~~position. ~~to barges~~However, ~~vessels~~the ~~and~~ultimate ~~related~~outcome ~~equipment~~of ~~are~~this ~~capitalized~~litigation and our ~~depreciated~~potential ~~over~~liability ~~the~~from ~~useful~~this ~~life~~assessment, ofif ~~the~~any, ~~equipment.~~cannot ~~Maintenance~~be ~~and~~determined ~~repairs~~at ~~are~~this ~~expensed as incurred~~time. ~~When~~Accordingly, ~~equipment~~no isaccrual ~~sold~~has orbeen ~~otherwise~~recorded ~~disposed~~at ofSeptember 30, ~~the~~2007 ~~cost~~in of the ~~equipment and accumulated~~accompanying ~~depreciation~~consolidated ~~are~~financial ~~removed from the accounts and any gain or loss is reflected in income~~statements.

~~Depreciation on other fixed assets is provided using the~~Letters ~~straight-line~~of ~~method based on the following estimated useful~~Credit ~~lives:~~

Buildings			15 years
Machinery and equipment			8-15 years
Office furniture and equipment			3-5 years
Leasehold improvements			3-10 years

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.

~~Depreciation expense is included in the following expense~~Capital ~~accounts (in thousands):~~Expenditures

	Three Months Ended March 31,
	2007		2006
Cost of contract revenues	$	3,263	$	4,270
Selling, general and administrative expenses		252		282
	$	3,515	$	4,552

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

~~Depreciation expense calculated under the~~ ~~units-of-production~~Warranties method may be different than depreciation expense calculated under the straight-line method in any period. In the event we do not utilize each vessel to the extent estimated, the annual depreciation based on utilization of each vessel will not be less than 25% of annual straight-line depreciation, and the cumulative depreciation based on utilization of each vessel will not be less than 50% of cumulative straight-line depreciation. We periodically review the remaining useful lives of our vessels and revise the estimated lives over current and future periods. If we alternatively applied only a straight-line depreciation method, less depreciation expense would be recorded in periods of high vessel utilization and more depreciation expense would be recorded in periods of low vessel utilization.

~~When~~In ~~events or changes in circumstances indicate that assets may be impaired, we review long-lived assets for impairment according to SFAS No. 144, “Accounting for~~ the ~~Impairment~~ ornormal ~~Disposal~~course of ~~Long-Lived Assets,” (SFAS No. 144) and evaluate whether the carrying value of any such asset may not be recoverable. Changes in~~ our business ~~plans~~, awe ~~significant~~provide ~~decrease in the market~~performance ~~value~~guarantees ~~of a long-lived asset, a change in the physical condition of a long-lived asset or the extent or manner in which it is being used, or a severe or sustained downturn in the oil~~ and ~~gas industry,~~warranties ~~among~~under ~~other~~our ~~factors are considered triggering events~~contracts. ~~The~~ ~~carrying~~Historically, ~~value of each asset is compared to the estimated~~we ~~undiscounted~~have ~~future~~not ~~net~~had ~~cash flows for each asset or asset group. If the carrying value of~~ any ~~asset~~significant iswarranty ~~more~~claims; ~~than the estimated undiscounted future net cash flows expected to result from the use of the asset~~however, awe ~~write-down of the asset to~~could ~~estimated fair market value must~~ be ~~made.~~liable ~~When~~for ~~quoted~~substantial ~~market prices~~warranty ~~are not available~~liabilities, ~~fair~~if ~~value~~any ~~must be determined based~~are ~~upon other valuation techniques. These could include appraisals or present value calculations of estimated future cash flows. In the calculation of fair market value~~incurred, ~~including~~on ~~the~~projects ~~discount rate~~prior ~~used~~to ~~and~~ the ~~timing~~expiration of the ~~related cash flows, as well as~~warranty ~~undiscounted future net cash flows, we apply judgment in our estimates and projections, which could result in varying levels of impairment recognition~~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)

311. ~~STOCKHOLDERS’~~GEOGRAPHIC ~~EQUITY~~INFORMATION AND SIGNIFICANT CUSTOMERS:

Horizon operates in a single industry segment, the marine ~~Earnings~~construction services industry. Our domestic geographic segment ~~Per~~has ~~Share~~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):

The following table presents information necessary to calculate earnings per share for the three months ended March 31, 2007 and 2006 (in thousands, except per share amounts):


							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

	Three Months Ended March 31,
	As of
	September 30,		December 31,
	2007		2006
Net income	$	2,269	$	15,471
Property and Equipment(1):
Average common shares outstanding		31,857		29,560
Domestic	$	144.4	$	121.1
Basic earnings per share	$	0.07	$	0.52
Latin America		15.2		39.4
Average common and dilutive potential common shares outstanding:
West Africa		0.3		0.3
Average common shares outstanding		31,857		29,560
Southeast Asia/Mediterranean		34.5		36.6
Unvested restricted stock		589		815
Total	$	194.4	$	197.4
		32,446		30,375
Diluted earnings per share	$	0.07	$	0.51

As(1) ofProperty ~~March 31, 2007, we had outstanding options covering an aggregate of 79,290 shares of common stock, of which 39,290 shares were exercisable,~~ and weequipment ~~had 707,606 shares~~includes ~~of unvested restricted stock. Restricted stock grants are legally considered issued and outstanding~~vessels, ~~but are~~property ~~included in both basic~~ and ~~diluted~~related ~~EPS~~marine ~~only to the extent they are vested~~equipment. ~~Unvested~~Amounts ~~shares~~reflect ~~are included in~~ the ~~computation~~ location of ~~diluted EPS using~~ the ~~treasury~~assets ~~stock~~at ~~method.~~September ~~Excluded~~30, ~~from the~~2007 ~~computation~~and ofDecember ~~diluted EPS for the three months ended March~~ 31, ~~2007 and~~ 2006. ~~are~~Equipment ~~options~~location tochanges ~~purchase 79,290 shares~~as ~~and~~necessary ~~80,683 shares~~to ofmeet ~~common~~working ~~stock,~~requirements. atOther ~~a weighted~~identifiable ~~average~~assets ~~price~~include ofinventory ~~$105.92~~ and ~~$188.16,~~other ~~respectively~~long-term assets, ~~as the~~and ~~exercise~~are ~~price~~primarily islocated ~~greater~~in ~~than~~ the ~~average~~domestic ~~market price~~region.

Stock-Based Compensation

Our pre-tax compensation cost for stock-based employee compensation was approximately $1.1 million and $2.0 million for the three months ended March 31, 2007 and 2006. For the three months ended March 31, 2007 and 2006, we recognized approximately $0.4 million and $0.7 million in tax benefits for these costs.

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 March 31, 2007, we had 1,360,778 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, 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

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~generally~~Customers ~~one~~accounting ~~year).~~for Atmore ~~March 31,~~than ~~2007,~~10% weof ~~had~~consolidated revenues ~~130,000 shares~~for ofthe ~~common~~three ~~stock~~and ~~remaining~~nine ~~for~~months ~~issuance~~ended ~~under~~September 30, 2007 and ~~the~~ 2006 ~~Director~~ ~~Stock~~are ~~Plan.~~as follows:

Stock Options


							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	%

WeThe ~~recognized~~amount ~~stock-based~~of ~~compensation~~revenue ~~cost~~accounted ~~related~~for toby ~~our~~a ~~stock~~customer depends on the ~~option~~level ~~awards~~ of ~~$210,000~~construction ~~and~~services ~~$31,000~~we perform for the ~~three~~customer, which ~~months~~is ~~ended~~based on the size of its capital expenditure budget and ~~March 31,~~our ~~2007~~ability to bid for and ~~2006~~obtain the work. Consequently, customers ~~respectively~~who account for a significant portion of contract revenues in one period may represent an immaterial portion of contract revenues in subsequent periods. OfOur ~~these~~West ~~amounts~~Africa geographic segment revenues are currently derived from one customer, West Africa Gas Pipeline Company. We currently have no ~~$210~~assets located in our West Africa geographic segment,~~000~~ and ~~$23~~at this time,~~000~~ iswe ~~included~~do not have any future projects scheduled in ~~selling,~~West Africa. ~~general~~We ~~and~~generally derive the revenues associated with our ~~administrative~~Latin ~~expenses~~America ~~and~~geographic $0segment ~~and~~from $8our work offshore Mexico for Pemex,~~000~~ isthe ~~included~~Mexican innational ~~cost~~oil ofcompany. From time to time ~~contract~~we ~~revenues~~also inperform ~~the~~work ~~accompanying~~for ~~consolidated~~customers ~~statements~~in other areas of Latin ~~operations~~America. ~~for~~Our ~~the~~Southeast ~~three~~Asia/Mediterranean ~~months~~geographic ~~ended~~segment revenues ~~March 31~~are currently derived from one customer, ~~2007~~TL ~~and~~Offshore ~~2006~~Sdn Bhd, ~~respectively~~in Southeast Asia.

We did not grant any stock options during the three months ended March 31, 2007 and 2006.

At March 31, 2007, $26,000 of total unrecognized compensation cost related to stock options is expected to be recognized in April 2007. During the three months ended March 31, 2007, we did not receive any cash from the exercise of options, and we received $8,000 cash from the exercise of options during the three months ended March 31, 2006. The impact of these cash receipts is included in financing activities in the accompanying consolidated statements of cash flows. No tax benefit was recorded.

Restricted Stock

During the three months ended March 31, 2007 and 2006, we recognized $0.9 million and $2.0 million of stock-based compensation cost related to restricted stock of which $0.9 million and $1.8 million is reflected in selling, general and administrative expenses, and $0 and $0.2 million is reflected in cost of contract revenues in the accompanying consolidated statement of operations, respectively.

Under our 2006 Annual Incentive Compensation Plan (the 2006 Compensation Plan), we awarded 312,279 shares of restricted stock to our executive officers, officers and selected employees on March 15, 2007 based on an amount by which our net income for 2006 exceeded specified net income goals. The grant date fair value of this restricted stock was $13.49 per share.

At March 31, 2007, $4.1 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 1.3 years.

4. RELATED PARTY TRANSACTIONS:

In August 1998, we entered into a master services agreement with Odyssea Marine, Inc. (Odyssea), an entity wholly-owned by Elliott Associates, L.P. and Elliott International, L.P. (collectively, the Elliott Companies), to charter certain marine vessels from Odyssea. The Elliott Companies were significant stockholders of our outstanding common stock during 2006. Based on their SEC filings, the Elliott Companies are no longer 5% beneficial owners of our common stock. As of December 31, 2006, we owed Odyssea $6.4 million for charter services. During the three months ended March 31, 2006, Odyssea billed Horizon $3.2 million and Horizon paid Odyssea $3.8 million for services rendered under the master services agreement.

At December 31, 2006, Elliott Associates, L.P. held approximately $4.9 million of the remaining $13.9 million of outstanding 8% Subordinated Notes. During the three months ended March 31, 2006, we issued additional notes for paid-in kind interest on our 8% Subordinated Notes to Elliott Associates, L.P. of $0.1 million.

5. NOTES PAYABLE:

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

month commercial paper rate plus 2.45% to a fixed rate of 9.99% (7.67% to 9.99%) at March 31, 2007, and our average interest rate at March 31, 2007 was 9.78% per annum. In May 2006, we entered into an interest rate swap agreement to effectively convert the variable interest rate on a portion of our debt (approximately $30.8 million at March 31, 2007) into fixed rate debt with a 9.99% interest rate. Our term-debt borrowings require approximately $1.2 million in total monthly principal payments.

Our CIT Group term loan ($61.6 million outstanding at March 31, 2007), secured by seven of our marine vessels, bears interest at an annual rate of one-month Libor plus 4.50% and is payable in monthly principal installments of $0.9 million for the first 24 months beginning March 31, 2006 and $0.6 million for the next 35 months beginning March 31, 2008, with a balloon payment due at maturity on March 9, 2011.

Additionally, we have a term debt facility with General Electric Capital Corporation (GE Capital) ($4.4 million outstanding at March 31, 2007) secured by our marine base at Port Arthur, Texas. This term loan bears interest at an annual rate of one-month Libor plus 3.50% and is payable in 60 monthly principal installments of approximately $87,000 commencing on July 30, 2006. We also have a GE Capital term loan ($5.9 million outstanding at March 31, 2007), secured by the Pecos Horizon, that bears interest at the one-month commercial paper rate plus 2.45% and is payable in monthly installments of principal and interest of approximately $115,000, maturing December 31, 2011.

Our loan with General Electric Credit Corporation of Tennessee ($24.5 million outstanding at March 31, 2007), secured by the Sea Horizon, bears interest at a fixed rate of 8.55% per annum and is payable in monthly installments of principal and interest of approximately $354,000, maturing on January 1, 2011.

Our 8% Subordinated Notes ($14.2 million outstanding at March 31, 2007) accrue interest annually at 8% payable in-kind. The 8% Subordinated Notes mature on March 31, 2010 and are subordinate and junior to our existing senior secured debt in all respects. The 8% Subordinated Notes are classified as long-term debt at March 31, 2007 and December 31, 2006, as these notes mature on March 31, 2010.

We have a $30 million revolving credit facility with PNC Bank that matures on April 28, 2011. At March 31, 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. At March 31, 2007, we had no borrowings outstanding under this revolving credit facility, and based upon the borrowing base calculation, we had no material borrowing capacity available after utilizing the facility to support letters of credit. Advances under the revolving credit facility bear interest at one-month Libor plus a margin ranging from 2.25% to 2.75%, or, at our option, at the prime rate plus a margin ranging from 0% to 0.25%. In addition to monthly interest, we are required to pay monthly maintenance fees for this revolving credit facility.

Substantially all of our assets are pledged as collateral to secure our indebtedness. Our loans contain customary default and cross-default 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 March 31, 2007, we were in compliance with all the financial covenants required by our loan and credit facilities.

6. LOSS ON DEBT EXTINGUISHMENT:

There was no loss on debt extinguishment for the three months ended March 31, 2007. Loss on debt extinguishment of $2.4 million for the three months ended March 31, 2006 relates to the write-off of $1.8 million of the unamortized portion of deferred loan fees and a $636,000 prepayment penalty on the Senior Credit Facilities during the first quarter of 2006.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

7. COMMITMENTS AND CONTINGENCIES:

Contractual Disputes and Litigation

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.

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 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 March 31, 2007 in the accompanying consolidated financial statements.

Letters of Credit

At March 31, 2007, we had outstanding letters of credit totaling $23.8 million to secure performance bonds on existing Pemex contracts. We utilized $23.8 million of our $30 million revolving credit facility to support these letters of credit.

Capital Expenditures

Our estimated planned capital expenditures for the remainder of 2007 range from approximately $17 million to $20 million and are primarily related to the purchase of equipment currently being rented, vessel improvements required for specific project needs and dry-docks. The actual amount expended will depend upon available funds, work awarded and future operating activity.

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.

HORIZON OFFSHORE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

8. GEOGRAPHIC INFORMATION:

Horizon operates in a single industry segment, the marine construction services industry. Geographic information relating to Horizon’s operations follows (in millions):

	Three Months Ended March 31,
	2007			2006
Revenues:
Domestic	$	23.3		$	73.1
Latin America		51.9			10.2
West Africa		6.2			42.7
Southeast Asia/Mediterranean		5.3			3.9
Total	$	86.7		$	129.9
Gross Profit:
Domestic	$	4.5		$	27.4
Latin America		15.6			—
West Africa		(8.7	)		8.6
Southeast Asia/Mediterranean		1.8			2.4
Total	$	13.2		$	38.4

	As of
	March 31,		December 31,
	2007		2006
Property and Equipment(1):
Domestic	$	108.9	$	121.1
Latin America		52.6		39.4
West Africa		0.3		0.3
Southeast Asia/Mediterranean		36.2		36.6
Total	$	198.0	$	197.4

(1) Property and equipment includes vessels, property and related marine equipment. Amounts reflect the location of the assets at March 31, 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.


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

WeHorizon 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.~~

2017

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

~~Our~~During ~~first~~the third quarter ~~results~~of ~~for~~ 2007, ~~reflect~~we ~~the~~reported ~~typical~~revenues of ~~seasonality~~$147.8 million, ofgross ~~marine~~profit ~~construction~~of in$36.5 million, operating ~~the~~income Uof $28.S.6 ~~Gulf~~million, net income of ~~Mexico,~~$18.9 million asand ~~operators~~diluted ~~traditionally~~earnings ~~delay~~per ~~the~~share ~~start~~ of ~~new~~$0.58. Our ~~construction~~quarterly ~~projects~~results ~~until~~reflect ~~the~~our ~~summer~~continued ~~months~~work toon ~~coincide~~a ~~with~~significant ~~more~~project ~~favorable~~in ~~weather~~the ~~conditions~~Northeast U.S. that ~~Operators~~began ~~have~~during ~~also~~the ~~delayed a~~second ~~substantial~~quarter ~~amount~~ of ~~hurricane-related~~2007. ~~platform~~Good ~~salvage~~operating ~~work. In~~efficiency ~~addition~~and toproductivity ~~the~~on this ~~effect~~project ofin the ~~seasonality~~Northeast onU.S. are ~~our~~reflected ~~domestic~~in higher ~~revenues~~gross margins and ~~gross~~strong ~~profit~~performance ~~during~~by our domestic geographic operations for the ~~first~~third quarter. ofOur ~~2007,~~results wefor the quarter ~~performed~~were ~~projects~~also strong in Southeast Asia due to the ~~U.S. Gulf~~charter of ~~Mexico~~the Sea ~~under~~Horizon ~~both~~offshore Malaysia where we achieved 100% ~~fixed~~utilization ~~price~~of this vessel. In Latin America, most of the revenues and ~~day-rate~~gross ~~contracts~~profit ~~versus~~for the ~~first~~third quarter ofwere derived ~~2006,~~from ~~when~~a ~~our~~project ~~work~~that ~~was~~we performed ~~under~~as ~~day-rate~~a ~~contracts~~subcontractor ~~that~~offshore ~~provided~~Veracruz, ~~higher~~Mexico ~~margins~~in ~~primarily~~the ~~associated~~Marsopa ~~with~~field, ~~the~~which ~~emergency~~we began and ~~hurricane-related~~completed ~~repair~~during ~~work~~the third quarter of 2007.

Our ~~first quarter 2007~~ results ~~were~~for ~~also significantly affected by further losses on~~ the ~~West~~third ~~Africa~~quarter ~~Gas~~of ~~Pipeline~~2007 ~~project~~were ~~in our~~negatively ~~West~~impacted ~~Africa~~by ~~geographic~~our ~~segment.~~work Weon ~~recognized a $(8.7) million gross loss during~~ the ~~first~~projects ~~quarter~~for ~~of 2007~~Petróleos inMexicanos ~~addition to the $~~(~~14.2~~“Pemex”) ~~million~~ ~~gross~~offshore ~~loss~~Mexico, ~~recognized during~~which ~~2006. We have experienced delays in completing the shore~~is ~~approaches~~reflected in ~~Ghana,~~our ~~Africa,~~Latin ~~which~~America ~~further~~geographic ~~delayed the commissioning and tie-in work~~segment. During the ~~pre-commissioning work~~ inthree ~~late~~months ~~March~~ended September 30, 2007, we ~~discovered~~recognized ~~major damage to a large~~additional ~~section~~losses of ~~the~~approximately pipeline where the 20” main line was severed and dragged from its original path by a third party vessel. We also discovered a damaged subsea valve assembly along a lateral line that approaches shore. The repair of these damaged pipelines is covered under the customer’s insurance policy, but pursuant to the contract, we are responsible for the first $1(15.01) million ofon ~~costs~~our ~~incurred for each of these two~~Pemex ~~occurrences~~contracts. We ~~expect~~were ~~that~~successful ~~these~~in ~~repairs~~recovering ~~will~~costs ~~cause~~due ~~further~~to ~~delays~~inefficiencies ~~and~~of ~~associated~~third ~~costs~~party insubcontractors, ~~completing~~which ~~this~~offset ~~project. We also~~some ~~continue~~of tothe ~~experience~~deterioration ~~delays~~during ~~in completing~~ the ~~commissioning and~~third ~~tie-in work due to subcontractor and equipment inefficiencies and failures~~quarter. WeThese ~~have recognized the estimated~~additional losses ~~through~~for ~~completion of~~ the ~~project~~third asquarter of ~~March 31,~~ 2007; ~~however,~~relate ~~there~~to ~~can be no assurance that further~~ delays and ~~additional~~significant ~~contract~~increases ~~costs~~in ~~not~~estimated ~~anticipated~~costs atto ~~March 31,~~complete ~~2007~~these ~~will~~projects ~~not~~due ~~occur. We expect~~ to ~~complete~~the ~~this~~combined ~~project~~effect byof the ~~fourth quarter~~factors ~~of 2007~~below.

In• ~~Latin~~Continued ~~America,~~adverse weweather ~~continue~~conditions toimpeded ~~work~~the onability ~~two~~of ~~significant projects~~our ~~for~~subcontracted ~~Petróleos~~diving ~~Mexicanos~~support ~~(Pemex)~~vessels ~~offshore~~to ~~Mexico. These~~perform ~~two~~weather ~~projects~~sensitive ~~for~~work. ~~Pemex~~• ~~are~~A ~~part~~subcontracted ofdiving ~~the~~support ~~Ku-Maloob-Zaap project~~vessel was in ~~the~~port ~~Bay~~for ofrepairs ~~Campeche~~for ~~consisting~~most of ~~several~~the ~~pipelines and~~third ~~related~~quarter, ~~tie-in~~causing ~~and~~further ~~commissioning.~~project Wecompletion ~~received~~delays aand ~~change~~additional ~~order for~~third ~~the~~party ~~first~~costs. ~~project~~• ~~during~~We ~~the~~engaged ~~first~~an ~~quarter~~additional ofthird ~~2007 consisting~~party ofdive ~~several~~support ~~additional~~ vessel ~~days, but this scope remains incomplete due~~ to ~~scheduling~~assist ~~conflicts~~in ~~with~~completion ~~Pemex’s other~~of ~~contractors~~these projects and utilized our ~~utilization~~barge, ofthe ~~vessels~~Canyon ~~and~~Horizon, ~~equipment on~~which ~~the~~increased ~~second project~~costs. We• ~~expect~~Poor toproductivity ~~complete~~of ~~the~~our ~~first~~barges ~~project by~~and ~~the~~third ~~end~~party ofsubcontracted ~~the~~vessels ~~second~~has ~~quarter~~also ofincreased ~~2007~~costs. ~~and~~• toWe ~~complete~~recorded ~~the second~~additional ~~project~~penalties bythat ~~the~~we ~~end~~expect ofto ~~the~~incur ~~third~~for ~~quarter~~these ~~of 2007~~delays.

~~Our~~If ~~Southeast~~we ~~Asia~~are ~~operations~~unsuccessful ~~continued~~in torecovering ~~produce~~all ~~solid~~of ~~results~~our unapproved ~~related~~change toorders ~~the~~and ~~vessel~~claims ~~charter~~with ofPemex, ~~the~~we ~~Sea~~could ~~Horizon~~incur ~~offshore~~additional ~~Malaysia.~~losses ~~This~~up ~~charter~~to ~~began in February 2007~~$20 million, ~~and~~of wewhich ~~expect~~$18.5 million ithas tobeen ~~continue~~recognized ~~through~~as ~~November~~revenue ~~2007.~~at September 30,

~~Our gross profit was $13.2 million, or 15.2% of contract~~ ~~revenues of $86.7 million and operating income was~~18 $5.4 million, for the three months ended March 31, 2007. This compares to a gross profit of $38.4 million, or 29.5% of contract revenues of $129.9 million, and operating income of $30.1 million for the three months ended March 31, 2006. Net income was $2.3 million, or $0.07 per diluted share, for the three months ended March 31, 2007, compared with net income of $15.5 million, or $0.51 per diluted share, for the three months ended March 31, 2006.

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 Ended March 31,
	Three Months						Nine Months
	2007			2006
	Ended September 30,						Ended September 30,
Revenues:
	2007			2006			2007			2006
Domestic	$	23.3		$	73.1
Revenues:
Latin America		51.9			10.2
Domestic	$	107.7		$	61.3		$	216.6		$	201.1
West Africa		6.2			42.7
Latin America		16.8			66.1			74.4			146.3
Southeast Asia/Mediterranean		5.3			3.9
West Africa		13.0			6.7			34.9			68.9
Total	$	86.7		$	129.9
Southeast Asia/Mediterranean		10.3			9.6			25.9			14.3
Gross Profit:
Total	$	147.8		$	143.7		$	351.8		$	430.6
Domestic	$	4.5		$	27.4
Gross Profit:
Latin America		15.6			—
Domestic	$	42.1		$	21.7		$	66.4		$	75.5
West Africa		(8.7	)		8.6
Latin America		(9.2	)		19.3			(18.6	)		39.2
Southeast Asia/Mediterranean		1.8			2.4
West Africa		(1.9	)		(7.5	)		(10.7	)		(5.7	)
Total	$	13.2		$	38.4
Southeast Asia/Mediterranean		5.5			5.6			13.6			7.8
Total	$	36.5		$	39.1		$	50.7		$	116.8

Quarter Ended ~~March~~September 3130, 2007 Compared to the Quarter Ended ~~March~~September 3130, 2006

Contract Revenues. ~~Contract~~For the quarter ended September 30, 2007, contract revenues ~~were~~increased $864.71 million, ~~for~~or ~~the~~2.8%, ~~quarter~~to ~~ended March~~$147.8 ~~31,~~million ~~2007,~~ compared to $~~129~~143.97 million for the quarter ended ~~March~~ September 3130, 2006. ~~The~~Domestic ~~decrease~~revenues inincreased ~~revenues~~significantly ~~for~~during the ~~first~~third quarter ofdue ~~2007~~to ~~reflects~~work ~~the~~on ~~return~~our toproject ~~typical~~in ~~seasonality~~the inNortheast ~~the~~ U.S. ~~Gulf~~This ofincrease ~~Mexico~~was ~~market~~offset ~~and~~by ~~the~~a ~~reduction~~decrease in our Latin ~~revenues~~America ~~from~~operations ~~our~~as ~~West~~we ~~Africa~~continue ~~geographic~~to ~~segment,~~experience ~~offset~~delays byin ~~significant~~completing ~~increases in~~ our ~~Latin~~projects ~~America~~for ~~geographic segment~~Pemex.

~~Revenues~~Domestically, ~~for~~we ~~our~~completed ~~domestic~~the ~~operations~~pipeline installation and burial portions of the Northeast Gateway Deepwater Port project offshore Massachusetts during the ~~first~~third quarter of 2007 using ~~2007~~two ~~primarily~~of ~~relate~~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 ~~new~~the final stages of the construction ~~projects~~portion inof the Uproject.~~S. Gulf~~ ofHigh ~~Mexico,~~vessel ~~compared~~utilization toand significant third party subcontracted services on this project resulted in higher revenues for the ~~first~~ third quarter of ~~2006,~~2007. ~~which~~We ~~primarily~~expect ~~related~~ to ~~emergency~~complete ~~hurricane-related~~this ~~repair~~project in November 2007. Also, work in the U.S. Gulf of ~~Operators~~Mexico ~~have~~during ~~completed~~the ~~most~~third quarter of 2007 related to recovery ~~their~~and ~~emergency~~removal ~~repair~~of ~~work~~damaged pipe and ~~have~~several ~~delayed~~platform ~~the~~installations provided ~~start~~high utilization of ~~many~~two of our four vessels located in ~~new~~this ~~construction~~region. ~~projects~~During ~~until~~2006, the ~~summer~~majority ~~months~~of ~~because~~our ofprojects ~~the~~in our ~~adverse~~domestic ~~weather~~geographic ~~conditions~~segment were in the U.S. Gulf of Mexico ~~during~~for ~~the~~hurricane-related ~~winter~~emergency ~~months~~pipeline repair work, which has now been completed.

~~Revenues~~In ~~from our~~ Latin America ~~operations for the first quarter of 2007 reflect our continued work for Pemex offshore Mexico~~, ~~primarily~~ onmost ~~the second~~ of the ~~two~~revenues ~~significant~~were ~~projects~~derived infrom the ~~Ku-Maloob-Zaap~~project ~~field~~ that ~~began~~we inperformed ~~June~~as ~~2006.~~a Wesubcontractor ~~also~~offshore ~~worked on~~Veracruz, aMexico ~~project~~in ~~offshore~~the ~~Colombia~~Marsopa ~~for~~field. aThe ~~branch~~contractor’s ofcustomer ~~a major~~was UPemex.~~S. oil~~ ~~and~~However, ~~gas~~revenues ~~company~~from ~~that began in~~ the ~~first~~second ~~quarter~~Pemex ~~of 2007~~project ~~and~~we ~~was completed in April 2007. During the first quarter~~are ofcurrently ~~2006,~~working ~~revenues~~on ~~reflected~~were ~~work~~negative onunder the ~~first significant~~ ~~project in the Ku~~percentage-~~Maloob~~of-~~Zaap~~completion ~~field~~method ~~that began in 2005.~~for

~~Our contract revenues for West Africa decreased during the~~ ~~quarter ended March 31, 2007, compared with the first~~19 quarter of 2006 as much of the scope of work required by the West Africa Gas Pipeline Company under the contract for the installation of the West Africa Gas Pipeline is reaching final stages of completion. We are currently working on the last phases of the project. However, subcontractor inefficiencies and additional repair work required on the pipeline have delayed final completion, which is now expected by the fourth quarter of 2007.

Our Southeast Asia/Mediterranean revenues for the first quarter of 2007 increased compared with the first quarter of last year related to the charter of the Sea Horizon offshore Malaysia. We expect to continue to work this vessel in this geographic area through 2007. During the first quarter of 2006, we did not have any vessels located in this geographic area, and our revenues reflect recoveries on repair work for a project offshore Israel that was completed in 2005.

Gross Profit. Gross profit was $13.2 million (15.2% of contract revenues) for the quarter ended March 31, 2007, compared to $38.4 million (29.5% of contract revenues) for the first quarter of 2006. Our gross profit and

~~margins~~the ~~have~~third ~~decreased~~quarter of 2007 due to ~~losses~~increases wein ~~recorded on~~ the ~~West~~estimated ~~Africa~~costs ~~Gas~~to ~~Pipeline~~complete the contract ~~and~~resulting in a lower ~~margins~~percentage completion onthan ~~contracts~~reported in the second quarter of 2007. We were unable to complete the Uwork on this project for Pemex during the third quarter of 2007 due to the delays discussed in the “Overview” section above.~~S. Gulf~~ Revenues for the same period of ~~Mexico~~2006 related solely to work on our two current Pemex projects.

~~Lower~~Revenues ~~levels~~for ofWest ~~offshore~~Africa ~~construction~~during ~~activity~~the ~~for~~quarter ~~our domestic~~ended ~~geographic~~September 30, ~~segment~~2007 ~~due~~primarily relate to ~~the~~repair ~~seasonality~~work on a large section of ~~marine~~the ~~construction~~West Africa Gas Pipeline project that was indamaged by a third party vessel during the ~~U.S. Gulf~~first quarter of 2007. ~~Mexico~~This ~~has~~repair ~~placed~~work ~~pressure~~is oncovered ~~pricing~~under the customer’s ~~and~~insurance ~~margins~~policy onand ~~contracts.~~was Incompleted ~~addition,~~during ~~some~~the ~~contracts~~third inquarter. ~~the~~We ~~U.S. Gulf~~have ofalso ~~Mexico~~completed ~~have~~the ~~moved~~final ~~back~~phases toof ~~fixed-price~~the shore approaches in ~~contracts~~Ghana ~~versus~~under the ~~higher~~original ~~margin~~contract, ~~day-rate~~which ~~contracts~~was ~~for~~performed by ~~emergency~~subcontracted ~~hurricane-related~~vessels. ~~repair~~Revenues ~~work~~for ~~that~~the wethird ~~were~~quarter ~~executing~~of 2006 ~~during~~also ~~2006~~related to this project.

InSoutheast ~~our~~Asia/Mediterranean ~~West~~revenues ~~Africa~~for ~~geographic segment, we recognized an additional $(8.7) million gross loss during~~ the ~~first~~third quarter of 2007 ~~on the West Africa Gas Pipeline project~~ related to ~~recently discovered~~a ~~pipeline~~charter ~~damage~~for ~~and~~the ~~continued~~Sea ~~delays~~Horizon ~~in completing~~offshore ~~the~~Malaysia ~~commissioning~~that ~~and~~began ~~tie-~~in ~~work~~February on2007 ~~the project due to subcontractor~~ and ~~equipment~~is ~~inefficiencies~~expected ~~and failures. We discovered major damage~~ to ~~the pipeline which was caused by a~~last ~~third~~through ~~party~~November ~~vessel~~2007. ~~requiring~~Revenues ~~repair~~for ~~work that will further delay~~ the ~~completion of the project through the~~ third quarter of ~~2007.~~2006 Wealso ~~have~~related ~~begun~~to ~~working~~a ~~with~~charter of the ~~customer~~Sea ~~and~~Horizon ~~its insurance~~offshore ~~underwriters~~Malaysia onthat ~~the~~was ~~work~~performed ~~scope~~during ~~for the repairs~~2006.

~~Selling,~~Gross ~~General and Administrative Expenses~~Profit. ~~Selling,~~Gross ~~general~~profit ~~and administrative~~was ~~expenses were~~ $736.85 million (924.07% of contract revenues) for the ~~three months~~ quarter ended ~~March~~September 3130, 2007, compared to $839.31 million (627.42% of contract revenues) for the ~~first~~quarter ended ~~quarter~~September 30, of 2006. ~~Due~~Gross profit for our domestic geographic segment improved due to ~~the~~higher ~~decrease~~utilization inof ~~revenues~~our larger construction vessels for the ~~first~~execution of our significant ~~quarter~~project in the Northeast U.S. Two of ~~2007,~~these ~~selling,~~larger ~~general~~vessels worked ~~and~~primarily ~~administrative~~in ~~expenses~~our Latin America geographic segment during ~~increased~~2006. asWe aalso ~~percentage~~recorded ofstrong ~~revenues,~~results asin ~~compared~~our domestic geographic segment due to work in the ~~first quarter~~U.S. Gulf of ~~2006~~Mexico. ~~Selling~~In Latin America, ~~general~~we successfully executed and ~~administrative~~completed ~~expenses~~a project ~~decreased~~offshore byVeracruz, ~~$0.5 million~~Mexico ~~compared~~as toa ~~the~~subcontractor. ~~same~~The ~~quarter last~~profit ~~year~~recognized ~~because~~on wethis ~~incurred~~project ~~less~~was ~~legal~~offset ~~expenses~~by asa weloss ~~settled~~on our two Pemex ~~significant~~projects ~~claims~~of inapproximately ~~2006~~$(15.1) million ~~and~~during ~~less~~the ~~stock-based~~third quarter ~~compensation~~of 2007. In West Africa, we incurred additional costs ~~expenses~~for ~~compared~~the tocompletion of the ~~first~~shore ~~quarter~~approaches of ~~2006,~~the ~~partially~~lateral ~~offset~~lines byof ~~increases~~the inWest ~~labor~~Africa ~~costs~~Gas Pipeline project. The gross profit for our ~~the~~Southeast ~~first~~Asia/Mediterranean ~~quarter~~geographic segment reflects 100% utilization of ~~2007~~the Sea Horizon under charter in that region.

~~Interest~~Selling, ~~Expense. For~~General ~~the~~and ~~three months ended~~Administrative ~~March 31~~Expenses. Selling, ~~2007,~~general ~~interest~~and ~~expense~~administrative expenses ~~was~~were $2.7.9 million, (5.4% of contract revenues) for the third quarter of 2007, compared to $48.13 million (5.8% of contract revenues) for the ~~three~~third ~~months~~quarter ~~ended~~of 2006. Selling, ~~March 31,~~general ~~2006~~and administrative expenses decreased by $403,000 compared asto ~~follows~~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 ~~millions):~~costs for the third quarter of 2007 and merger related costs in connection with the proposed merger with Cal Dive.

	Three Months Ended March 31,
	2007		2006
Cash paid for interest	$	2.5	$	3.4
Interest paid in-kind		0.2		0.6
Other non-cash charges, net		—		0.1
	$	2.7	$	4.1

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):

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 $110.6 million at March 31, 2007, compared to $141.1 million at March 31, 2006.


	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

~~Interest~~Other ~~Income. Interest income includes interest from~~ non-cash ~~and~~charges ~~short-term~~to ~~investments~~interest ~~for~~expense ~~the~~primarily ~~three~~consist of ~~months~~amortization ~~ended~~of ~~March 31,~~deferred ~~2007~~loan fees and ~~2006~~accrued ~~of $886,000~~ and unpaid ~~$393~~interest,~~000,~~ ~~respectively~~net. ~~Cash~~Our ~~investments~~total ~~consist~~outstanding ofdebt ~~interest~~was ~~bearing~~$103.6 million ~~demand~~at ~~deposits~~September 30, ~~short-term~~2007, ~~money~~compared ~~market investment~~to ~~accounts~~$118.9 million ~~and~~at ~~other~~September 30, ~~highly liquid investments with maturities of three months or less~~2006. ~~Short-term~~Cash ~~investments~~paid ~~consist primarily~~for ofinterest ~~municipal~~also ~~bonds~~includes ~~and~~interest ~~auction~~charges ~~rate~~related ~~securities. Interest income increased due~~ to ~~higher~~the ~~average cash and cash investment and~~letters ~~short-term~~of ~~investment~~credit ~~balances~~issued ~~invested~~under atour ~~higher~~revolving ~~interest~~credit ~~rates during the first quarter of 2007~~facility.

~~Loss~~Interest ~~on Debt Extinguishment~~Income. ~~There~~Interest ~~was~~income ~~no loss~~includes oninterest ~~debt~~from ~~extinguishment~~cash and short-term investments for the ~~quarter~~three months ended ~~March~~September 3130, 2007. ~~Loss~~and on2006 ~~debt~~of ~~extinguishment was~~ $~~2.4 million~~886,000 ~~during~~and ~~the~~$894,000, ~~first~~respectively. ~~quarter~~Cash ~~of 2006~~ and ~~was~~cash ~~related~~equivalents toconsist ~~the write-off~~ of ~~the~~interest ~~unamortized~~bearing ~~portion~~demand ofdeposits ~~deferred loan fees~~ and ashort-term ~~prepayment~~money market ~~penalty~~investment onaccounts. ~~our~~Short-term ~~former~~investments ~~senior~~consist ~~secured~~primarily ~~term~~of municipal ~~loans~~bonds ~~prepaid~~and ~~on March 9,~~auction ~~2006~~rate securities.

~~Other Income (Expense), Net. Other income~~ ~~(expense) for the quarter ended March 31, 2007 primarily~~20 consisted of approximately $(280,000) of foreign currency loss and $21,000 of net other miscellaneous income generated during the quarter. Other income (expense) for the quarter ended March 31, 2006 primarily consisted of approximately $(80,000) of foreign currency loss. The foreign currency losses are primarily due to revaluation of

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 ~~March~~September 3130, 2007, we recorded an income tax provision of $17.08 million, at an effective rate of 3129.2% on pre-tax ~~income~~ income from continuing operations of $326.36 million. For the ~~quarter~~ quarter ended ~~March~~September 3130, 2006, we recorded an income tax ~~provision~~ provision of $8.51 million at an effective ~~rater~~rate of 3527.69% on pre-tax income ~~from continuing operations~~ of $2429.0 million. The difference in the statutory rate and the effective rate for the quarter ended ~~March~~ September 3130, 2007 relates to income generated in foreign ~~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.

~~Net Income. Net income for the quarter ended~~Nine ~~March 31,~~Months ~~2007~~Ended ~~was $2.3~~September ~~million~~30, or2007 ~~$0.07 per diluted~~Compared ~~share. This compares~~ to ~~net~~the ~~income~~Nine ofMonths ~~$15.5 million,~~Ended ~~or $0.51~~September ~~per diluted share for the quarter ended March 31~~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 ~~March~~September 3130, 2007, cash and ~~cash~~short-term ~~equivalents were~~investments totaled approximately $73100.54 million compared to ~~approximately~~ approximately $96.9 million as of December 31, 2006. ~~Short-term~~ investments were approximately $15.2 million at March 31, 2007, and we have the ability to quickly liquidate these securities. At March 31, 2007, we also had approximately $9.4 million of total restricted cash, including interest received, securing our obligations related to a letter of credit issued in connection with the Israel Electric Corporation contract. Additionally, we have a $30 million revolving credit facility with PNC Bank, National Association (“PNC Bank”). At ~~March~~September 3130, 2007, $23.8 million of ~~the~~ the facility was utilized to support letters of credit to secure performance bonds on existing Pemex contracts. At ~~March 31,~~ September 30, 2007, we had no borrowings outstanding under our revolving credit facility, and based upon the borrowing base ~~calculation,~~ calculation, we had noapproximately ~~material~~$6.2 million of additional borrowing capacity available after utilizing the ~~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.

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. We have not

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.

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.

Cash Flows

Cash ~~used~~provided inby operations was $(024.9)6 million for the ~~three~~nine months ended ~~March~~September 3130, 2007 compared to cash ~~used in~~provided by operations of $(310.3)1 million for the ~~three~~nine months ended ~~March~~September 3130, 2006. Cash ~~used~~provided inby operations is ~~primarily~~ primarily attributable to ~~the~~ net ~~change~~income infor ~~costs~~the innine ~~excess~~months ~~of billings,~~ended ~~accrued~~September 30, ~~job~~2007 ~~costs~~ and ~~billings~~to inthe ~~excess~~release of ~~costs related to our~~$9.3 million ~~marine~~of ~~construction~~restricted ~~activities~~cash ~~for~~at ~~the~~December 31, ~~three~~2006 ~~months~~upon ~~ended~~the ~~March 31,~~termination ~~2007,~~of ~~partially~~our ~~offset~~obligations byunder ~~collections~~a onletter ~~contract receivables~~of credit. Cash provided ~~used~~by in operations for the ~~three~~nine months ended ~~March~~September 3130, 2006 ~~was~~is primarily attributable to ~~the~~net ~~increase~~income of $53.2 million offset by increases in ~~contract~~accounts ~~receivables~~receivable and ~~associated~~costs ~~with~~in excess of billings related to the ~~higher~~increase ~~levels~~in ofour ~~contract~~marine ~~activity~~construction ~~and~~activities ~~revenues~~in ~~during~~2006 ~~the~~because ~~first~~of ~~quarter~~the substantial amount of ~~2006~~hurricane-related repair work.

Cash used in investing activities was $(1815.79) million for the ~~three~~nine months ended ~~March~~September 3130, 2007 compared to cash ~~used~~ used in investing activities of $(133.79) million for the ~~three months~~nine months ended ~~March~~September 3130, 2006. Cash flows ~~from~~used in investing activities for the nine months ended ~~include~~September 30, a2007 includes $15(10.2) million ~~net~~of additions ~~purchase~~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 ~~quarter~~ 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 $(311.94) million for the ~~three~~nine months ended ~~March~~September 3130, 2007 compared to cash ~~used~~ inprovided by financing activities of $(311.6) 3 million for the ~~three months~~ nine months ended ~~March~~September 3130, 2006. Cash used in financing activities for the ~~three~~nine months ended ~~March~~ September 3130, 2007 ~~and~~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 ~~recurring~~net ~~principal~~proceeds ~~payments~~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 ~~outstanding~~term debt and the prepayment of term debt.

~~Working~~Contractual ~~Capital~~Disputes — Unasserted Claims for Penalties Resulting from Contract Delays

AsMany of March 31, 2007, we had working capital of $190.0 million, compared to $204.5 million of working capital at December 31, 2006. As of March 31, 2007, we had approximately $130.3 million of unbilled receivables compared to $112.8 million at December 31, 2006, included in costs in excess of billings in the accompanying consolidated financial statements. We have significant unbilled receivables primarily because of our ~~Pemex~~large ~~projects~~international ~~offshore Mexico and West Africa Gas Pipeline project. Under our~~ contracts ~~with~~ ~~Pemex,~~contain ~~we must fully complete certain milestones before an~~specific ~~invoice~~completion ~~for~~schedule ~~the~~requirements ~~work~~that ~~performed~~require ~~can~~us beto ~~issued. However, changes~~pay inpenalties ~~scheduling and work priorities by Pemex and interference from other Pemex contractors~~ in the ~~area~~event ~~have~~that ~~resulted in delays in our ability to fully complete and invoice for certain milestones within~~ the ~~original~~completion ~~contract~~ schedules. ~~Delays of this nature~~ are ~~remedied~~not ~~by contract extensions from Pemex that are agreed~~met tofor onreasons ~~a case-by-case basis.~~attributable ~~Pemex has approved several contract extensions~~ to ~~date. Subsequent~~us toand ~~March 31, 2007,~~ we ~~received~~may ~~approved~~not ~~contract extensions~~be ~~and~~able ~~billed approximately $20 million. We are currently negotiating with Pemex~~ to ~~extend the contracts through~~meet ~~our estimated~~ completion ~~date~~schedules. WeOur ~~will~~exposures ~~invoice for our work~~ under ~~the~~these ~~Pemex contracts as milestones are fully completed and~~penalty ~~additional~~provisions ~~contract extensions~~ are ~~approved~~generally bybased ~~Pemex.~~on ~~Unbilled receivables~~a ~~also~~percentage ~~relate~~of ~~to extra work under~~ the ~~Pemex contracts~~remaining ofcontract ~~approximately~~value ~~$39.2 million~~ for ~~changes in~~ work ~~scope under~~which ~~the~~will ~~contracts,~~be ~~customer~~completed ~~interferences~~outside ~~and~~of ~~port closures due to adverse weather conditions. Under~~ the ~~West Africa Gas~~ ~~Pipeline~~completion ~~contract~~schedule requirements, weup ~~have unbilled receivables of approximately $22.5 million mostly for weather delays and costs incurred in connection with damage~~ to ~~the~~maximum ~~pipeline in 2006. We will issue~~amounts ~~billings~~generally ~~for~~based ~~the~~on ~~extra~~an ~~work~~agreed ~~upon~~percentage ~~the receipt~~ of ~~approved~~contract ~~change orders from Pemex and the West Africa Gas Pipeline Company~~values.

We are currently working outside of the scheduled completion ~~Indebtedness~~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.

At March 31, 2007, we had approximately $110.6 million of total outstanding debt. The outstanding debt at March 31, 2007 represents a decrease of approximately $3.6 million from the amounts outstanding at December 31, 2006 as a result of scheduled debt payments. At March 31, 2007, $15.6 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% (7.67% to 9.99%) at March 31, 2007, and our average interest rate at March 31, 2007 was 9.78% per annum. In May 2006, we entered into an interest rate swap agreement to effectively convert the variable interest rate on a portion of our debt (approximately $30.8 million at March 31, 2007) into fixed rate debt with a 9.99% interest rate. Our term-debt borrowings require approximately $1.2 million in total monthly principal payments.

We have a $30 million revolving credit facility with PNC Bank, N.A. (PNC Bank) that matures on April 28, 2011. At March 31, 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. At March 31, 2007, we had no borrowings outstanding under this revolving credit facility. Advances under the revolving credit facility bear interest at one-month Libor plus a margin ranging from 2.25% to 2.75%, or, at our option, at the prime rate plus a margin ranging from 0% to 0.25%. In addition to monthly interest, we are required to pay monthly maintenance fees for this revolving credit facility.

Claims and Litigation

During the fourth quarter of 2006, we received a tax assessment from the Servicio De Administacion 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 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.

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 ~~March~~September 3130, 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% (7.6769% to 9.99%) at ~~March~~September 3130, 2007, and ~~our~~ our average interest rate at ~~March~~September 3130, 2007, was 9.78%. ~~The~~ The following table summarizes our long-term material ~~contractual~~ contractual cash obligations, including interest payments calculated at the effective interest rate at ~~March~~September 3130, 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	$	197,~~073~~165	$	19,~~609~~508	$	18,~~177~~092	$	35,~~354~~285	$	4847,~~170~~942	$	~~653~~697	$	~~141~~128,~~036~~689
Operating leases		~~1,981~~653		2,~~337~~361		~~757~~769		1,879		1,838		7,017		1514,~~809~~517
	$	217,~~054~~818	$	21,~~946~~869	$	18,~~934~~861	$	37,~~233~~164	$	5049,~~008~~780	$	7,~~670~~714	$	~~156~~143,~~845~~206

Our estimated planned capital expenditures for the remainder of 262007 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

~~Our~~historical ~~estimated~~data ~~planned~~and ~~capital~~current ~~expenditures~~market ~~for~~data. ~~the~~There ~~remainder~~have ofbeen no ~~2007~~material ~~range~~changes ~~from~~or ~~approximately~~developments ~~$17 million~~in toauthoritative accounting ~~$20 million~~pronouncements ~~and~~or ~~are~~in ~~primarily~~our ~~related~~evaluation toof the ~~purchase~~accounting ofestimates ~~equipment~~and ~~currently~~the ~~being~~underlying ~~rented,~~assumptions ~~vessel~~or ~~improvements~~methodologies ~~required~~that we believe ~~for~~to ~~specific~~be ~~project~~critical ~~needs~~accounting policies and ~~dry-docks.~~estimates ~~The~~as ~~actual~~disclosed ~~amount~~in ~~expended~~our ~~will~~2006 ~~depend~~Annual ~~upon~~Report ~~available funds, work awarded and~~on ~~future operating activity~~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.

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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 ~~construction~~ our construction services,. asThere ~~detailed~~were ~~below.~~no ~~The~~material ~~following~~changes ~~sections~~during the ~~address~~quarter ended September 30, 2007 to the disclosures ~~significant~~made ~~market~~in ~~risks~~Part II, ~~associated~~Item 7A, ~~with~~“Quantitative ~~our financial~~and ~~activities~~Qualitative ~~for~~Disclosures ~~the~~about ~~three~~Market ~~months~~Risk” ~~ended~~of ~~March 31,~~our ~~2007~~2006 Form 10-K. ~~Our~~ Our exposure to market risk, ~~as discussed below,~~ 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.

Interest Rate Risk

As of March 31, 2007, the carrying value of our debt, including accrued interest, was approximately $111.0 million. The fair value of this debt approximates the carrying value because the interest rates on our variable rate debt are based on floating rates established by reference to market rates and interest rates on our fixed rate debt approximates the rates at which we can currently borrow. Our average interest rate at March 31, 2007, was 9.78%. We have $14.2 million aggregate principal amount of 8% Subordinated Notes at a fixed 8% interest rate and a $24.5 million term loan at a fixed 8.55% interest rate. We have also fixed approximately $30.8 million of our variable rate debt at 9.99% through an interest rate swap. A hypothetical 1% increase in the applicable floating interest rates as of March 31, 2007 would increase our annual interest expense by approximately $0.4 million.

We entered into an interest rate swap agreement with PNC Bank in May 2006 to minimize earnings fluctuations caused by interest rate volatility associated with our variable rate debt. The interest rate swap agreement effectively converts the variable interest rate on approximately $30.8 million of our debt at March 31, 2007 into fixed rate debt with a 9.99% interest rate. We did not enter into this agreement for speculative or trading purposes. Depending on interest rate fluctuations, our interest rate exposure and its related impact on interest expense and net cash flow may increase or decrease. The fair value of the interest rate swap agreement is the estimated amount that we would receive or pay to terminate the agreement at the reporting date, taking into account current interest rates and the credit worthiness of the counter party. At March 31, 2007 and December 31, 2006, the fair value of the derivative instrument was negative and was recorded as a liability of approximately $337,000 and $291,000, net of tax benefits of $181,000 and $157,000, respectively, in accordance with SFAS No. 133. This liability is reflected in other liabilities in the accompanying consolidated balance sheets at March 31, 2007 and December 31, 2006.

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash and cash equivalents, short-term investments and accounts receivable. Cash and cash equivalents include interest bearing demand deposits and highly liquid investments with original maturities of three months or less. Short-term investments include municipal bonds and auction rate securities. We control our exposure to credit risk associated with these instruments by placing our financial interests with credit-worthy financial institutions and generally performing services for national oil companies, major and independent oil and gas companies, energy companies and their affiliates. The concentration of customers in the energy industry may impact our overall credit exposure, either positively or negatively, since these customers may be similarly affected by changes in economic or other conditions. We had a total of three customers who accounted for 88% and 75% of total billed and unbilled receivables as of March 31, 2007 and December 31, 2006, respectively. No other single customer accounted for more than 10% of accounts receivable as of March 31, 2007 and December 31, 2006.

Foreign Currency Risk

We operate in international areas and are therefore subject to market risk for changes in foreign exchange rates. We are exposed to foreign currency risk from foreign currency denominated monetary assets, receivables and payables. We collect certain revenues and pay certain local expenses in foreign currency. In the first quarter of 2007, our primary net foreign currency exposure related to the Mexican peso, which is unhedged. We manage foreign currency risk by attempting to contract as much foreign revenue as possible in U.S. dollars. All of our revenues from foreign contracts, except for a portion generated from our contracts with Pemex, are denominated in U.S. dollars. Also, a significant amount of local foreign expenses are also denominated in U.S. dollars. We monitor the exchange rate of our foreign currencies in order to mitigate the risk from foreign currency fluctuations. We receive payment in foreign currency for our Pemex receivables in Mexico equivalent to the U.S. dollars billed, which is converted to U.S. dollars on that day or the day following payment. We recognized a $(280,000) net foreign currency loss 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 for the three months ended March 31, 2007. Additional exposure could occur if we perform more international contracts.


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 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 ~~March~~September 3130, 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. ~~This~~The information in this report should be read in conjunction with the risk factors and information disclosed in our 2006 Form 10-K.

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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)
	10	.1	Fourth Amendment to Revolving Credit and Security Agreement, dated and effective as of April 4, 2007, by and between Horizon Offshore, Inc., Horizon Offshore Contractors, Inc., HOC Offshore, S. de R.L. de C.V., Horizon Marine Contractors (Malaysia) Sdn. Bhd., PT Horizon Offshore Indonesia, Horizon Marine Construction (Mauritius) Ltd., Horizon Marine Construction Ltd. and PNC Bank, National Association, as agent and lender (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed April 5, 2007)
	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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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: ~~May~~November 101, 2007

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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)
	10	.1	Fourth Amendment to Revolving Credit and Security Agreement, dated and effective as of April 4, 2007, by and between Horizon Offshore, Inc., Horizon Offshore Contractors, Inc., HOC Offshore, S. de R.L. de C.V., Horizon Marine Contractors (Malaysia) Sdn. Bhd., PT Horizon Offshore Indonesia, Horizon Marine Construction (Mauritius) Ltd., Horizon Marine Construction Ltd. and PNC Bank, National Association, as agent and lender (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed April 5, 2007)
	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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