##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




---

Form 10-Q

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarterly period ended
    September 30, 2003                                       
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-23653



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Horizon Offshore, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 76-0487309                              
|(State or other jurisdiction
    of incorporation or organization) |  | (I.R.S. employer
    identification no.)

2500 CityWest Boulevard,
Suite 2200

Houston, Texas 77042


(Address of principal executive
offices)


(Zip code)


(713) 361-2600

(Registrants telephone number, including
area code)


Indicate by check
mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days.     Yes þ          No o

Indicate
by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of
1934).     Yes þ          No o

The
number of shares of the registrants common stock, $1.00
par value per share, outstanding as of November 12, 2003
was 26,459,686.



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##### 

TABLE OF CONTENTS



|                                      |                                                                                               |  |  |  |  |  |  | 
|------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION      
|                                      | Item 1. Financial Statements                                                                 
|                                      | Item 2. Managements Discussion And Analysis Of Financial Condition And Results Of Operations
|                                      | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                      | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION         
|                                      | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                            
|Certification Pursuant to Section 302
|Certification Pursuant to Section 302
|Certification Pursuant to Section 906
|Certification Pursuant to Section 906

HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

TABLE OF CONTENTS

|                                   |  |                                                                                                           |    |      |    | 
|---------------------------------- |  | --------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|Description                        |  |                                                                                                           |    | Page
|                                   |  |                                                                                                           |    |     
|PART I.  FINANCIAL
    INFORMATION
|Item 1.                            |  | Financial Statements                                                                                      |    |      | 2  | 
|                                   |  | Consolidated Balance Sheets as of
    September 30, 2003 and December 31, 2002                            |    |      | 2  | 
|                                   |  | Consolidated Statements of Operations for the
    Three and Nine Months Ended September 30, 2003 and 2002 |    |      | 3  | 
|                                   |  | Consolidated Statements of Cash Flows for the
    Nine Months Ended
    September 30, 2003 and 2002       |    |      | 4  | 
|                                   |  | Notes to Consolidated Financial Statements                                                                |    |      | 5  | 
|Item 2.                            |  | Managements Discussion and Analysis of
    Financial Condition and
    Results of Operations             |    |      | 14 | 
|Item 3.                            |  | Quantitative and Qualitative Disclosures About
    Market Risk                                            |    |      | 25 | 
|Item 4.                            |  | Controls and Procedures                                                                                   |    |      | 25 | 
|PART II.  OTHER
    INFORMATION   
|Item 6.                            |  | Exhibits and Reports on Form 8-K                                                                          |    |      | 26 | 
|Signature                          |  |                                                                                                           | 27 |     

1



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##### 






PART I  FINANCIAL
INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS


(in thousands, except share data)

|                                          |                                                                                             |                             |                            |              |         |         |         |         |         |         | 
|----------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------- | -------------------------- | ------------ | ------- | ------- | ------- | ------- | ------- | ------- | 
|                                          |                                                                                             | September 30,               |                            | December 31,
|                                          |                                                                                             | 2003                        |                            | 2002        
|                                          |                                                                                             |                             |                            |             
|                                          |                                                                                             | (unaudited)                 |                            |             
|ASSETS                                   
|CURRENT ASSETS:                           |                                                                                             |                             |                            |              |         |         |         |        
|                                          | Cash and cash equivalents                                                                   |                             | $                          | 18,460       |         |         | $       | 6,073   |        
|                                          | Accounts receivable-                                                                        |                             |                            |              |         |         |         |         |        
|                                          |                                                                                             | Contract receivables        |                            |              | 74,969  |         |         |         | 52,362  |        
|                                          |                                                                                             | Costs in excess of billings |                            |              | 88,589  |         |         |         | 78,494  |        
|                                          |                                                                                             | Affiliated parties          |                            |              | 170     |         |         |         | 170     |        
|                                          | Other current assets                                                                        |                             |                            | 2,779        |         |         |         | 3,010   |        
|                                          |                                                                                             |                             |                            |              |         |         |         |        
|                                          |                                                                                             | Total current assets        |                            |              | 184,967 |         |         |         | 140,109 |        
|PROPERTY AND EQUIPMENT, net               |                                                                                             |                             | 261,165                    |              |         |         | 257,847 |        
|INVENTORY                                 |                                                                                             |                             | 8,098                      |              |         |         | 7,816   |        
|OTHER ASSETS                              |                                                                                             |                             | 15,617                     |              |         |         | 14,761  |        
|DEFERRED INCOME TAXES, net                |                                                                                             |                             | 51                         |              |         |         |        |        
|                                          |                                                                                             |                             |                            |              |         |         |         |        
|                                          |                                                                                             | $                           | 469,898                    |              |         | $       | 420,533 |        
|                                          |                                                                                             |                             |                            |              |         |         |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY 
|CURRENT LIABILITIES:                      |                                                                                             |                             |                            |              |         |         |         |        
|                                          | Accounts payable                                                                            |                             | $                          | 24,698       |         |         | $       | 34,930  |        
|                                          | Accrued liabilities                                                                         |                             |                            | 6,514        |         |         |         | 10,641  |        
|                                          | Accrued job costs                                                                           |                             |                            | 60,518       |         |         |         | 54,866  |        
|                                          | Billings in excess of costs                                                                 |                             |                            | 2,561        |         |         |         | 602     |        
|                                          | Current maturities of long-term debt                                                        |                             |                            | 55,531       |         |         |         | 8,262   |        
|                                          | Related party debt                                                                          |                             |                            | 15,000       |         |         |         |        |        
|                                          | Current taxes payable                                                                       |                             |                            | 671          |         |         |         | 423     |        
|                                          |                                                                                             |                             |                            |              |         |         |         |        
|                                          |                                                                                             | Total current liabilities   |                            |              | 165,493 |         |         |         | 109,724 |        
|LONG-TERM DEBT, net of current maturities |                                                                                             |                             | 99,475                     |              |         |         | 90,062  |        
|DEFERRED INCOME TAXES, net                |                                                                                             |                             |                           |              |         |         | 9,072   |        
|                                          |                                                                                             |                             |                            |              |         |         |         |        
|                                          |                                                                                             | Total liabilities           |                            |              | 264,968 |         |         |         | 208,858 |        
|COMMITMENTS AND CONTINGENCIES             |                                                                                             |                             |                            |              |         |         |         |        
|STOCKHOLDERS EQUITY:                     |                                                                                             |                             |                            |              |         |         |         |        
|                                          | Preferred stock, $1 par value, 5,000,000 shares
    authorized, none issued and outstanding |                             |                            |             |         |         |         |        |        
|                                          | Common stock, $1 par value, 35,000,000 shares
    authorized, 27,290,582 shares issued      |                             |                            | 16,583       |         |         |         | 16,583  |        
|                                          | Additional paid-in capital                                                                  |                             |                            | 182,737      |         |         |         | 182,722 |        
|                                          | Retained earnings                                                                           |                             |                            | 11,059       |         |         |         | 18,353  |        
|                                          | Treasury stock, 830,896 and 912,207 shares,
    respectively                                |                             |                            | (5,449       | )       |         |         | (5,983  | )      
|                                          |                                                                                             |                             |                            |              |         |         |         |        
|                                          |                                                                                             |                             | Total stockholders equity |              |         | 204,930 |         |         |         | 211,675 | 
|                                          |                                                                                             |                             |                            |              |         |         |         |        
|                                          |                                                                                             | $                           | 469,898                    |              |         | $       | 420,533 |        
|                                          |                                                                                             |                             |                            |              |         |         |         |        

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

2



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS


(unaudited)


(in thousands, except share and per share
data)

|                                                                           |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |            |        |  
|-------------------------------------------------------------------------- | ------- | ------------------------------------------- | ------ | ------------------------- | ------ | ---- | ------ | ---------- | ------ | - | ------- | ---------- | ------ | - | ------- | ---------- | ------ | -
|                                                                           |         |                                             |        |                          
|                                                                           |         | For the Three Months Ended                  |        | For the Nine Months Ended
|                                                                           |         | September 30,                               |        | September 30,            
|                                                                           |         |                                             |        |                          
|                                                                           |         | 2003                                        |        | 2002                      |        | 2003 |        | 2002      
|                                                                           |         |                                             |        |                           |        |      |        |           
|CONTRACT REVENUES                                                          |         | $                                           | 79,770 |                           |        | $    | 64,977 |            |        | $ | 204,759 |            |        | $ | 195,371 |           
|COST OF CONTRACT REVENUES                                                  |         |                                             | 72,301 |                           |        |      | 53,335 |            |        |   | 195,506 |            |        |   | 169,142 |           
|                                                                           |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|                                                                           |         | Gross profit                                |        |                           | 7,469  |      |        |            | 11,642 |   |         |            | 9,253  |   |         |            | 26,229 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                               |         |                                             | 5,398  |                           |        |      | 5,852  |            |        |   | 17,297  |            |        |   | 13,744  |           
|                                                                           |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|                                                                           |         | Operating income (loss)                     |        |                           | 2,071  |      |        |            | 5,790  |   |         |            | (8,044 | ) |         |            | 12,485 |  
|OTHER:                                                                     |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|                                                                           |         | Interest expense, net of amount capitalized |        |                           | (2,852 | )    |        |            | (1,074 | ) |         |            | (6,800 | ) |         |            | (3,057 | )
|                                                                           |         | Interest income                             |        |                           | 9      |      |        |            | 22     |   |         |            | 30     |   |         |            | 75     |  
|                                                                           |         | Other income (expense), net                 |        |                           | (76    | )    |        |            | (2,085 | ) |         |            | (776   | ) |         |            | (2,515 | )
|                                                                           |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|NET INCOME (LOSS) BEFORE INCOME TAXES                                      |         |                                             | (848   | )                         |        |      | 2,653  |            |        |   | (15,590 | )          |        |   | 6,988   |           
|INCOME TAX PROVISION (BENEFIT)                                             |         |                                             | (559   | )                         |        |      | 822    |            |        |   | (8,296  | )          |        |   | 2,166   |           
|                                                                           |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|NET INCOME (LOSS)                                                          |         |                                             | (289   | )                         |        | $    | 1,831  |            |        | $ | (7,294  | )          |        | $ | 4,822   |           
|                                                                           |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|EARNINGS PER SHARE:                                                        |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|Net income (loss) per share  BASIC                                        |         | $                                           | (0.01  | )                         |        | $    | 0.07   |            |        | $ | (0.28   | )          |        | $ | 0.19    |           
|                                                                           |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|Net income (loss) per share  DILUTED                                      |         | $                                           | (0.01  | )                         |        | $    | 0.07   |            |        | $ | (0.28   | )          |        | $ | 0.19    |           
|                                                                           |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
    INCOME (LOSS) PER SHARE: |         |                                             |        |                           |        |      |        |            |        |   |         |            |        |   |         |           
|                                                                           | BASIC   |                                             |        | 26,443,222                |        |      |        | 26,346,163 |        |   |         | 26,416,182 |        |   |         | 25,306,301 |       
|                                                                           | DILUTED |                                             |        | 26,443,222                |        |      |        | 26,347,851 |        |   |         | 26,416,182 |        |   |         | 25,624,989 |       

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

3



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS


(unaudited)


(in thousands)

|                                                         |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |          |        |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------------------- | ------ | ------- | ------- | -------- | ------ | ------- | ------- | -
|                                                         |                                                                                                        |                                                                                    
|                                                         |                                                                                                        | For the Nine Months Ended                                                          
|                                                         |                                                                                                        | September 30,                                                                      
|                                                         |                                                                                                        |                                                                                    
|                                                         |                                                                                                        | 2003                                                                                |                             | 2002                                                   
|                                                         |                                                                                                        |                                                                                     |                             |                                                        
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|                                                         | Net income (loss)                                                                                      |                                                                                     | $                           | (7,294                                                  | )      |         | $       | 4,822    |       
|                                                         | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities- |                                                                                     |                             |                                                         |        |         |         |          |       
|                                                         |                                                                                                        | Depreciation and amortization                                                       |                             |                                                         | 14,595 |         |         |          | 11,204 |        
|                                                         |                                                                                                        | Deferred income tax expense (benefit)                                               |                             |                                                         | (9,123 | )       |         |          | 2,166  |        
|                                                         |                                                                                                        | Expense recognized for issuance of treasury stock
    for 401(k) plan contributions |                             |                                                         | 337    |         |         |          | 307    |        
|                                                         |                                                                                                        | Stock compensation expense                                                          |                             |                                                         | 212    |         |         |          |       |        
|                                                         |                                                                                                        | Loan prepayment penalty                                                             |                             |                                                         | 569    |         |         |          |       |        
|                                                         |                                                                                                        | Changes in operating assets and liabilities-                                        |                             |                                                         |        |         |         |          |        |        
|                                                         |                                                                                                        |                                                                                     | Accounts receivable         |                                                         |        | (22,607 | )       |          |        | 9,568   |        
|                                                         |                                                                                                        |                                                                                     | Costs in excess of billings |                                                         |        | (10,095 | )       |          |        | 6,657   |        
|                                                         |                                                                                                        |                                                                                     | Billings in excess of costs |                                                         |        | 1,959   |         |          |        | (996    | )      
|                                                         |                                                                                                        |                                                                                     | Inventory                   |                                                         |        | (282    | )       |          |        | (3,859  | )      
|                                                         |                                                                                                        |                                                                                     | Other assets                |                                                         |        | (3,921  | )       |          |        | (6,651  | )      
|                                                         |                                                                                                        |                                                                                     | Accounts payable            |                                                         |        | (10,232 | )       |          |        | 25,587  |        
|                                                         |                                                                                                        |                                                                                     | Accrued liabilities         |                                                         |        | (7,086  | )       |          |        | (5,433  | )      
|                                                         |                                                                                                        |                                                                                     | Accrued job costs           |                                                         |        | 5,652   |         |          |        | (17,351 | )      
|                                                         |                                                                                                        |                                                                                     | Current taxes payable       |                                                         |        | 187     |         |          |        |        |        
|                                                         |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|                                                         |                                                                                                        |                                                                                     |                             | Net cash provided by (used in) operating
    activities |        |         | (47,129 | )        |        |         | 26,021  |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|                                                         | Purchases and additions to property, equipment
    and intangibles                                     |                                                                                     |                             | (10,802                                                 | )      |         |         | (41,076  | )     
|                                                         |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|                                                         |                                                                                                        |                                                                                     |                             | Net cash used in investing activities                   |        |         | (10,802 | )        |        |         | (41,076 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|                                                         | Borrowings under term debt                                                                             |                                                                                     |                             | 21,362                                                  |        |         |         | 4,045    |       
|                                                         | Principal payments on term debt                                                                        |                                                                                     |                             | (6,565                                                  | )      |         |         | (5,997   | )     
|                                                         | Borrowings under revolving credit facilities                                                           |                                                                                     |                             | 116,416                                                 |        |         |         | 88,524   |       
|                                                         | Payments on revolving credit facilities                                                                |                                                                                     |                             | (75,100                                                 | )      |         |         | (104,300 | )     
|                                                         | Borrowings under related party debt                                                                    |                                                                                     |                             | 15,000                                                  |        |         |         |         |       
|                                                         | Loan fees                                                                                              |                                                                                     |                             | (795                                                    | )      |         |         | (860     | )     
|                                                         | Proceeds from issuance of common stock, net                                                            |                                                                                     |                             |                                                        |        |         |         | 30,843   |       
|                                                         | Stock option transactions and other                                                                    |                                                                                     |                             |                                                        |        |         |         | 285      |       
|                                                         |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|                                                         |                                                                                                        |                                                                                     |                             | Net cash provided by financing activities               |        |         | 70,318  |          |        |         | 12,540  |  
|                                                         |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS |                                                                                                        |                                                                                     | 12,387                      |                                                         |        |         | (2,515  | )       
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD         |                                                                                                        |                                                                                     | 6,073                       |                                                         |        |         | 7,864   |         
|                                                         |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|CASH AND CASH EQUIVALENTS AT END OF PERIOD               |                                                                                                        | $                                                                                   | 18,460                      |                                                         |        | $       | 5,349   |         
|                                                         |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|SUPPLEMENTAL DISCLOSURES:                                |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|                                                         | Cash paid for interest                                                                                 |                                                                                     | $                           | 5,380                                                   |        |         | $       | 4,070    |       
|                                                         | Cash paid for income taxes                                                                             |                                                                                     | $                           | 640                                                     |        |         | $       |         |       
|NON-CASH INVESTING AND FINANCING ACTIVITIES:             |                                                                                                        |                                                                                     |                             |                                                         |        |         |         |         
|                                                         | Purchases and additions to property and equipment
    included in accrued liabilities                  |                                                                                     | $                           | 3,020                                                   |        |         | $       | 6,640    |       
|                                                         | Repayment of debt with proceeds from additional
    term debt                                          |                                                                                     | $                           | 14,069                                                  |        |         | $       |         |       

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

4



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                                                                
|-- | ---------------------------------------------------------------
|1. | Organization and Summary of Significant
    Accounting Policies

The consolidated interim financial statements
included herein have been prepared by Horizon Offshore, Inc. (a
Delaware corporation) and its subsidiaries (references to
Horizon, we, our or us are intended to refer to Horizon
Offshore, Inc. and its subsidiaries), and are unaudited, except
for the balance sheet at December 31, 2002, which has been
derived from the audited consolidated financial statements. 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 financial position as of September 30, 2003, the
statements of operations for the three and nine months ended
September 30, 2003 and 2002, and the statements of cash
flows for the nine months ended September 30, 2003 and
2002. Although management believes the unaudited interim related
disclosures in these consolidated interim financial statements
are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included
in annual audited financial statements prepared in accordance
with generally accepted accounting principles have been
condensed or omitted pursuant to the rules of the Securities and
Exchange Commission (SEC). The results of operations for the
nine months ended September 30, 2003 are not necessarily
indicative of the results to be expected for the entire year
ending December 31, 2003. The consolidated interim
financial statements included herein should be read in
conjunction with the audited consolidated financial statements
and notes thereto included in our 2002 Annual Report on
Form 10-K.



| |             
| | ------------
| | Organization

Horizon provides marine construction services for
the offshore oil and gas industry. These services generally
consist of laying, burying or repairing marine pipelines for the
transportation of oil and gas; installing, disassembling and
salvaging production platforms and other marine structures; and
performing pipe spooling services. Work is performed primarily
on a fixed-price or day-rate basis or a combination thereof.



| |                      
| | ---------------------
| | Significant Customers

We have domestic and international operations in
one industry segment, the marine construction service industry
for offshore oil and gas companies. Customers accounting for
more than 10% of consolidated revenues for the three and nine
months ended September 30, 2003 and 2002 are as follows:

|          |  |                    |     |                   |  |      |    |      |  |  |     |  |  |  |   |  
|--------- |  | ------------------ | --- | ----------------- |  | ---- | -- | ---- |  |  | --- |  |  |  | - | -
|          |  |                    |     |                  
|          |  | Three Months Ended |     | Nine Months Ended
|          |  | September 30,      |     | September 30,    
|          |  |                    |     |                  
|Customer  |  | 2003               |     | 2002              |  | 2003 |    | 2002
|          |  |                    |     |                   |  |      |    |     
|Company A |  |                    | 12% |                   |  |      | 13 | %    |  |  | 32% |  |  |  | 7 | %
|Company B |  |                    | 10% |                   |  |      |   |      |  |  | 13% |  |  |  |  |  
|Company C |  |                    | 15% |                   |  |      |   |      |  |  | 11% |  |  |  |  |  
|Company D |  |                    | 18% |                   |  |      |   |      |  |  | 7%  |  |  |  |  |  
|Company E |  |                    | 13% |                   |  |      |   |      |  |  | 6%  |  |  |  |  |  
|Company F |  |                    | 5%  |                   |  |      | 13 | %    |  |  | 2%  |  |  |  | 6 | %

In addition to the list in the table above,
Petróleos Mexicanos (Pemex) accounted for 0% and 2% of
revenues for the three and nine months ended September 30,
2003, respectively compared to 42% and 40% of revenues for the
three and nine months ended September 30, 2002,
respectively. There were no other customers accounting for more
than 10% of consolidated revenues for the three and nine months
ended September 30, 2003 and 2002.

The amount of revenue accounted for by a customer
depends on the level of construction services required by the
customer based on the size of their capital expenditure budget
for construction for the year and our ability to successfully
bid for and obtain their work. Consequently, customers that
account for a significant

5



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

portion of contract revenues in one year may
represent an immaterial portion of contract revenues in
subsequent years.



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

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America 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 apply 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 accounting principles generally
accepted in the United States; 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 fair value of salvage inventory, the
depreciable lives of and future cash flows to be provided by our
equipment, the period and extent of maintenance and repairs of
dry-docking activity 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 often 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

Construction contract 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. 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 of Construction-Type and
Certain Production-Type Contracts, for our accounting
policy relating to the use of the percentage-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. 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
claims to the extent of costs incurred and include no profit on
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 revenues recognized 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 revenues recognized on an individual
contract basis.

For certain service contracts, revenues are
recognized under SEC Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial
Statements, when all of the following criteria are met;
persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the sellers price
is fixed or determinable; and collectibility is reasonably
assured.

6



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                 
| | ----------------
| | Cost Recognition

Cost of contract revenues includes all direct
material and labor costs and certain indirect costs, which are
allocated to contracts based on utilization, such as supplies,
tools, repairs and depreciation. Selling, general and
administrative costs are charged to expense as incurred.



| |                        
| | -----------------------
| | Interest Capitalization

Interest is capitalized on the average amount of
accumulated expenditures for equipment that is undergoing major
modifications and refurbishment prior to being placed into
service. Interest is capitalized using an effective rate based
on related debt until the equipment is placed into service.
Interest expense for the three and nine months ended
September 30, 2003 was net of $6,000 and $130,000 of
capitalized interest, respectively. Interest expense for the
three and nine months ended September 30, 2002 was net of
$453,000 and $1,466,000 of capitalized interest, respectively.



| |                    
| | -------------------
| | Accounts Receivable

We have significant investments in billed and
unbilled receivables as of September 30, 2003. As of
September 30, 2003, we had contract receivables of
$2.1 million and costs in excess of billings of
$59.6 million from Pemex totaling $61.7 million. The
significant delays between the completion of the work and when
it is billed and collected are caused by Pemexs rigid
requirements on the submission, review and approval of invoices
and documentation prior to their payment of contract claims and
change orders. As of September 30, 2003, there were
$52.2 million of claims included in accounts receivable for
extra work related to interferences, interruptions and other
delays, primarily related to the EPC 64 contract in the
Cantarell field. Pemex extended the EPC 64 contract, which
had an original value of $41.0 million, and substantially
increased the scope of our operations in the Cantarell field. As
a result, this project was subject to greater interruptions due
to weather conditions and standby time as other contractors
completed their work. The EPC 64 claim was formally
submitted in July 2003, with final resolution now expected by
the end of the fourth quarter of 2003. Upon resolution, a final
billing will be invoiced for the remaining unbilled amounts with
collection expected shortly thereafter. As of September 30,
2003, we have collected all amounts related to our other
projects with Pemex. We believe our receivables are realizable;
however, any change in estimate in collectibility will be
recognized in the period in which they are determined. We have
historically not experienced any significant losses on
receivables, but significant losses would adversely affect our
financial position, results of operations and our overall
liquidity.



| |          
| | ---------
| | Inventory

Inventory consists of production platforms and
other marine structures received from time to time as partial
consideration from salvage projects performed in the
U.S. Gulf of Mexico. For the three and nine months ended
September 30, 2003, there was no significant revenue
recognized representing the non-cash values assigned to the
structures received as partial consideration for performing
salvage projects. During the three and nine months ended
September 30, 2002, respectively, revenue of
$3.0 million and $4.3 million was recognized
representing the non-cash values assigned to the structures
received as partial consideration for performing salvage
services. These structures are held for resale. The inventory is
valued at amounts not in excess of the fair value of services
provided. Horizon assesses the net realizable value of its
inventory items at each balance sheet date. Inventory is
classified as long-term due to the uncertain timing of its sale.



| |             
| | ------------
| | Other Assets

Dry-dock costs are direct costs associated with
scheduled major maintenance on our marine construction vessels.
Costs incurred in connection with dry-dockings are deferred and
amortized over the five-year cycle to the next scheduled
dry-docking. On June 29, 2001, the AICPA issued an exposure
draft of a proposed SOP,

7



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accounting for Certain Costs and Activities
Related to Property, Plant and Equipment. If adopted, we
would be required to expense regulatory maintenance cost on our
vessels as incurred. We incurred and capitalized dry-dock costs
of $4.2 million and $3.7 million for the nine months
ended September 30, 2003 and 2002, respectively. As of
September 30, 2003, deferred dry-dock costs totaled
$14.2 million. Expensing dry-dock costs would likely result
in greater variability of our quarterly operating results as a
substantial portion of our dry-dock activities take place during
the first and fourth quarters.



| |                         
| | ------------------------
| | Stock-Based Compensation

At September 30, 2003, we had two
stock-based compensation plans. Pursuant to Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of SFAS No. 123, we have elected to
account for stock-based employee compensation under the
recognition and measurement principles of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related interpretations. No
stock-based employee compensation cost is reflected in net
income (loss), as all options granted under those plans had an
exercise price equal to the market value of the underlying
common stock on the date of grant. Additionally, for stock-based
compensation grants to non-employees, we recognize as
compensation expense the fair market value of such grants as
calculated pursuant to SFAS No. 123, amortized ratably over
the lesser of the vesting period of the respective option or the
individuals expected service period. The following table
illustrates the effect on net income (loss) and earnings per
share if we had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation (in
thousands, except per share data).

|                                                                                                                                                    |                       |                    |      |                   |   |      |       |      |  |   |        |       |   |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------ | ---- | ----------------- | - | ---- | ----- | ---- |  | - | ------ | ----- | - | - | ------ | ---- | 
|                                                                                                                                                    |                       |                    |      |                  
|                                                                                                                                                    |                       | Three Months Ended |      | Nine Months Ended
|                                                                                                                                                    |                       | September 30,      |      | September 30,    
|                                                                                                                                                    |                       |                    |      |                  
|                                                                                                                                                    |                       | 2003               |      | 2002              |   | 2003 |       | 2002
|                                                                                                                                                    |                       |                    |      |                   |   |      |       |     
|Net income (loss), as reported                                                                                                                      |                       | $                  | (289 | )                 |   | $    | 1,831 |      |  | $ | (7,294 | )     |   | $ | 4,822  |     
|Add: Total stock-based compensation cost, net of
    related tax effects, included in net income (loss)                                             |                       |                    |     |                   |   |      |      |      |  |   | 140    |       |   |   |       |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                    | (367 | )                 |   |      | (556  | )    |  |   | (1,452 | )     |   |   | (2,652 | )   
|                                                                                                                                                    |                       |                    |      |                   |   |      |       |      |  |   |        |       |   |   |        |     
|Pro forma net income (loss)                                                                                                                         |                       | $                  | (656 | )                 |   | $    | 1,275 |      |  | $ | (8,606 | )     |   | $ | 2,170  |     
|                                                                                                                                                    |                       |                    |      |                   |   |      |       |      |  |   |        |       |   |   |        |     
|Earnings per share:                                                                                                                                 |                       |                    |      |                   |   |      |       |      |  |   |        |       |   |   |        |     
|                                                                                                                                                    | Basic  as reported   |                    | $    | (0.01             | ) |      | $     | 0.07 |  |   | $      | (0.28 | ) |   | $      | 0.19 | 
|                                                                                                                                                    | Basic  pro forma     |                    | $    | (0.03             | ) |      | $     | 0.05 |  |   | $      | (0.33 | ) |   | $      | 0.09 | 
|                                                                                                                                                    | Diluted  as reported |                    | $    | (0.01             | ) |      | $     | 0.07 |  |   | $      | (0.28 | ) |   | $      | 0.19 | 
|                                                                                                                                                    | Diluted  pro forma   |                    | $    | (0.03             | ) |      | $     | 0.04 |  |   | $      | (0.33 | ) |   | $      | 0.08 | 

To determine pro forma information as if we had
accounted for the employee stock options under the fair-value
method as defined by SFAS No. 123, we used the
Black-Scholes method and assumed no dividends, as well as the
following additional weighted average assumptions included in
the following table:

|                        |  |      |      |      |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                        |  | 2003 |      | 2002
|                        |  |      |      |     
|Option life (in years)  |  |      | 7    |      |  |  | 7    |  
|Volatility              |  |      | 77.6 | %    |  |  | 77.8 | %
|Risk-free interest rate |  |      | 3.50 | %    |  |  | 4.77 | %

In January 2003, we granted options to three
former directors to purchase 15,320 shares of common stock at an
exercise price equal to the market price of the common stock on
the date of grant. These options vested

8



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

immediately, and $56,000 was recorded as
compensation expense in the statements of operations during the
first quarter of 2003. Also, we recorded an additional $156,000
as compensation expense in the statements of operations during
the second quarter of 2003 related to the remeasurement of
options in connection with the resignation of a key employee.



| |                  
| | -----------------
| | Reclassifications

Certain prior period amounts have been
reclassified to conform to the presentation shown in the
consolidated interim financial statements as of
September 30, 2003.

2.     Property and
Equipment

Property and equipment consists of the following
(in thousands):

|                                      |                                 |               |         |              |   |   |         |         |  
|------------------------------------- | ------------------------------- | ------------- | ------- | ------------ | - | - | ------- | ------- | -
|                                      |                                 | September 30, |         | December 31,
|                                      |                                 | 2003          |         | 2002        
|                                      |                                 |               |         |             
|Barges, vessels and related equipment |                                 | $             | 281,338 |              |   | $ | 268,770 |        
|Land and buildings                    |                                 |               | 19,732  |              |   |   | 19,726  |        
|Machinery and equipment               |                                 |               | 245     |              |   |   | 245     |        
|Office furniture and equipment        |                                 |               | 6,064   |              |   |   | 5,554   |        
|Leasehold improvements                |                                 |               | 4,178   |              |   |   | 3,440   |        
|                                      |                                 |               |         |              |   |   |         |        
|                                      |                                 |               | 311,557 |              |   |   | 297,735 |        
|                                      | Less  accumulated depreciation |               |         | (50,392      | ) |   |         | (39,888 | )
|                                      |                                 |               |         |              |   |   |         |        
|                                      | Property and equipment, net     |               | $       | 261,165      |   |   | $       | 257,847 |  
|                                      |                                 |               |         |              |   |   |         |        

During the nine months ended September 30,
2003, we incurred $13.8 million of capital expenditures,
including capitalized interest, primarily related to the
upgrades of the Sea Horizons lift capacity to 1200
tons, the Lone Star Horizon upgrades, the Pacific
Horizon upgrades, the fabrication of a 110-ton plow
initially used for the pipeline installation and burial project
in the Northeastern U.S. and the purchase of other
miscellaneous equipment.

We use the units-of-production method to
calculate depreciation on our major barges, vessels and related
equipment to accurately reflect the wear and tear of normal use.
The useful lives of our major barges and vessels range from
15 years to 18 years. Depreciation expense calculated
under the units-of-production method may be different than
depreciation expense calculated under the straight-line method
in any period. 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.



|   |                     
|-- | --------------------
|3. | Stockholders Equity



| |               
| | --------------
| | Stock Offering

In April 2002, we sold 3,000,000 shares of common
stock in a public offering. We received $30.8 million after
deducting the underwriting discount and expenses. We used
$20.0 million to reduce indebtedness under our revolving
credit facilities and the remainder was used for general
corporate purposes.



| |                   
| | ------------------
| | Earnings Per Share

Earnings per share data for all periods presented
has been computed pursuant to SFAS No. 128, Earnings
Per Share that requires a presentation of basic earnings
per share (basic EPS) and diluted

9



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

earnings per share (diluted EPS). Basic EPS
excludes dilution and is determined by dividing income available
to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted EPS reflects the
potential dilution that could occur if securities and other
contracts to issue common stock were exercised or converted into
common stock. As of September 30, 2003, we had outstanding
options covering an aggregate of 3,463,452 shares of common
stock, of which 2,338,824 shares were exercisable. Excluded from
the computation of diluted EPS are options to purchase 3,463,452
shares of common stock at a weighted average price of $7.35 per
share for the three and nine months ended September 30,
2003, as they would be anti-dilutive. Options to purchase
2,542,538 shares of common stock at a weighted average price of
$8.83 per share and 845,645 shares of common stock at a weighted
average price of $13.56 per share for the three and nine months
ended September 30, 2002, respectively, were excluded from
the computation of diluted EPS as they would be anti-dilutive.



| |               
| | --------------
| | Treasury Stock

During the nine months ended September 30,
2003, we contributed 26,038 shares of treasury stock to our
401(k) Plan. As of September 30, 2003, our treasury stock
consisted of 830,896 shares at a cost of $5.4 million.



|   |                           
|-- | --------------------------
|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. (Elliott Associates)
and Elliott International, L.P. (Elliott International),
collectively our largest stockholder owning 15.8% of our
outstanding common stock, to charter certain marine vessels from
Odyssea. As of September 30, 2003, we owed Odyssea
$1.1 million for charter services compared to
$3.0 million at September 30, 2002. Odyssea billed
Horizon and Horizon paid Odyssea for services rendered under the
agreement as follows (in millions):

|                         |  |                   |      |      |  |   |      | 
|------------------------ |  | ----------------- | ---- | ---- |  | - | ---- | 
|                         |  |                  
|                         |  | Nine Months Ended
|                         |  | September 30,    
|                         |  |                  
|                         |  | 2003              |      | 2002
|                         |  |                   |      |     
|Amount billed to Horizon |  | $                 | 13.8 |      |  | $ | 11.8 | 
|Amount paid to Odyssea   |  | $                 | 16.9 |      |  | $ | 9.4  | 

In June 2003, we secured a $15.0 million
loan due June 30, 2004 from Elliott Associates. See
Note 5.

In October 2000, we loaned $142,000 to our Chief
Operating Officer. Forgiveness of that debt in connection with
his resignation resulted in a write-off of his loan to selling,
general and administrative expenses in the accompanying
consolidated statement of operations in the second quarter of
2003. See Note 7.



|   |              
|-- | -------------
|5. | Notes Payable

As of September 30, 2003, we had
approximately $170.0 million of total outstanding debt.
This represents an approximate net increase of
$71.7 million from December 31, 2002. Of the
$170.0 million of outstanding debt, $72.2 million
represents borrowings on our three revolving credit facilities
and $97.8 million represents borrowings on eight term-debt
facilities.

During the second quarter of 2003, we secured a
$35.0 million term loan from Boeing Capital Corporation, of
which $30.0 million was advanced in June 2003 and the
remaining $5.0 million was advanced in July 2003. The loan
has a seven-year term, due in monthly principal installments of
$238,000 through June 30, 2010, with a balloon payment of
$15.0 million on June 30, 2010, and bears interest at
Libor plus 4.8%. A portion of the proceeds from the loan was
used to retire our GMAC Business Credit, LLC debt of
$14.1 million. In connection with the retirement of this
debt, we recognized additional interest expense of
$0.3 million during the second quarter of 2003 related to
the write-off of deferred loan fees and incurred a

10



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

prepayment penalty of $0.6 million which was
reflected in other expense in the accompanying consolidated
statements of operations in the second quarter of 2003. We also
obtained a $15.0 million loan with a one-year term from
Elliott Associates during the second quarter of 2003, which
bears interest at 18%. The loan agreement provides that if the
loan is not repaid at the maturity date, Elliott Associates has
the option to convert up to $5.0 million of the loan into
our common stock at a conversion price which is the greater of
the weighted average price of our common stock for the preceding
30 trading days or $3.50 per share. Any outstanding loan balance
at the maturity date will be due in September 2004.

At September 30, 2003, we classified
$45.9 million as current maturities for our revolving
credit facilities with Southwest Bank of Texas, N.A. based on
their maturity date of April 2004. We had no additional
available borrowings under our three revolving credit facilities
at September 30, 2003, and we had $18.5 million of
cash and cash equivalents. In October 2003, we repaid net
$6.0 million of borrowings under our three revolving credit
facilities, which is currently available for future borrowings.
Our weighted average interest rate on all indebtedness was 5.86%
at September 30, 2003, and our term-debt borrowings
currently require $796,000 in monthly principal payments.

Our loans require that certain conditions be met
in order for us to obtain advances. Our loans are collateralized
by mortgages on our vessels and property and by accounts
receivable. Advances under our revolving credit facilities may
be obtained in accordance with a borrowing base defined as a
percentage of accounts receivable balances and costs in excess
of billings. The loans contain customary default and
cross-default provisions and some require us to maintain certain
financial ratios. The loan agreements also contain certain
covenants that limit our ability to incur additional debt, pay
dividends, create certain liens, sell assets and make capital
expenditures.

For the quarter ended September 30, 2003, we
were not in compliance with our required debt to EBITDA
(earnings before interest, taxes, depreciation, amortization)
covenant ratio of not more than 5.95, and our required EBITDA to
fixed charges covenant ratio of not less than 1.40, related to
our two revolving credit facilities with Southwest Bank of
Texas, N.A., which had a total outstanding balance of
$45.9 million at September 30, 2003. Compliance with
these covenants is determined quarterly based on the trailing
four quarters ending on each determination date, and as of
September 30, 2003, our ratios for the debt to EBITDA and
EBITDA to fixed charges covenants were 18.24 and 0.11,
respectively. We have obtained waivers of compliance from this
lender on these two revolving credit facilities as of the
September 30, 2003 determination date. We were also not in
compliance with the required debt to EBITDA covenant ratio of
not more than 3.60 and the required EBITDA to fixed charges
covenant ratio of not less than 1.30 related to our
$6.6 million term loan for the quarter ended
September 30, 2003. We have obtained a waiver of compliance
on this term loan as of the September 30, 2003
determination date and for determination dates on or before
March 31, 2004. Based on current and forecasted demand for
our services, we do not expect to meet certain financial
covenant ratios for the Southwest Bank of Texas, N.A. facilities
at future determination dates. We expect that we will need to
further amend these debt covenants or receive waivers of
compliance for these facilities through their maturity in April
2004. In connection with the waivers obtained from Southwest
Bank of Texas, N.A., we will be required to reduce borrowing
capacity under our two revolving credit facilities from an
aggregate of $50 million to $20 million upon the
earlier to occur of collection of the Pemex receivable and
January 31, 2004. These facilities, along with the Elliott
Associates loan, are classified as current in the accompanying
balance sheet at September 30, 2003 based on their
maturity. In the event that the Southwest Bank of Texas, N.A.
covenants are not met in the future and we are unsuccessful in
obtaining waivers of compliance, the violation of covenant
requirements gives the lender the right to accelerate our debt
with them, and cross-default provisions could result in
acceleration of our remaining indebtedness. Our other facilities
have been classified as long-term due to their stated maturity
date, the future expected status of compliance with covenants,
as amended, and our expectations regarding future payoffs,
refinancing, or waivers to be obtained. We are currently in
discussion with other lenders for new credit facilities to
replace our existing facilities and satisfy debt facilities that
will be due in 2004.

11



---



##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During 2003, we have closely managed our cash
position and borrowed funds to meet working capital requirements
due to the delayed timing of the collection of our Pemex
receivables and claims. The additional asset based financing
secured during the second quarter of 2003 has provided
additional working capital to support our receivable position
with Pemex and our operations. We expect that the volume of our
contract revenues will largely influence our working capital and
cash requirements. Our cash requirements are greatest at the
start-up of a new project since we are required to incur
mobilization expenses and complete all or a substantial portion
of the majority of our projects before receiving payment from
the customer. Although there can be no assurance, we believe
that funds from operations will be sufficient in order to
maintain necessary levels of operating liquidity.



|   |              
|-- | -------------
|6. | Casualty Loss

On September 20, 2002, the pipelay barge,
Lone Star Horizon, sustained electrical damage due to a
fire while at anchor off Ciudad Del Carmen, Mexico. We have
incurred costs totaling $5.5 million to repair the Lone
Star Horizon. We maintain hull and machinery insurance to
cover physical damage to our vessels. This insurance coverage
provides for both a $0.5 million occurrence deductible and
a $1.5 million annual aggregate deductible. During the
third quarter of 2002, we recorded this $2.0 million loss
as other expense. To date, we have collected reimbursement of
$3.0 million and included the $0.5 million remaining
insurance claim in current assets as of September 30, 2003.



|   |                  
|-- | -----------------
|7. | Severance Charges

During the second quarter of 2003, we incurred
approximately $680,000 in charges related to severance and other
costs in connection with the resignation of a key employee,
which was reflected in selling, general and administrative
expenses in the accompanying consolidated statements of
operations in the second quarter of 2003. We recorded
liabilities of $382,000 for severance and other benefits to be
paid pursuant to the employees separation agreement
through August 31, 2004. This amount will be paid ratably
each month through the term of the agreement. In addition, we
incurred a non-cash charge of approximately $156,000 related to
the remeasurement of the employees options and a non-cash
charge of approximately $142,000 related to the forgiveness of
the employees loan pursuant to conditions in his
separation agreement. During the third quarter of 2003, we paid
$76,000 of the recorded liability and $306,000 remains as a
liability at September 30, 2003. All charges are reflected
in our domestic geographic segment.



|   |             
|-- | ------------
|8. | Income Taxes

We use the liability method of accounting for
income taxes. We recorded a federal income tax benefit of $(0.6)
million, at a net effective rate of 65.9% on pre-tax net loss of
$(0.8) million for the quarter ended September 30, 2003 and
a federal income tax benefit of $(8.3) million, at a net
effective rate of 53.2% on pre-tax net loss of $(15.6) million
for the nine months ended September 30, 2003. The increase
in the effective tax rate for the quarter ended
September 30, 2003 is due to a lower effective rate on
foreign earnings and a change in estimate to our state tax
liability. The difference in the effective tax rate and the
statutory tax rate for the nine months ended September 30,
2003 is primarily due to the tax benefit recognized in the
second quarter of 2003 attributable to a research and
development credit of $(3.0) million. We recorded a federal
income tax provision of $0.8 million, at a net effective
rate of 31.0% on pre-tax net income of $2.7 million for the
quarter ended September 30, 2002 and a federal income tax
provision of $2.2 million, at a net effective rate of 31.0%
on pre-tax net income of $7.0 million for the nine months
ended September 30, 2002. The difference from the statutory
tax rate is due to the application of the extraterritorial
income exclusion for income earned primarily in Mexico from
January 1, 2002 to September 30, 2002. The exclusion
allows us to exclude a qualifying portion of income earned
outside the United States for tax purposes.

12



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|9. | Geographic Information

Horizon operates in the marine construction
services industry. Geographic information relating to
Horizons operations follows (in millions):

|              |                      |               |   |               |      |      |   |      |      |  |   |       |       |  |   |      |       | 
|------------- | -------------------- | ------------- | - | ------------- | ---- | ---- | - | ---- | ---- |  | - | ----- | ----- |  | - | ---- | ----- | 
|              |                      |               |   |              
|              |                      | Three Months  |   | Nine Months  
|              |                      | Ended         |   | Ended        
|              |                      | September 30, |   | September 30,
|              |                      |               |   |              
|              |                      | 2003          |   | 2002          |      | 2003 |   | 2002
|              |                      |               |   |               |      |      |   |     
|Revenues:     |                      |               |   |               |      |      |   |      |      |  |   |       |       |  |   |     
|              | Domestic             |               | $ | 61.0          |      |      | $ | 30.9 |      |  | $ | 157.1 |       |  | $ | 83.3 |      
|              | Latin America        |               |   | 0.3           |      |      |   | 26.7 |      |  |   | 3.9   |       |  |   | 98.1 |      
|              | West Africa          |               |   | 0.3           |      |      |   | 0.8  |      |  |   | 5.9   |       |  |   | 0.8  |      
|              | Southeast Asia       |               |   | 18.2          |      |      |   | 6.0  |      |  |   | 37.4  |       |  |   | 11.6 |      
|              | Other                |               |   |              |      |      |   | 0.6  |      |  |   | 0.5   |       |  |   | 1.6  |      
|              |                      |               |   |               |      |      |   |      |      |  |   |       |       |  |   |     
|              |                      | Total         |   | $             | 79.8 |      |   | $    | 65.0 |  |   | $     | 204.8 |  |   | $    | 195.4 | 
|              |                      |               |   |               |      |      |   |      |      |  |   |       |       |  |   |     
|Gross Profit: |                      |               |   |               |      |      |   |      |      |  |   |       |       |  |   |     
|              | Domestic             |               | $ | 4.7           |      |      | $ | 5.2  |      |  | $ | 6.3   |       |  | $ | 13.7 |      
|              | Latin America        |               |   | 0.5           |      |      |   | 9.1  |      |  |   | (0.4  | )     |  |   | 16.0 |      
|              | West Africa          |               |   | (0.9          | )    |      |   |     |      |  |   | (2.1  | )     |  |   |     |      
|              | Southeast Asia       |               |   | 3.2           |      |      |   | 1.3  |      |  |   | 5.7   |       |  |   | 2.1  |      
|              | Other                |               |   |              |      |      |   | 0.3  |      |  |   | (0.2  | )     |  |   | 0.8  |      
|              | Unallocated costs(1) |               |   |              |      |      |   | (4.3 | )    |  |   |      |       |  |   | (6.4 | )    
|              |                      |               |   |               |      |      |   |      |      |  |   |       |       |  |   |     
|              |                      | Total         |   | $             | 7.5  |      |   | $    | 11.6 |  |   | $     | 9.3   |  |   | $    | 26.2  | 
|              |                      |               |   |               |      |      |   |      |      |  |   |       |       |  |   |     

|                      |                |               |   |              |       |  |   |       |       | 
|--------------------- | -------------- | ------------- | - | ------------ | ----- |  | - | ----- | ----- | 
|                      |                |              
|                      |                | As of        
|                      |                |              
|                      |                | September 30, |   | December 31,
|                      |                | 2003          |   | 2002        
|                      |                |               |   |             
|Long-lived assets(2): |                |               |   |              |       |  |   |      
|                      | Domestic       |               | $ | 187.0        |       |  | $ | 168.4 |      
|                      | Latin America  |               |   | 0.2          |       |  |   | 21.5  |      
|                      | West Africa    |               |   | 19.8         |       |  |   | 19.6  |      
|                      | Southeast Asia |               |   | 40.3         |       |  |   | 34.3  |      
|                      | Other          |               |   | 13.9         |       |  |   | 14.0  |      
|                      |                |               |   |              |       |  |   |      
|                      |                | Total         |   | $            | 261.2 |  |   | $     | 257.8 | 
|                      |                |               |   |              |       |  |   |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unallocated costs include support costs and
    operational overhead costs included in cost of contract revenues.                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|(2) | Long-lived assets include vessels, property and
    related marine equipment. Amounts reflect the location of the
    assets at September 30, 2003 and December 31, 2002.
    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 geographic segment. Goodwill is included in the Latin
    America geographic segment and is included in other assets in
    the accompanying balance sheets.

13



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##### 








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|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 included in our 2002 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, actual results may differ from those
expressed or implied by the forward-looking
statements.

General

We provide marine construction services for the
offshore oil and gas industry in the U.S. Gulf of Mexico,
Northeast U.S., Latin America, Southeast Asia and West Africa.
We have twelve vessels in our marine fleet that are currently
operational.

The primary services we provide include:



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | installing pipelines;                                                         
|
| |  | providing pipebury, hook-up and commissioning
    services;                   
|
| |  | installing production platforms and other
    structures;                     
|
| |  | disassembling and salvaging production platforms
    and other structures; and
|
| |  | performing pipe spooling services.                                            

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. Historically, oil
and gas prices and the level of exploration and development
activity have fluctuated substantially, impacting the demand for
pipeline and marine construction services. Factors affecting our
profitability include competition, equipment and labor
productivity, contract estimating, weather conditions and other
risks inherent in marine construction. The marine construction
industry in the U.S. Gulf of Mexico is highly seasonal as a
result of weather conditions with the greatest demand for these
services occurring during the second and third calendar quarters
of the year.

Critical Accounting Policies

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America 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 apply 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 accounting
principles generally accepted in the United States;
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 fair
value of salvage inventory, the depreciable lives of and future
cash flows to be provided by our equipment, the period and
extent of maintenance and repairs for dry-docking activity 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 often 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.

14



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##### 



We consider certain accounting policies to be
critical policies due to the significant judgments, estimation
processes and uncertainties involved for each in the preparation
of our consolidated financial statements. We believe the
following represent our critical accounting policies.



| |                    
| | -------------------
| | Revenue Recognition

Contract revenues for construction contracts are
recognized on the percentage-of-completion method, measured by
the percentage of costs incurred to date to the total estimated
costs at completion for each 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. Changes in job performance, job
conditions and estimated profitability, including those arising
from claims and final contract settlements, may result in
revisions to estimated 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. Revenues from salvage
projects sometimes include non-cash values assigned to
structures that are received from time to time as partial
consideration.

We follow the guidance of AICPA Statement of
Position (SOP) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
relating to the use of the percentage-of-completion method,
estimating costs and claim recognition for construction
contracts. Contract revenue reflects the original contract price
adjusted for agreed upon change orders and unapproved claims. 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 for claims to the extent of costs
incurred and include no profit on claims recorded.

For certain service contracts, revenues are
recognized under SEC Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial
Statements, when all of the following criteria are met;
persuasive evidence of an arrangement exists; delivery has
occurred or services have been rendered; the sellers price
is fixed or determinable; and collectability is reasonably
assured.



| |                 
| | ----------------
| | Cost Recognition

Cost of contract revenues includes all direct
material and labor costs and certain indirect costs, such as
supplies, tools, repairs and depreciation, which are allocated
to contracts based on asset utilization. Selling, general and
administrative costs are charged to expense as incurred.



| |                    
| | -------------------
| | Accounts Receivable

We have significant investments in billed and
unbilled receivables as of September 30, 2003. As of
September 30, 2003, we had contract receivables of
$2.1 million and costs in excess of billings of
$59.6 million from Pemex totaling $61.7 million. The
significant delays between the completion of the work and when
it is billed and collected are caused by Pemexs rigid
requirements on the submission, review and approval of invoices
and documentation prior to their payment of contract claims and
change orders. As of September 30, 2003, there were
$52.2 million of claims included in accounts receivable for
extra work related to interferences, interruptions and other
delays, primarily related to the EPC 64 contract in the
Cantarell field. Pemex extended the EPC 64 contract, which
had an original value of $41.0 million, and substantially
increased the scope of our operations in the Cantarell field. As
a result, this project was subject to greater interruptions due
to weather conditions and standby time as other contractors
completed their work. The EPC 64 claim was formally submitted in
July 2003, with final resolution now expected by the end of the
fourth quarter of 2003. Upon resolution, a final billing will be
invoiced for the remaining unbilled amounts with collection
expected shortly thereafter. As of September 30, 2003, we
have collected all amounts related to our other projects with
Pemex. We believe our receivables are realizable; however, any
change in estimate in collectibility will be recognized in the
period in which they are determined. We have historically not
experienced any significant losses on receivables, but
significant losses would adversely affect our financial
position, results of operations and our overall liquidity.

15



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##### 





| |          
| | ---------
| | Inventory

Inventory consists of production platforms and
other marine structures received from time to time as partial
consideration from salvage projects performed in the
U.S. Gulf of Mexico. These structures are held for resale.
The inventory is valued at amounts not in excess of the fair
value of services provided. Horizon assesses the net realizable
value of its inventory items at each balance sheet date.
Inventory is classified as long-term due to the uncertain timing
of the sale of inventory.



| |                       
| | ----------------------
| | Property and Equipment

We use the units-of-production method to
calculate depreciation on our major barges, vessels and related
equipment to accurately reflect the wear and tear of normal use.
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. The useful lives of our major barges and vessels
range from 15 years to 18 years. Major additions and
improvements to barges, boats and related equipment are
capitalized and depreciated over the useful life of the vessel.
Maintenance and repairs are expensed as incurred. When equipment
is sold or otherwise disposed of, the cost of the equipment and
accumulated depreciation are removed from the accounts and any
gain or loss is reflected in income.

We review long-lived assets for impairment
whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. Based
on our analysis of the estimated future cash flows for our
long-term assets, we recognized a $9.9 million impairment
loss related to the Phoenix Horizon under SFAS
No. 144 for the year ended December 31, 2002. Our
planned use of the Phoenix Horizon changed during the
fourth quarter of 2002 based on capital requirements and the
projected utilization of our operating fleet to meet current
market demands. During the fourth quarter of 2002, management
determined not to invest in the improvements required to place
the Phoenix Horizon into service due to the availability
of other operational assets to address current market demands.
No impairments were recognized for the nine months ended
September 30, 2003 and 2002.



| |             
| | ------------
| | Other Assets

Dry-dock costs are direct costs associated with
scheduled major maintenance on our marine construction vessels.
Costs incurred in connection with dry-dockings are deferred and
amortized over the five-year cycle to the next scheduled
dry-docking. On June 29, 2001, the AICPA issued an exposure
draft of a proposed SOP, Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment. If
adopted, we would be required to expense regulatory maintenance
cost on our vessels as incurred. We incurred and capitalized
dry-dock costs of $4.2 million and $3.7 million for
the nine months ended September 30, 2003 and 2002,
respectively. As of September 30, 2003, deferred dry-dock
costs totaled $14.2 million. Expensing dry-dock costs would
likely result in greater variability of our quarterly operating
results as a substantial portion of our dry-dock activities take
place during the first and fourth quarters.



| |                         
| | ------------------------
| | Stock-Based Compensation

We have elected the method that requires
disclosure of stock-based compensation pursuant to Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. Because of
this election, we account for stock-based employee compensation
under the recognition and measurement principles of APB Opinion
No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based
employee compensation cost is reflected in net income (loss), as
all options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant.
Additionally, for stock-based compensation grants to
non-employees, we recognize as compensation expense the fair
market value of such grants as calculated pursuant to SFAS
No. 123, amortized ratably over the lesser of the vesting
period of the respective option or the individuals
expected service period.

In January 2003, we granted options to three
former directors to purchase 15,320 shares of common stock at an
exercise price equal to the market price of the common stock on
the date of grant. These options vested

16



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##### 



immediately, and $56,000 was recorded as
compensation expense in the statements of operations during the
first quarter of 2003. Also, we recorded an additional $156,000
as compensation expense in the statements of operations during
the second quarter of 2003 related to the remeasurement of
options in connection with the resignation of a key employee.


The FASB has indicated that it expects to require
expensing of stock options issued based upon their fair values
in 2005. Should this rule be implemented, we may be subject to
significant stock compensation expense each quarter.

Recent Accounting Pronouncements

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of SFAS No. 123. SFAS No. 148
amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements
of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. SFAS No. 148 does
not permit the use of the original SFAS No. 123 prospective
method of transition for changes to the fair value based method
made in fiscal years beginning after December 15, 2003. The
adoption of this standard did not have a significant impact on
our consolidated financial statements.

On June 29, 2001, the AICPA issued an
exposure draft of a proposed SOP, Accounting for Certain
Costs and Activities Related to Property, Plant, and
Equipment. This proposed SOP would change, among other
things, the method by which companies would account for normal,
recurring or periodic repairs and maintenance costs related to
in service fixed assets. It would require that these
types of expenses be recognized when incurred rather than
recognizing expense for these costs while the asset is
productive. We are assessing the impact of the change should
this SOP be adopted. If adopted, we would be required to expense
regulatory maintenance cost on our vessels as incurred. We
currently capitalize a significant portion of these costs and
amortize them over the future periods they are expected to
benefit. We incurred and capitalized dry-dock costs of
$4.2 million and $3.7 million for the nine months
ended September 30, 2003 and 2002, respectively. As of
September 30, 2003, deferred dry-dock costs totaled
$14.2 million. Expensing dry-dock costs would likely result
in greater variability of our quarterly operating results as a
substantial portion of our dry-dock activities take place during
the first and fourth quarters.

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51. FIN 46 requires certain variable interest
entities to be consolidated by the primary beneficiary of the
entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after
January 31, 2003. The guidelines of the interpretation will
become applicable as of December 31, 2003 for variable
interest entities created before February 1, 2003 as the
FASB has issued a staff position delaying the effective date of
FIN 46 for public companies. The adoption of FIN 46 is not
expected to have a material effect on our results of operations
or financial position.

In April 2003, the FASB issued SFAS No. 149,
Amendment of Statement 133 on Derivative Instruments and
Hedging Activities. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for
hedging activities under Statement 133. SFAS No. 149 is
effective for contracts entered into or modified after
June 30, 2003 and for hedging relationships designated
after June 30, 2003, and should be applied prospectively.
The provisions of SFAS No. 149 that relate to Statement 133
Implementation Issues that have been effective for fiscal
quarters that began prior to June 15, 2003, should continue
to be applied in accordance with their respective effective
dates. The adoption of SFAS No. 149 is not expected to have
a material effect on our results of operations or financial
position.

In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. SFAS
No. 150 establishes how an issuer classifies and

17



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##### 



measures certain financial instruments that have
characteristics of both liabilities and equity. The statement
requires that an issuer classify financial instruments that are
within its scope as a liability and requires disclosure
regarding the terms of those instruments and settlement
alternatives. Previously, many of these instruments were
classified as equity or as mezzanine instruments (between the
liabilities and the equity section). SFAS No. 150 is
effective immediately for qualifying financial instruments
issued after May 31, 2003 and is effective for existing
issuances in the third quarter of 2003. Adoption of SFAS
No. 150 did not have a material effect on our results of
operations or financial position.


Results of Operations

The discussion below describes our results of
operations. During the first nine months of 2003, revenues
related to our pipeline installation and burial project in the
Northeastern U.S. accounted for 32% of our consolidated
revenues. Construction activities under our contract for this
project were completed during October 2003. Also in the
Northeastern U.S., we completed a pipeline inspection and
pipetrenching project during the third quarter of 2003, which
accounted for 11% of our consolidated revenues during the first
nine months of 2003. Additionally, operations in the Southeast
Asia region contributed significant revenues during the first
nine months of 2003, accounting for 18% of our consolidated
revenues as of September 30, 2003. Work on a structural and
pipeline installation project in Brunei was completed during the
third quarter of 2003 while construction activities continue on
a pipeline and structural installation project in Malaysia. In
the U.S. Gulf of Mexico, work on an 83 mile pipeline
installation and burial project continues to progress and
accounted for 18% and 7% of our consolidated revenues for the
three and nine months ended September 30, 2003,
respectively.

Even though revenues increased for the period, we
have recognized lower profit margins. The continuing low levels
of vessel utilization due to competitive market conditions in
the U.S. Gulf of Mexico, together with lower profit margins
on projects in the Northeastern U.S. and schedule slippage
in several major projects in West Africa and the U.S. Gulf
of Mexico contributed to a decrease in gross profit for the
first nine months of 2003. We also experienced lower margins on
vessels operating in the northern U.S. Gulf of Mexico
because of downtime due to unanticipated inclement weather
conditions. We believe our operations in Southeast Asia and West
Africa will provide some measure of counter-seasonal balance to
the effect of adverse winter weather conditions in the
U.S. Gulf of Mexico and Latin America. We will continue to
pursue international construction projects in Mexico, Latin
America, Southeast Asia and West Africa.

The Brazos Horizon began work on a major
portion of a two-year pipeline and structural installation
program in Nigeria in January 2003. In late March 2003, our
customer temporarily suspended operations in Nigeria, including
construction on this project, due to ethnic unrest in the Niger
Delta. Due to the temporary suspension of operations followed by
the adverse weather season in this region from May through
September, our work on this project did not resume until late
October 2003, which negatively impacted revenues and gross
profit during the second and third quarters of 2003.

Pemex accounted for 2% of consolidated revenues
for the first nine months of 2003, compared with 40% for the
first nine months of 2002. As of September 30, 2003, we had
$61.7 million of Pemex receivables, consisting of contract
receivables of $2.1 million and costs in excess of billings
of $59.6 million. Cumulative revenues recognized from 2000
through September 2003 on all Pemex projects in Mexico total
$290.4 million, including $57.0 million of claims for
extra work related to interferences, interruptions and other
delays, primarily related to our second major project for Pemex,
EPC 64, which was completed during the fourth quarter of 2002.

A summary of our Pemex claims included in revenue
is as follows (in millions):

|                                |              |   |      |      | 
|------------------------------- | ------------ | - | ---- | ---- | 
|Claims included in 2001 revenue |              | $ | 42.8 |     
|Claims included in 2002 revenue |              |   | 14.2 |     
|                                |              |   |      |     
|                                | Total claims |   | $    | 57.0 | 
|                                |              |   |      |     

18



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There were no claims related to Pemex included in
revenues for the nine months ended September 30, 2003.

During November 2002, we engaged a consulting
firm in Mexico to assist us in the administration of our Pemex
claims. After complying with Pemexs requirements, we
formally submitted these claims in July 2003, with final
resolution now expected by the end of the fourth quarter of
2003. Upon resolution, a final billing will be invoiced for the
remaining unbilled amounts with collection expected shortly
thereafter. The unapproved claims that we have included as
revenue through December 31, 2002 are substantially less
than the actual claims presented to Pemex, and we believe we are
entitled to collect more than the claim amounts recorded.
However, there is a risk that the unapproved claims we have
recognized as revenue may not be collected in full. Should the
full amount of the unapproved claims become uncollectible based
upon subsequent events, we will recognize a loss in our
financial statements at that time. There may be factors other
than the submission, review and approval of our claims which are
outside our control that may impact the ultimate collectibility
of these amounts. We have considered these factors, including
changes that have occurred related to Pemex employees involved
in the project, the operating structure of Pemex, and the
political and economic conditions in Mexico, in assessing the
collectibility of these amounts.

As of November 12, 2003, our backlog totaled
approximately $57.0 million compared to our backlog at
December 31, 2002 of approximately $123.6 million.
This change is attributable to our execution of contract
activity during that period and the lower levels of construction
activity in the U.S. Gulf of Mexico.

In 2003 we have undertaken initiatives to enhance
profitability through productivity, efficiency and a reduction
in expense levels in response to the challenging business
environment and competitive conditions in the marine
construction industry. As a result of those efforts, we have
implemented cost-saving plans in the areas of travel, marketing,
information systems, and other employee related expenses. In
July 2003, we reorganized our current operations oriented
management structure to place more emphasis on project
management. We reduced our workforce during the first quarter of
2003 and again in July 2003. We believe that these continuing
cost-saving initiatives and project focused management will
result in improved productivity.

Quarter Ended September 30, 2003 Compared
to the Quarter Ended September 30, 2002

Contract Revenues.Contract revenues were $79.8 million for the quarter ended
September 30, 2003, compared to $65.0 million for the
quarter ended September 30, 2002. The increase in revenues
for the third quarter of 2003 is primarily due to projects in
Southeast Asia and the Northeastern U.S. as well as an 83 mile
pipeline installation and burial project in the U.S. Gulf
of Mexico. Increased revenues in the Southeast Asia and
Northeastern U.S. regions exceeded the decrease in revenues
from the Pemex projects in Mexico.

Gross Profit.Gross
profit was $7.5 million (9.4% of contract revenues) for the
quarter ended September 30, 2003, compared to
$11.6 million (17.9% of contract revenues) for 2002. Profit
margins were lower on projects in the Northeastern U.S. and
Southeast Asia, which accounted for a greater percentage of
revenues for the third quarter of 2003, compared to higher
profit margins on Pemex projects, which accounted for a greater
percentage of revenues in 2002. A decline in vessel utilization
due to competitive market conditions in the U.S. Gulf of
Mexico and schedule slippage in West Africa and the
U.S. Gulf of Mexico further reduced gross profit in 2003.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses were $5.4 million (6.8% of contract
revenues) for the three months ended September 30, 2003,
compared with $5.9 million (9.0% of contract revenues) for
the three months ended September 30, 2002. Expenses
decreased during the third quarter of 2003 as a result of our
workforce reductions and cost-saving measures in the areas of
travel, marketing, information systems and other employee
related expenses.

Interest Expense.Interest expense was $2.9 million for the three months
ended September 30, 2003, net of $6,000 interest
capitalized, and $1.1 million for the same period last
year, net of $0.5 million interest capitalized. Our total
outstanding debt was $170.0 million at September 30,
2003, compared to $101.4 million

19



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at September 30, 2002. Interest expense
increased due to higher average outstanding debt balances and
higher interest rates.


Interest Income.Interest income on cash investments for the three months ended
September 30, 2003 was $9,000 compared to $22,000 for the
three months ended September 30, 2002.

Other Income (Expense),
Net.Other income (expense) for the
three months ended September 30, 2003 primarily consisted
of $76,000 of net foreign currency loss due to activity in
Mexico denominated in Mexican pesos and a weakening of the
Mexican peso compared to the U.S. dollar. Other income
(expense) for the quarter ended September 30, 2002
primarily consisted of a $2.0 million loss related to a
fire on the Lone Star Horizon and approximately $106,000
of foreign currency loss due to activity in Mexico denominated
in Mexican pesos and a weakening of the Mexican peso compared to
the U.S. dollar.

Income Taxes.We use
the liability method of accounting for income taxes. For the
quarter ended September 30, 2003, we recorded a federal
income tax benefit of $(0.6) million, at a net effective
rate of 65.9% on pre-tax net loss of $(0.8) million. The
increase in the effective tax rate for the quarter ended
September 30, 2003 is primarily due to a lower effective
rate on foreign earnings and a change in estimate to our state
tax liability for the third quarter of 2003. We recorded a
federal income tax provision of $0.8 million, at a net
effective rate of 31.0% on pre-tax net income of
$2.7 million for the quarter ended September 30, 2002.
The extraterritorial income exclusion for 2002 consists of
income earned in Mexico and parts of Southeast Asia from
July 1, 2002 to September 30, 2002. The exclusion
allows us to exclude a portion of income earned outside the
United States for tax purposes. The impact of this exclusion on
future periods will vary depending upon the amount of income
earned outside the United States.

Net Income (Loss).Net loss for the quarter ended September 30, 2003 was
$(0.3) million, or $(0.01) per share-diluted. This compares with
net income of $1.8 million, or $0.07 per share-diluted for
the quarter ended September 30, 2002.

Nine Months Ended September 30, 2003
Compared to the Nine Months Ended September 30,
2002

Contract Revenues.Contract revenues were
$204.8 million for the nine months ended September 30,
2003, compared to $195.4 million for the nine months ended
September 30, 2002 as a result of the increase in revenues
on projects in the Northeastern U.S. and Southeast Asia.
Increased revenues from these regions counter-balanced the
decline in revenues on the Pemex projects in Mexico and reduced
demand for offshore construction in the U.S. Gulf of Mexico.

Gross Profit.Gross
profit was $9.3 million (4.5% of contract revenues) for the
nine months ended September 30, 2003, compared to gross
profit of $26.2 million (13.4% of contract revenues) for
the same period of 2002. Lower profit margins on projects in the
Northeastern U.S. and Southeast Asia, reduced vessel
utilization and unusually adverse weather conditions during
2003, and resulting downtime and revenues recorded for such
events, lowered the overall profit margins. The profit margins
on the Pemex projects, which accounted for a greater percentage
of revenues in 2002, were higher than profit margins on other
contracts in 2003.

Selling, General and Administrative Expenses.Selling, general and administrative
expenses were $17.3 million (8.4% of contract revenues) for
the nine months ended September 30, 2003, compared to
$13.7 million (7.0% of contract revenues) for the same
period of 2002. The increase primarily relates to costs
associated with international operations, additional
depreciation expense for corporate fixed assets placed into
service during the second half of 2002 and first quarter of
2003, and severance and other charges due to the resignation of
a key employee in 2003.

Interest Expense.Interest expense for the nine months
ended September 30, 2003 was $6.8 million, net of
$0.1 million of interest capitalized. Interest expense was
$3.1 million for the nine months ended September 30,
2002, net of $1.5 million of interest capitalized. Our
total outstanding debt was $170.0 million at
September 30, 2003, compared to $101.4 million at
September 30, 2002. Interest expense increased due to
higher average outstanding debt balances, higher interest rates,
the write-off of deferred loan fees related to

20



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early retirement of debt and other fees
associated with the additional financing secured during the
second quarter of 2003.


Interest Income.Interest income on cash investments
for the nine months ended September 30, 2003 and 2002 was
$30,000 and $75,000, respectively. The decrease was primarily
due to lower interest rates and lower average cash balances for
2003.

Other Income (Expense),
Net.Other income (expense) for the
nine months ended September 30, 2003, primarily consisted
of $569,000 in prepayment penalties for the early retirement of
debt and $211,000 of net foreign currency loss due to activity
in Mexico denominated in Mexican pesos and a weakening of the
Mexican peso compared to the U.S. dollar. Included in other
income (expense) for the nine months ended September 30,
2002 is a $2.0 million loss related to a fire on the
Lone Star Horizon and $517,000 of foreign currency loss
due to activity in Mexico denominated in Mexican pesos and a
weakening of the Mexican peso compared to the U.S. dollar.

Income Taxes.We use
the liability method of accounting for income taxes. For the
nine months ended September 30, 2003, we recorded a federal
income tax benefit of $(8.3) million, at a net effective
rate of 53.2% on pre-tax net loss of $(15.6) million. The
difference in the effective tax rate and the statutory tax rate
is primarily due to the tax benefit recognized for the nine
months ended September 30, 2003 attributable to a research
and development credit of $(3.0) million. For the nine
months ended September 30, 2002, we recorded a federal
income tax provision of $2.2 million, at a net effective
rate of 31.0% on pre-tax net income of $7.0 million. The
difference from the statutory tax rate is due to the application
of the extraterritorial income exclusion for income earned
primarily in Mexico from January 1, 2002 to
September 30, 2002. The exclusion allows us to exclude a
portion of income earned outside the United States for tax
purposes. The impact of this exclusion on future periods will
vary depending upon the amount of income earned outside the
United States.

Net Income (Loss).Net loss was $(7.3) million, or $(0.28) per share-diluted,
for the nine months ended September 30, 2003, compared to
net income for the nine months ended September 30, 2002 of
$4.8 million, or $0.19 per share-diluted.

Liquidity and Capital Resources

Our primary liquidity needs are to provide
working capital to support our projects and other operations and
to fund acquisitions and improvements to the fleet necessary to
maintain and expand operations. We had $19.5 million of
working capital at September 30, 2003 compared to
$30.4 million of working capital at December 31, 2002.
The decrease in working capital was primarily attributable to
our pretax losses for the nine months ended September 30,
2003 and to the reclassification of an aggregate of
$45.9 million to current maturities for our revolving
credit facilities with Southwest Bank of Texas, N.A. based on
their maturity date of April 2004. This decrease in working
capital was partially offset by long-term financing used to
reduce current liabilities and increase cash and cash
equivalents, and by the increase in contract receivables due to
increased revenues during the third quarter. We intend to either
repay our revolving credit facilities with Southwest Bank of
Texas, N.A. prior to their scheduled maturity when we collect
Pemex receivables or refinance the outstanding borrowings with
long-term debt.

Cash used in operations was $(47.1) million
for the first nine months of 2003 compared to cash provided by
operations of $26.0 million for the first nine months of
2002. The increase in funds used in operating activities is
primarily attributable to the decrease in accrued job costs and
accrued liabilities as projects were completed, an increase in
contract receivables associated with the increase in revenues
for the third quarter of 2003, and delays in collections of
these revenues. Subsequent to September 30, 2003, we
collected $29.8 million of our outstanding contract
receivables. Also, our net loss before income tax benefit of
$(15.6) million for the nine months ended
September 30, 2003 contributed to the increase in funds
used in operating activities.

Cash used in investing activities was
$10.8 million for the nine months of 2003 compared to cash
used in investing activities of $41.1 million for the first
nine months of 2002. The decrease in funds used in investing

21



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activities is primarily attributable to the
significant upgrades to the Sea Horizon, our largest
vessel, and other vessels in our fleet during the first nine
months of 2002 compared to the first nine months of 2003. Our
capital expenditure activity has significantly decreased during
2003 as a result of the continued low levels of vessel
utilization due to competitive market conditions in the
U.S. Gulf of Mexico.


Cash provided by financing activities was
$70.3 million for the first nine months of 2003 compared to
cash provided by financing activities of $12.5 million for
the first nine months of 2002. The increase in funds provided by
financing activities is primarily attributable to the additional
$55 million in secured asset based financing obtained
during the second quarter of 2003. Also, in September 2003, we
borrowed additional funds under our revolving credit facilities
to meet our short-term operating needs. For the first nine
months ended September 30, 2002, the $30.8 million we
received in our public stock offering was offset by the funds
used to reduce indebtedness under our revolving credit
facilities.

Our receivables from Pemex continue to impact our
liquidity. As of September 30, 2003, we had contract
receivables of $2.1 million and costs in excess of billings
of $59.6 million from Pemex totaling $61.7 million.
The significant delays between the completion of the work and
when it is billed and collected are caused by Pemexs rigid
requirements on the submission, review and approval of invoices
and documentation prior to their payment of contract claims and
change orders. As of September 30, 2003, there were
$52.2 million of claims included in accounts receivable for
extra work related to interferences, interruptions and other
delays, primarily related to the EPC 64 contract in the
Cantarell field. Pemex extended the EPC 64 contract, which had
an original value of $41.0 million, and substantially
increased the scope of our operations in the Cantarell field. As
a result, this project was subject to greater interruptions due
to weather conditions and standby time as other contractors
completed their work. The EPC 64 claim was formally submitted in
July 2003, with final resolution now expected by the end of the
fourth quarter of 2003. Upon resolution, a final billing will be
invoiced for the remaining unbilled amounts with collection
expected shortly thereafter. From 2000 through
September 30, 2003, cumulative revenues recognized on all
Pemex projects in Mexico totaled $290.4 million. As of
September 30, 2003, we have collected all amounts related
to our other projects with Pemex.

At September 30, 2003, we had approximately
$170.0 million of total outstanding debt. This represents
an approximate net increase of $71.7 million from
December 31, 2002 primarily due to additional borrowings to
meet working capital needs during the first nine months of 2003.
Of the $170.0 million of outstanding debt,
$72.2 million represents borrowings on our three revolving
credit facilities and $97.8 million represents borrowings
on our eight term-debt facilities. At September 30, 2003,
we had no additional available borrowings under our three
revolving credit facilities, and we had $18.5 million of
cash and cash equivalents. In October 2003, we repaid net
$6.0 million of borrowings under our three revolving credit
facilities. Our weighted average interest rate on all
indebtedness was 5.86% at September 30, 2003, and our
term-debt borrowings currently require $796,000 in monthly
principal payments. Current maturities of long-term debt were
$70.5 million as of September 30, 2003. Subsequent to
September 30, 2003 and as of November 12, 2003, we
collected $29.8 million of contract receivables and had
$6.0 million available under our three revolving credit
facilities.

During the second quarter of 2003, we secured
$55 million in secured asset based financing from three
lenders, of which $45 million was funded during the second
quarter of 2003 and $10 million was funded in July 2003.
The proceeds were used to repay our $14.1 million loan with
GMAC Business Credit, LLC and the remaining proceeds will
continue to be used to provide working capital to support
operations. We obtained a $35.0 million loan with a
seven-year term from Boeing Capital Corporation, of which
$30.0 million was advanced in June 2003 and the remaining
$5.0 million was advanced in July 2003. Additionally, we
increased our borrowing capacity by $5.0 million with CIT
Group/ Equipment Finance, Inc. The additional $5.0 million
was received in July 2003 and has been repaid. We also obtained
a $15.0 million loan during the second quarter of 2003 with
a one-year term from Elliott Associates, L.P., which together
with Elliott International, L.P. owns 15.8% of our outstanding
common stock.

Our loans require that certain conditions be met
in order for us to obtain advances. Our loans are collateralized
by mortgages on our vessels and property and by accounts
receivable. Advances under our revolving credit facilities may
be obtained in accordance with a borrowing base defined as a
percentage of

22



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accounts receivable balances and costs in excess
of billings. The loans contain customary default and
cross-default provisions and some require us to maintain certain
financial ratios. The loan agreements also contain certain
covenants that limit our ability to incur additional debt, pay
dividends, create certain liens, sell assets and make capital
expenditures.


For the quarter ended September 30, 2003, we
were not in compliance with our required debt to EBITDA
(earnings before interest, taxes, depreciation, amortization)
covenant ratio of not more than 5.95, and our required EBITDA to
fixed charges covenant ratio of not less than 1.40, related to
our two revolving credit facilities with Southwest Bank of
Texas, N.A., which had a total outstanding balance of
$45.9 million at September 30, 2003. Compliance with
these covenants is determined quarterly based on the trailing
four quarters ending on each determination date, and as of
September 30, 2003, our ratios for the debt to EBITDA and
EBITDA to fixed charges covenants were 18.24 and 0.11,
respectively. We have obtained waivers of compliance from this
lender on these two revolving credit facilities as of the
September 30, 2003 determination date. We were also not in
compliance with the required debt to EBITDA covenant ratio of
not more than 3.60 and the required EBITDA to fixed charges
covenant ratio of not less than 1.30 related to our
$6.6 million term loan for the quarter ended
September 30, 2003. We have obtained a waiver of compliance
on this term loan as of the September 30, 2003
determination date and for determination dates on or before
March 31, 2004. Based on current and forecasted demand for
our services, we do not expect to meet certain financial
covenant ratios for the Southwest Bank of Texas, N.A. facilities
at future determination dates. We expect that we will need to
further amend these debt covenants or receive waivers of
compliance for these facilities through their maturity in April
2004. In connection with the waivers obtained from Southwest
Bank of Texas, N.A., we will be required to reduce borrowing
capacity under our two revolving credit facilities from an
aggregate of $50 million to $20 million upon the
earlier to occur of collection of the Pemex receivable and
January 31, 2004. These facilities, along with the Elliott
Associates loan, are classified as current in the accompanying
balance sheet at September 30, 2003 based on their
maturity. In the event that the Southwest Bank of Texas, N.A.
covenants are not met in the future and we are unsuccessful in
obtaining waivers of compliance, the violation of covenant
requirements gives the lender the right to accelerate our debt
with them, and cross-default provisions could result in
acceleration of our remaining indebtedness. Our other facilities
have been classified as long-term due to their stated maturity
date, the future expected status of compliance with covenants,
as amended, and our expectations regarding future payoffs,
refinancing, or waivers to be obtained. We are currently in
discussion with other lenders for new credit facilities to
replace our existing facilities and satisfy debt facilities that
will be due in 2004.

During 2003, we have closely managed our cash
position and borrowed funds to meet working capital requirements
due to the delayed timing of the collection of our Pemex
receivables and claims. The additional $55 million of asset
based financing secured during the second quarter of 2003 has
provided additional working capital to support our receivable
position with Pemex and our operations. We expect that the
volume of our contract revenues will largely influence our
working capital and cash requirements. Our cash requirements are
greatest at the start-up of a new project since we are required
to incur mobilization expenses and complete all or a substantial
portion of the majority of our projects before receiving payment
from the customer. Although there can be no assurance, we
believe that funds from operations will be sufficient in order
to maintain necessary levels of operating liquidity.

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 commercial paper plus 2.45% to a fixed 18.0%.
The following table summarizes our long-term material
contractual cash obligations (in millions):

|                                        |  |           |       |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |       |  |  |   |        | 
|--------------------------------------- |  | --------- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | - | ------ |  |  | - | ----- |  |  | - | ------ | 
|                                        |  | Remainder |       |      |  |      |        |      |  |      |        |           
|                                        |  | of 2003   |       | 2004 |  | 2005 |        | 2006 |  | 2007 |        | Thereafter
|                                        |  |           |       |      |  |      |        |      |  |      |        |           
|Principal and interest payments on debt |  | $         | 4,903 |      |  | $    | 77,467 |      |  | $    | 54,347 |            |  | $ | 17,405 |  |  | $ | 5,664 |  |  | $ | 30,051 | 
|Operating leases                        |  |           | 651   |      |  |      | 2,510  |      |  |      | 2,504  |            |  |   | 2,341  |  |  |   | 2,347 |  |  |   | 2,489  | 
|                                        |  |           |       |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |       |  |  |   |        | 
|                                        |  | $         | 5,554 |      |  | $    | 79,977 |      |  | $    | 56,851 |            |  | $ | 19,746 |  |  | $ | 8,011 |  |  | $ | 32,540 | 
|                                        |  |           |       |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |       |  |  |   |        | 

23



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We completed the construction of a spooling
facility at our marine base in Port Arthur, Texas in the first
quarter of 2002. The facility can be used to provide pipe
spooling services to other contractors and to our joint venture
with Cal Dive. The joint venture, which has not commenced
operations, was formed to charter from Cal Dive the
Intrepid, a 374-foot dynamically positioned multi-service
vessel, with reel pipelaying equipment. If both Cal Dive and
Horizon decide to commence joint venture operations, the joint
venture would be jointly managed and staffed, and we would be
required to contribute approximately $8 million for the
design, construction and installation of reel pipelaying
equipment on the Intrepid that was completed in 2002.
Based on current market conditions, we do not know when, or if,
the joint venture will become operational.

Planned capital expenditures for the remainder of
2003 are estimated to range from approximately $1 million
to $2 million largely related to vessel improvements. These
expenditures will depend upon available funds, work awarded and
future operating activity. Our strategy, however, is to make
other acquisitions, to expand our operating capabilities and to
expand into additional selected international areas. To the
extent we are successful in identifying acquisition and
expansion opportunities and have expanded our market share in
those areas, we may require additional equity or debt financing
depending on the size of any transaction.

Forward-Looking Statements

In addition to historical information,
Managements Discussion and Analysis of Financial Condition
and Results of Operations includes certain forward-looking
statements regarding events and financial trends that may affect
our future operating results and financial position. 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:



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Pemexs approval of claims and the outcome
    of these claims, and our ability to manage our liquidity needs
    pending the timing of collection of our receivables and claims
    from Pemex;     
|
| |  | expected loan covenant noncompliance, related
    waivers and the need for additional financing;                                                                                                     
|
| |  | industry volatility, including the level of
    capital expenditures by oil and gas companies due to
    fluctuations in the price and perceptions of the future price of
    oil and gas;           
|
| |  | risks of growth strategy, including the risks of
    rapid growth;                                                                                                                                   
|
| |  | operating hazards, including the unpredictable
    effect of natural occurrences on operations and the significant
    possibility of accidents resulting in personal injury and
    property damage;
|
| |  | the highly competitive nature of the marine
    construction business;                                                                                                                               
|
| |  | dependence on the continued strong working
    relationships with significant customers operating in the
    U.S. Gulf of Mexico;                                                                    
|
| |  | seasonality of the offshore construction industry
    in the U.S. Gulf of Mexico;                                                                                                                    
|
| |  | ability to realize carrying values of salvaged
    structures;                                                                                                                                       
|
| |  | contract bidding risks;                                                                                                                                                                              
|
| |  | percentage-of-completion accounting;                                                                                                                                                                 
|
| |  | successful negotiation and collection of contract
    claims;                                                                                                                                        
|
| |  | continued active participation of our executive
    officers and key operating personnel;                                                                                                            
|
| |  | the effect on our performance of regulatory
    programs and environmental matters;                                                                                                                  
|
| |  | risks involved in the expansion of our operations
    into international offshore oil and gas producing areas;                                                                                       
|
| |  | risks involved in joint venture operations,
    including difficulty in resolving disputes with present partners
    or reaching agreements with future partners; and                                
|
| |  | a terrorist attack and future wars.                                                                                                                                                                  

24



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Many of these factors are beyond our ability to
control or predict. We caution investors not to place undue
reliance on forward-looking statements. We disclaim any intent
or obligation to update the forward-looking statements contained
in this report, whether as a result of receiving new
information, the occurrence of future events or otherwise.

These and other uncertainties related to the
business are described in detail under the heading
Cautionary Statements in our 2002 Annual Report on
Form 10-K.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

Our market risk exposures primarily include
interest rate and exchange rate fluctuation on financial
instruments as detailed below. Our market risk sensitive
instruments are classified as other than trading.
The following sections address the significant market risks
associated with our financial activities during the nine months
ended September 30, 2003. 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 foreign currency exchange rates
or interest rates.

As of September 30, 2003, the carrying value
of our debt, including $0.4 million of accrued interest,
was approximately $170.4 million. The fair value of this
debt approximates the carrying value because the interest rates
are based on floating rates identified by reference to market
rates. A hypothetical 1% increase in the applicable interest
rates as of September 30, 2003 would increase annual
interest expense by approximately $1.7 million.

We collect a portion of international contract
revenues and pay local expenses in foreign currency. We manage
foreign currency risk by attempting to contract as much foreign
revenue as possible in U.S. dollars. We monitor the
exchange rate of our foreign currencies in order to mitigate the
risk from foreign currency fluctuations. Additional exposure
could occur as we expand internationally. Approximately 80% of
our current contracts with Pemex are denominated in
U.S. dollars. We receive payment in Mexican pesos
equivalent to the U.S. dollars billed, which is converted
to U.S. dollars that day or the following day. Our
contracts in Mexico also typically provide some protection from
declining exchange rates on the portion of the contract revenues
denominated in foreign currency. We recognized a $211,000
foreign currency loss due to activity in Mexico denominated in
Mexican pesos and a weakening of the Mexican peso compared to
the U.S. dollar for the nine months ended
September 30, 2003.

The level of construction services required by a
customer depends on the size of its capital expenditure budget
for construction for the year. Consequently, customers that
account for a significant portion of contract revenues in one
year may represent an immaterial portion of contract revenues in
subsequent years.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

As of the end of the period ended
September 30, 2003, we carried out an evaluation, under the
supervision and with the participation and assurances of
management, including the President and Chief Executive Officer
along with our Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rule 13a-14. Based upon
that evaluation, the President and Chief Executive Officer along
with the Chief Financial Officer concluded that our disclosure
controls and procedures are effective in timely alerting them to
material information relating to us and our consolidated
subsidiaries required to be included in our periodic SEC filings.

There have been no material changes in
Horizons internal controls over financial reporting or in
other factors that have materially affected or are reasonably
likely to materially affect these internal controls over
financial reporting subsequent to the date of our recent
valuation.

25



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##### 






PART II  OTHER
INFORMATION






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

(a) Exhibits

| |      |  |  |                                                                               
| | ---- |  |  | ------------------------------------------------------------------------------
| | 3.1  |  |  | Amended and Restated Certificate of Incorporation
    of the Company(1)       
| | 3.2  |  |  | Bylaws of the Company(1)                                                      
| | 31.1 |  |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002(2)
| | 31.2 |  |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002(2)
| | 32.1 |  |  | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002(2)
| | 32.2 |  |  | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002(2)

(b) Reports on Form 8-K

On July 3, 2003, we filed a report on
Form 8-K, reporting under item 5, announcing a
reorganization of management and the resignation of the Chief
Operating Officer.

On July 18, 2003, we filed a report on
Form 8-K, reporting under item 5, announcing a
refinancing and updated earnings guidance.

On August 8, 2003, we filed a report on
Form 8-K, reporting under item 12, announcing second
quarter 2003 results.



---



|    |                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to our Registration
    Statement on Form S-1 (Registration Statement
    No. 333-43965).
|   
|(2) | Filed herewith.                                                                                                    

26



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##### 






SIGNATURE

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



| |                             
| | ----------------------------
| | HORIZON OFFSHORE, INC.      
|
| | /s/ DAVID W. SHARP          
| |                             
| | David W. Sharp              
| | Executive Vice President and
| | Chief Financial Officer     

Date: November 13, 2003

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