##### Table of Contents









UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q


|           |  |                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                              
|þ          |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
    SECURITIES EXCHANGE ACT OF 1934 
|           |  | For the quarterly period ended September 30, 2005                                            
|          
|or        
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
    THE SECURITIES EXCHANGE ACT OF 1934
|           |  | For the transition period
    from           to                                              

Commission File Number 001-16857


HORIZON OFFSHORE, INC.


(Exact name of registrant as specified in its charter)


|                                                                                               |  |                                         
|---------------------------------------------------------------------------------------------- |  | ----------------------------------------
|Delaware                                                                                       |  | 76-0487309                              
|(State or other jurisdiction
    of incorporation or organization)                             |  | (I.R.S. Employer
    Identification No.)
|                                                                                              
|2500 CityWest Boulevard, Suite 2200
    Houston, Texas(Address of principal executive offices) |  | 77042(Zip Code)                         

(713) 361-2600


(Registrants telephone number, including area code)


þ o


þ o


o þ












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HORIZON OFFSHORE, INC. AND SUBSIDIARIES


TABLE OF CONTENTS


|                                      |  |                                                                                                               |    |      |    | 
|------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|Description                           |  |                                                                                                               |    | Page |   
|                                      |  |                                                                                                               |    |      |   
|PART I. FINANCIAL
    INFORMATION    
|Item 1.                               |  | Financial Statements                                                                                          |    |      | 3  | 
|                                      |  | Consolidated Balance Sheets as of
    September 30, 2005 and December 31, 2004                                |    |      | 3  | 
|                                      |  | Consolidated Statements of Operations for
    the Three and Nine Months Ended September 30, 2005 and
    2004 |    |      | 4  | 
|                                      |  | Consolidated Statements of Cash Flows for
    the Nine Months Ended September 30, 2005 and 2004.              |    |      | 5  | 
|                                      |  | Notes to Consolidated Financial
    Statements                                                                |    |      | 6  | 
|Item 2.                               |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                     |    |      | 23 | 
|Item 3.                               |  | Quantitative and Qualitative Disclosures
    About Market Risk                                                |    |      | 38 | 
|Item 4.                               |  | Controls and Procedures                                                                                       |    |      | 39 | 
|PART II. OTHER INFORMATION           
|Item 1.                               |  | Legal Proceedings                                                                                             |    |      | 40 | 
|Item 2.                               |  | Unregistered Sales of Equity Securities and
    Use of Proceeds                                               |    |      | 40 | 
|Item 4.                               |  | Submission of Matters to a Vote of Security
    Holders                                                       |    |      | 41 | 
|Item 6.                               |  | Exhibits                                                                                                      |    |      | 42 | 
|Signatures                            |  |                                                                                                               | 43 |     
|Certification Pursuant to Section 302
|Certification Pursuant to Section 302
|Certification Pursuant to Section 906
|Certification Pursuant to Section 906



2



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##### Table of Contents






PART I. FINANCIAL INFORMATION







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

HORIZON OFFSHORE, INC. AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |         |         |          |        |         |        | 
|------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------- | ------------------------- | -------------------------- | ------------ | ------- | ------- | -------- | ------ | ------- | ------ | 
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | September 30,                    |                           |                            | December 31, |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | 2005                             |                           |                            | 2004         |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | (Unaudited)                      |                          
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | (In thousands,                   |                          
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | except share data)               |                          
|ASSETS                                                                  
|CURRENT ASSETS:                                                          |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |         |         |         
|                                                                         | Cash and cash equivalents                                                                                                                                                                                                                                                                                                           |                                  | $                         | 17,522                     |              |         | $       | 37,975   |       
|                                                                         | Restricted cash                                                                                                                                                                                                                                                                                                                     |                                  |                           | 2,476                      |              |         |         |         |       
|                                                                         | Accounts receivable                                                                                                                                                                                                                                                                                                                |                                  |                           |                            |              |         |         |          |       
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | Contract receivables, net        |                           |                            | 69,848       |         |         |          | 81,861 |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | Costs in excess of billings, net |                           |                            | 38,262       |         |         |          | 24,058 |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | Other                            |                           |                            | 671          |         |         |          | 346    |        
|                                                                         | Other current assets                                                                                                                                                                                                                                                                                                                |                                  |                           | 6,630                      |              |         |         | 5,079    |       
|                                                                         | Assets held for sale                                                                                                                                                                                                                                                                                                                |                                  |                           | 6,371                      |              |         |         | 8,632    |       
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  | Total current assets      |                            |              | 141,780 |         |          |        | 157,951 |       
|PROPERTY AND EQUIPMENT, net                                              |                                                                                                                                                                                                                                                                                                                                     |                                  | 191,087                   |                            |              |         | 198,804 |         
|RESTRICTED CASH                                                          |                                                                                                                                                                                                                                                                                                                                     |                                  | 7,967                     |                            |              |         | 9,247   |         
|INVENTORY                                                                |                                                                                                                                                                                                                                                                                                                                     |                                  | 850                       |                            |              |         | 1,415   |         
|OTHER ASSETS                                                             |                                                                                                                                                                                                                                                                                                                                     |                                  | 21,116                    |                            |              |         | 26,860  |         
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | $                                | 362,800                   |                            |              | $       | 394,277 |         
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |        
|                                                                        
|LIABILITIES AND STOCKHOLDERS EQUITY                                    
|CURRENT LIABILITIES:                                                     |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |         |         |         
|                                                                         | Accounts payable                                                                                                                                                                                                                                                                                                                    |                                  | $                         | 17,504                     |              |         | $       | 35,267   |       
|                                                                         | Accrued liabilities                                                                                                                                                                                                                                                                                                                 |                                  |                           | 6,846                      |              |         |         | 9,181    |       
|                                                                         | Accrued job costs                                                                                                                                                                                                                                                                                                                   |                                  |                           | 37,755                     |              |         |         | 31,152   |       
|                                                                         | Billings in excess of costs                                                                                                                                                                                                                                                                                                         |                                  |                           | 4,219                      |              |         |         | 9,900    |       
|                                                                         | Current maturities of long-term debt                                                                                                                                                                                                                                                                                                |                                  |                           | 28,203                     |              |         |         | 42,243   |       
|                                                                         | Current portion of related party term debt                                                                                                                                                                                                                                                                                          |                                  |                           | 22,195                     |              |         |         |         |       
|                                                                         | Current taxes payable                                                                                                                                                                                                                                                                                                               |                                  |                           | 1,323                      |              |         |         | 1,186    |       
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  | Total current liabilities |                            |              | 118,045 |         |          |        | 128,929 |       
|LONG-TERM DEBT, net of current maturities                                |                                                                                                                                                                                                                                                                                                                                     |                                  | 33,200                    |                            |              |         | 81,379  |         
|RELATED PARTY TERM DEBT, net of current portion                          |                                                                                                                                                                                                                                                                                                                                     |                                  | 43,629                    |                            |              |         |        |         
|SUBORDINATED NOTES, net of discount                                      |                                                                                                                                                                                                                                                                                                                                     |                                  | 25,613                    |                            |              |         | 88,968  |         
|OTHER LIABILITIES                                                        |                                                                                                                                                                                                                                                                                                                                     |                                  | 978                       |                            |              |         | 1,311   |         
|PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION (See Notes 3 and
    10) |                                                                                                                                                                                                                                                                                                                                     |                                  | 1,008                     |                            |              |         | 416     |         
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  | Total liabilities         |                            |              | 222,473 |         |          |        | 301,003 |       
|COMMITMENTS AND CONTINGENCIES                                            |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |         |         |         
|STOCKHOLDERS EQUITY:                                                    |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |         |         |         
|                                                                         | Preferred stock, $0.001 par value and $1.00 par value,
    respectively, 5,000,000 shares authorized, 1,000,000 mandatorily
    convertible redeemable shares of Series B Preferred Stock
    and 1,400 mandatorily redeemable shares of Series A
    Preferred Stock issued and outstanding, respectively (See
    Notes 3 and 10) |                                  |                           |                           |              |         |         |         |       
|                                                                         | Common stock, $0.001 par value and $1.00 par value,
    respectively, 1,500,000,000 shares authorized, 117,950,616 and
    32,583,882 shares issued, respectively                                                                                                                                                                   |                                  |                           | 118                        |              |         |         | 21,877   |       
|                                                                         | Deferred compensation                                                                                                                                                                                                                                                                                                               |                                  |                           | (9,375                     | )            |         |         |         |       
|                                                                         | Subscriptions receivable                                                                                                                                                                                                                                                                                                            |                                  |                           |                           |              |         |         | (42      | )     
|                                                                         | Additional paid-in capital                                                                                                                                                                                                                                                                                                          |                                  |                           | 309,079                    |              |         |         | 191,759  |       
|                                                                         | Accumulated deficit                                                                                                                                                                                                                                                                                                                 |                                  |                           | (157,851                   | )            |         |         | (117,720 | )     
|                                                                         | Treasury stock, 250,757 and 396,458 shares, respectively                                                                                                                                                                                                                                                                            |                                  |                           | (1,644                     | )            |         |         | (2,600   | )     
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           | Total stockholders equity |              |         | 140,327 |          |        |         | 93,274 | 
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |        
|                                                                         |                                                                                                                                                                                                                                                                                                                                     | $                                | 362,800                   |                            |              | $       | 394,277 |         
|                                                                         |                                                                                                                                                                                                                                                                                                                                     |                                  |                           |                            |              |        



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                         |                              |                                                 |        |             |                   |   |         |            |         |   |         |            |         |   |         |            |         |  
|------------------------------------------------------------------------ | ---------------------------- | ----------------------------------------------- | ------ | ----------- | ----------------- | - | ------- | ---------- | ------- | - | ------- | ---------- | ------- | - | ------- | ---------- | ------- | -
|                                                                         |                              | Three Months Ended                              |        |             | Nine Months Ended |  
|                                                                         |                              | September 30,                                   |        |             | September 30,     |  
|                                                                         |                              |                                                 |        |             |                   |  
|                                                                         |                              | 2005                                            |        |             | 2004              |   |         | 2005       |         |   | 2004    |           
|                                                                         |                              |                                                 |        |             |                   |   |         |            |         |   |         |           
|                                                                         |                              | (Unaudited)                                     |       
|                                                                         |                              | (In thousands, except share and per share data) |       
|CONTRACT REVENUES                                                        |                              | $                                               | 92,805 |             |                   | $ | 94,600  |            |         | $ | 200,655 |            |         | $ | 182,015 |           
|COST OF CONTRACT REVENUES                                                |                              |                                                 | 71,825 |             |                   |   | 78,660  |            |         |   | 167,955 |            |         |   | 167,230 |           
|                                                                         |                              |                                                 |        |             |                   |   |         |            |         |   |         |           
|                                                                         |                              | Gross profit                                    |        |             | 20,980            |   |         |            | 15,940  |   |         |            | 32,700  |   |         |            | 14,785  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                             |                              |                                                 | 9,881  |             |                   |   | 8,473   |            |         |   | 22,443  |            |         |   | 19,747  |           
|RESERVE FOR CLAIMS AND RECEIVABLES                                       |                              |                                                 |       |             |                   |   |        |            |         |   | 1,711   |            |         |   |        |           
|IMPAIRMENT OF PROPERTY AND EQUIPMENT                                     |                              |                                                 |       |             |                   |   | 20,302  |            |         |   |        |            |         |   | 20,302  |           
|IMPAIRMENT LOSS ON ASSETS HELD FOR SALE                                  |                              |                                                 | 2,261  |             |                   |   | 450     |            |         |   | 2,261   |            |         |   | 3,018   |           
|                                                                         |                              |                                                 |        |             |                   |   |         |            |         |   |         |           
|                                                                         |                              | Operating income (loss)                         |        |             | 8,838             |   |         |            | (13,285 | ) |         |            | 6,285   |   |         |            | (28,282 | )
|OTHER:                                                                   |                              |                                                 |        |             |                   |   |         |            |         |   |         |            |         |   |         |           
|                                                                         |                              | Interest expense (See Notes 1 and 3)            |        |             | (5,638            | ) |         |            | (8,122  | ) |         |            | (22,507 | ) |         |            | (18,580 | )
|                                                                         |                              | Interest income                                 |        |             | 218               |   |         |            | 27      |   |         |            | 520     |   |         |            | 55      |  
|                                                                         |                              | Loss on debt extinguishment                     |        |             |                  |   |         |            | (1,554  | ) |         |            | (23,138 | ) |         |            | (1,719  | )
|                                                                         |                              | Other income (expense), net                     |        |             | 21                |   |         |            | (121    | ) |         |            | (16     | ) |         |            | (99     | )
|                                                                         |                              |                                                 |        |             |                   |   |         |            |         |   |         |           
|NET INCOME (LOSS) BEFORE INCOME TAXES                                    |                              |                                                 | 3,439  |             |                   |   | (23,055 | )          |         |   | (38,856 | )          |         |   | (48,625 | )         
|INCOME TAX PROVISION                                                     |                              |                                                 | 359    |             |                   |   | 72      |            |         |   | 1,275   |            |         |   | 1,395   |           
|                                                                         |                              |                                                 |        |             |                   |   |         |            |         |   |         |           
|NET INCOME (LOSS)                                                        |                              | $                                               | 3,080  |             |                   | $ | (23,127 | )          |         | $ | (40,131 | )          |         | $ | (50,020 | )         
|                                                                         |                              |                                                 |        |             |                   |   |         |            |         |   |         |           
|EARNINGS (LOSS) PER SHARE  BASIC AND DILUTED:                           |                              |                                                 |        |             |                   |   |         |            |         |   |         |            |         |   |         |           
|                                                                         |                              | Net income (loss) per share  basic             |        | $           | 0.03              |   |         | $          | (0.72   | ) |         | $          | (0.71   | ) |         | $          | (1.64   | )
|                                                                         |                              |                                                 |        |             |                   |   |         |            |         |   |         |           
|                                                                         |                              | Net income (loss) per share  diluted           |        | $           | 0.00              |   |         | $          | (0.72   | ) |         | $          | (0.71   | ) |         | $          | (1.64   | )
|                                                                         |                              |                                                 |        |             |                   |   |         |            |         |   |         |           
|WEIGHTED AVERAGE SHARES USED IN COMPUTING EARNINGS
    (LOSS) PER SHARE: |                              |                                                 |        |             |                   |   |         |            |         |   |         |            |         |   |         |           
|                                                                         | BASIC (See Notes 3 and 10)   |                                                 |        | 92,323,139  |                   |   |         | 31,944,945 |         |   |         | 56,904,255 |         |   |         | 30,482,711 |        
|                                                                         | DILUTED (See Notes 3 and 10) |                                                 |        | 649,785,351 |                   |   |         | 31,944,945 |         |   |         | 56,904,255 |         |   |         | 30,482,711 |        



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                                  |                                                                                      |                               |                                                     |        |         |         |         |        |         |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------ | ----------------------------- | --------------------------------------------------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | -
|                                                     |                                                                                                  | Nine Months Ended                                                                    |                              
|                                                     |                                                                                                  | September 30,                                                                        |                              
|                                                     |                                                                                                  |                                                                                      |                              
|                                                     |                                                                                                  | 2005                                                                                 |                               |                                                     | 2004   |        
|                                                     |                                                                                                  |                                                                                      |                               |                                                     |        |        
|                                                     |                                                                                                  | (Unaudited)                                                                          |                              
|                                                     |                                                                                                  | (In thousands)                                                                       |                              
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                                  |                                                                                      |                               |                                                     |        |         |         |        
|                                                     | Net loss                                                                                         |                                                                                      | $                             | (40,131                                             | )      |         | $       | (50,020 | )     
|                                                     | Adjustments to reconcile net loss to net cash used in operating
    activities                  |                                                                                      |                               |                                                     |        |         |         |         |       
|                                                     |                                                                                                  | Depreciation and amortization                                                        |                               |                                                     | 17,528 |         |         |         | 13,887 |        
|                                                     |                                                                                                  | Reserve for claims and receivables                                                   |                               |                                                     | 1,711  |         |         |         |       |        
|                                                     |                                                                                                  | Impairment of property and equipment                                                 |                               |                                                     |       |         |         |         | 20,302 |        
|                                                     |                                                                                                  | Impairment loss on assets held for sale                                              |                               |                                                     | 2,261  |         |         |         | 3,018  |        
|                                                     |                                                                                                  | Net gain on sale of assets                                                           |                               |                                                     | (41    | )       |         |         |       |        
|                                                     |                                                                                                  | Paid in-kind interest on subordinated notes and related party
    term debt          |                               |                                                     | 5,975  |         |         |         | 7,159  |        
|                                                     |                                                                                                  | Amortization of subordinated debt discount recorded as interest
    expense          |                               |                                                     | 3,321  |         |         |         | 3,198  |        
|                                                     |                                                                                                  | Amortization of deferred loan fees recorded as interest expense                      |                               |                                                     | 2,597  |         |         |         | 2,314  |        
|                                                     |                                                                                                  | Adjustment of mandatorily redeemable preferred stock charged to
    interest expense |                               |                                                     | 1,863  |         |         |         |       |        
|                                                     |                                                                                                  | Expense recognized for issuance of treasury stock for 401(k)
    plan contributions  |                               |                                                     | 98     |         |         |         | 328    |        
|                                                     |                                                                                                  | Loss on debt extinguishment                                                          |                               |                                                     | 23,138 |         |         |         | 1,719  |        
|                                                     |                                                                                                  | Changes in operating assets and liabilities                                         |                               |                                                     |        |         |         |         |        |        
|                                                     |                                                                                                  |                                                                                      | Restricted cash               |                                                     |        | (1,196  | )       |         |        | (14,449 | )      
|                                                     |                                                                                                  |                                                                                      | Accounts receivable           |                                                     |        | 9,977   |         |         |        | (13,423 | )      
|                                                     |                                                                                                  |                                                                                      | Costs in excess of billings   |                                                     |        | (14,204 | )       |         |        | (4,107  | )      
|                                                     |                                                                                                  |                                                                                      | Billings in excess of costs   |                                                     |        | (5,681  | )       |         |        | 1,884   |        
|                                                     |                                                                                                  |                                                                                      | Inventory                     |                                                     |        | 565     |         |         |        | 88      |        
|                                                     |                                                                                                  |                                                                                      | Other assets                  |                                                     |        | (7,649  | )       |         |        | (18,962 | )      
|                                                     |                                                                                                  |                                                                                      | Accounts payable              |                                                     |        | (17,763 | )       |         |        | 21,792  |        
|                                                     |                                                                                                  |                                                                                      | Accrued and other liabilities |                                                     |        | (2,822  | )       |         |        | 7,198   |        
|                                                     |                                                                                                  |                                                                                      | Accrued job costs             |                                                     |        | 6,603   |         |         |        | (7,036  | )      
|                                                     |                                                                                                  |                                                                                      | Current taxes payable         |                                                     |        | 137     |         |         |        | 265     |        
|                                                     |                                                                                                  |                                                                                      |                               |                                                     |        |        
|                                                     |                                                                                                  |                                                                                      |                               | Net cash used in operating activities               |        |         | (13,713 | )       |        |         | (24,845 | )
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                                  |                                                                                      |                               |                                                     |        |         |         |        
|                                                     | Purchases and additions to property and equipment                                                |                                                                                      |                               | (2,011                                              | )      |         |         | (5,500  | )     
|                                                     | Proceeds from sale of assets                                                                     |                                                                                      |                               | 564                                                 |        |         |         |        |       
|                                                     |                                                                                                  |                                                                                      |                               |                                                     |        |        
|                                                     |                                                                                                  |                                                                                      |                               | Net cash used in investing activities               |        |         | (1,447  | )       |        |         | (5,500  | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                                  |                                                                                      |                               |                                                     |        |         |         |        
|                                                     | Principal payments on term debt                                                                  |                                                                                      |                               | (9,346                                              | )      |         |         | (7,230  | )     
|                                                     | Borrowings on revolving credit facilities                                                        |                                                                                      |                               |                                                    |        |         |         | 25,650  |       
|                                                     | Payments on revolving credit facilities                                                          |                                                                                      |                               | (27,299                                             | )      |         |         | (44,100 | )     
|                                                     | Borrowings on related party term debt                                                            |                                                                                      |                               | 44,233                                              |        |         |         |        |       
|                                                     | Principal payments on related party term debt                                                    |                                                                                      |                               | (5,300                                              | )      |         |         |        |       
|                                                     | Proceeds from issuance of subordinated notes                                                     |                                                                                      |                               |                                                    |        |         |         | 47,537  |       
|                                                     | Proceeds from issuance of subordinated notes allocable to
    warrants                           |                                                                                      |                               |                                                    |        |         |         | 16,593  |       
|                                                     | Principal payments on subordinated notes                                                         |                                                                                      |                               | (3,481                                              | )      |         |         | (4,472  | )     
|                                                     | Deferred loan fees                                                                               |                                                                                      |                               | (3,104                                              | )      |         |         | (2,509  | )     
|                                                     | Stock issuance costs                                                                             |                                                                                      |                               | (1,028                                              | )      |         |         |        |       
|                                                     | Stock option and warrant transactions and other                                                  |                                                                                      |                               | 32                                                  |        |         |         | 9       |       
|                                                     |                                                                                                  |                                                                                      |                               |                                                     |        |        
|                                                     |                                                                                                  |                                                                                      |                               | Net cash (used in) provided by financing activities |        |         | (5,293  | )       |        |         | 31,478  |  
|                                                     |                                                                                                  |                                                                                      |                               |                                                     |        |        
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                                  |                                                                                      | (20,453                       | )                                                   |        |         | 1,133   |        
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     |                                                                                                  |                                                                                      | 37,975                        |                                                     |        |         | 10,115  |        
|                                                     |                                                                                                  |                                                                                      |                               |                                                     |        |        
|CASH AND CASH EQUIVALENTS AT END OF PERIOD           |                                                                                                  | $                                                                                    | 17,522                        |                                                     |        | $       | 11,248  |        
|                                                     |                                                                                                  |                                                                                      |                               |                                                     |        |        
|SUPPLEMENTAL DISCLOSURES:                            |                                                                                                  |                                                                                      |                               |                                                     |        |         |         |        
|                                                     | Cash paid for interest                                                                           |                                                                                      | $                             | 8,244                                               |        |         | $       | 6,079   |       
|                                                     | Cash paid for income taxes                                                                       |                                                                                      | $                             | 1,116                                               |        |         | $       | 1,900   |       
|                                                     | Cash refund for income taxes                                                                     |                                                                                      | $                             |                                                    |        |         | $       | 906     |       
|NON-CASH INVESTING AND FINANCING ACTIVITIES:         |                                                                                                  |                                                                                      |                               |                                                     |        |         |         |        
|                                                     | Repayment of debt with proceeds of additional debt                                               |                                                                                      | $                             | 25,573                                              |        |         | $       | 15,000  |       
|                                                     | Capital expenditures for property and equipment included in
    accrued liabilities              |                                                                                      | $                             | 179                                                 |        |         | $       | 999     |       
|                                                     | Payment of deferred loan fees and warrant issuance costs with
    proceeds of subordinated notes |                                                                                      | $                             |                                                    |        |         | $       | 8,905   |       



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




|   |                                                                 
|-- | ----------------------------------------------------------------
|1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
    POLICIES:



| |                                       
| | --------------------------------------
| | Organization and Basis of Presentation





| |                  
| | -----------------
| | Status of Horizon





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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












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



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HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|         |  |               |     |  |               |  |     |      |  |  |      |  |  |  |     | 
|-------- |  | ------------- | --- |  | ------------- |  | --- | ---- |  |  | ---- |  |  |  | --- | 
|         |  | Three Months  |     |  | Nine Months   | 
|         |  | Ended         |     |  | Ended         | 
|         |  | September 30, |     |  | September 30, | 
|         |  |               |     |  |               | 
|Customer |  | 2005          |     |  | 2004          |  |     | 2005 |  |  | 2004 | 
|         |  |               |     |  |               |  |     |      |  |  |      | 
|A        |  |               | 18% |  |               |  | %  |      |  |  | 21%  |  |  |  | %  | 
|B        |  |               | 7%  |  |               |  | %  |      |  |  | 15%  |  |  |  | %  | 
|C        |  |               | 9%  |  |               |  | 3%  |      |  |  | 10%  |  |  |  | 4%  | 
|D        |  |               | 14% |  |               |  | %  |      |  |  | 7%   |  |  |  | %  | 
|E        |  |               | 10% |  |               |  | 31% |      |  |  | 4%   |  |  |  | 25% | 
|F        |  |               | 1%  |  |               |  | 37% |      |  |  | 8%   |  |  |  | 28% | 





| |                             
| | ----------------------------
| | Concentration of Credit Risk





| |                            
| | ---------------------------
| | Principles of Consolidation





| |                 
| | ----------------
| | Interest Expense



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |                          
| | -------------------------
| | Cash and Cash Equivalents





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



|                                 |  |   |      |  
|-------------------------------- |  | - | ---- | -
|Balance, December 31, 2003.      |  | $ |     |  
|Reserve for contract receivables |  |   | 5.7  |  
|Write-off of receivables         |  |   |     |  
|                                 |  |   |     
|Balance, December 31, 2004.      |  |   | 5.7  |  
|Reserve for contract receivables |  |   | 1.7  |  
|Write-off of receivables         |  |   | (7.4 | )
|                                 |  |   |     
|Balance, September 30, 2005.     |  | $ |     |  
|                                 |  |   |     



|                                        |  |   |      | 
|--------------------------------------- |  | - | ---- | 
|Balance, December 31, 2003.             |  | $ | 33.1 | 
|Reserve for costs in excess of billings |  |   |     | 
|Write-off of receivables                |  |   |     | 
|                                        |  |   |     
|Balance, December 31, 2004.             |  |   | 33.1 | 
|Reserve for costs in excess of billings |  |   |     | 
|Write-off of receivables                |  |   |     | 
|                                        |  |   |     
|Balance, December 31, 2005.             |  | $ | 33.1 | 
|                                        |  |   |     



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



|                           |  |               |        |  |              |   |        | 
|-------------------------- |  | ------------- | ------ |  | ------------ | - | ------ | 
|                           |  | September 30, |        |  | December 31, |  
|                           |  | 2005          |        |  | 2004         |  
|                           |  |               |        |  |              |  
|Capitalized dry-dock costs |  | $             | 17,607 |  |              | $ | 17,007 | 
|Deferred loan fees         |  |               | 2,844  |  |              |   | 8,548  | 
|Deposits                   |  |               | 258    |  |              |   | 294    | 
|Other                      |  |               | 407    |  |              |   | 1,011  | 
|                           |  |               |        |  |              |  
|                           |  | $             | 21,116 |  |              | $ | 26,860 | 
|                           |  |               |        |  |              |  

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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


Sea Horizon Pacific Horizon Canyon Horizon American Horizon Pecos
Horizon








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





| |                
| | ---------------
| | Restricted Cash



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





|                                                                                                                                                  |  |                    |       |   |                   |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                                  |  | Three Months Ended |       |   | Nine Months Ended |  
|                                                                                                                                                  |  | September 30,      |       |   | September 30,     |  
|                                                                                                                                                  |  |                    |       |   |                   |  
|                                                                                                                                                  |  | 2005               |       |   | 2004              |   |         | 2005 |  |   | 2004    |  
|                                                                                                                                                  |  |                    |       |   |                   |   |         |      |  |   |         |  
|Net income (loss), as reported                                                                                                                    |  | $                  | 3,080 |   |                   | $ | (23,127 | )    |  | $ | (40,131 | ) |  | $ | (50,020 | )
|Deduct: Total stock-based compensation expense determined under
    fair value based method for all option awards, net of related
    tax effects |  |                    | (42   | ) |                   |   | (200    | )    |  |   | (250    | ) |  |   | (814    | )
|                                                                                                                                                  |  |                    |       |   |                   |   |         |      |  |   |         |  
|Pro forma net income (loss)                                                                                                                       |  | $                  | 3,038 |   |                   | $ | (23,327 | )    |  | $ | (40,381 | ) |  | $ | (50,834 | )
|                                                                                                                                                  |  |                    |       |   |                   |   |         |      |  |   |         |  

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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                              |             |                    |   |      |                   |  |   |       |   |  |      |       |   |  |   |       |  
|----------------------------- | ----------- | ------------------ | - | ---- | ----------------- |  | - | ----- | - |  | ---- | ----- | - |  | - | ----- | -
|                              |             | Three Months Ended |   |      | Nine Months Ended | 
|                              |             | September 30,      |   |      | September 30,     | 
|                              |             |                    |   |      |                   | 
|                              |             | 2005               |   |      | 2004              |  |   | 2005  |   |  | 2004 |      
|                              |             |                    |   |      |                   |  |   |       |   |  |      |      
|Earnings per share  Basic:   |             |                    |   |      |                   |  |   |       |   |  |      |       |   |  |   |      
|                              | As reported |                    | $ | 0.03 |                   |  | $ | (0.72 | ) |  | $    | (0.71 | ) |  | $ | (1.64 | )
|                              | Pro forma   |                    | $ | 0.03 |                   |  | $ | (0.73 | ) |  | $    | (0.71 | ) |  | $ | (1.67 | )
|Earnings per share  Diluted: |             |                    |   |      |                   |  |   |       |   |  |      |       |   |  |   |      
|                              | As reported |                    | $ | 0.00 |                   |  | $ | (0.72 | ) |  | $    | (0.71 | ) |  | $ | (1.64 | )
|                              | Pro forma   |                    | $ | 0.00 |                   |  | $ | (0.73 | ) |  | $    | (0.71 | ) |  | $ | (1.67 | )



|                                |  |                    |      |                    |  |  |      |  
|------------------------------- |  | ------------------ | ---- | ------------------ |  |  | ---- | -
|                                |  | Three Months Ended |      | Nine Months Ended 
|                                |  | September 30, 2004 |      | September 30, 2004
|                                |  |                    |      |                   
|Expected option life (in years) |  |                    | 7    |                    |  |  | 7    |  
|Expected volatility             |  |                    | 79.5 | %                  |  |  | 78.6 | %
|Risk-free interest rate         |  |                    | 4.00 | %                  |  |  | 4.08 | %



| |                     
| | --------------------
| | Federal Income Taxes





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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





|   |                        
|-- | -----------------------
|2. | PROPERTY AND EQUIPMENT:



|                                       |  |               |         |   |              |   |         |  
|-------------------------------------- |  | ------------- | ------- | - | ------------ | - | ------- | -
|                                       |  | September 30, |         |   | December 31, |  
|                                       |  | 2005          |         |   | 2004         |  
|                                       |  |               |         |   |              |  
|Barges, vessels, and related equipment |  | $             | 222,974 |   |              | $ | 222,036 |  
|Land and buildings                     |  |               | 19,694  |   |              |   | 19,642  |  
|Machinery and equipment                |  |               | 245     |   |              |   | 245     |  
|Office furniture and equipment         |  |               | 6,282   |   |              |   | 6,232   |  
|Leasehold improvements                 |  |               | 4,192   |   |              |   | 4,213   |  
|                                       |  |               |         |   |              |  
|                                       |  |               | 253,387 |   |              |   | 252,368 |  
|Less  accumulated depreciation        |  |               | (62,300 | ) |              |   | (53,564 | )
|                                       |  |               |         |   |              |  
|Property and equipment, net            |  | $             | 191,087 |   |              | $ | 198,804 |  
|                                       |  |               |         |   |              |  

Sea Horizon,






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

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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                             |  |                    |       |  |                   |   |       |      |  |   |       |  |  |   |       | 
|-------------------------------------------- |  | ------------------ | ----- |  | ----------------- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                             |  | Three Months Ended |       |  | Nine Months Ended |  
|                                             |  | September 30,      |       |  | September 30,     |  
|                                             |  |                    |       |  |                   |  
|                                             |  | 2005               |       |  | 2004              |   |       | 2005 |  |   | 2004  | 
|                                             |  |                    |       |  |                   |   |       |      |  |   |       | 
|Cost of contract revenues                    |  | $                  | 3,475 |  |                   | $ | 4,129 |      |  | $ | 7,976 |  |  | $ | 8,630 | 
|Selling, general and administrative expenses |  |                    | 305   |  |                   |   | 458   |      |  |   | 952   |  |  |   | 1,105 | 
|                                             |  |                    |       |  |                   |   |       |      |  |   |       | 
|                                             |  | $                  | 3,780 |  |                   | $ | 4,587 |      |  | $ | 8,928 |  |  | $ | 9,735 | 
|                                             |  |                    |       |  |                   |   |       |      |  |   |       | 

Cajun Horizon Cajun Horizon




| |                     
| | --------------------
| | Assets Held For Sale





|   |                      
|-- | ---------------------
|3. | STOCKHOLDERS EQUITY:



| |                  
| | -----------------
| | Authorized Shares





| |          
| | ---------
| | Par Value





| |                 
| | ----------------
| | Restricted Stock



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





| |                                       
| | --------------------------------------
| | Mandatorily Redeemable Preferred Stock





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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                          
| | -------------------------
| | Stockholders Rights Plan





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





|   |                            
|-- | ---------------------------
|4. | RELATED PARTY TRANSACTIONS:



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                         |  |               |     |  |      |   |     | 
|------------------------ |  | ------------- | --- |  | ---- | - | --- | 
|                         |  | Nine Months   |    
|                         |  | Ended         |    
|                         |  | September 30, |    
|                         |  |               |    
|                         |  | 2005          |     |  | 2004 |  
|                         |  |               |     |  |      |  
|Amount billed to Horizon |  | $             | 9.5 |  |      | $ | 6.2 | 
|Amount paid to Odyssea   |  | $             | 7.5 |  |      | $ | 4.9 | 







|                                |  |              |            |              |             |  |           |                 |      |             |                 |  |  |  |       |  
|------------------------------- |  | ------------ | ---------- | ------------ | ----------- |  | --------- | --------------- | ---- | ----------- | --------------- |  |  |  | ----- | -
|                                |  |              |            | % of         |             |  |           |                 |     
|                                |  |              |            | Outstanding  |             |  |           |                 | % of |            
|                                |  |              |            | Common Stock |             |  | Shares of |                 |      | Outstanding |                
|                                |  | Shares of    |            |              | on June 10, |  |           | Series B        |      |             | Series B        | 
|                                |  | Common Stock |            |              | 2005        |  |           | Preferred Stock |      |             | Preferred Stock | 
|                                |  |              |            |              |             |  |           |                 |      |             |                 | 
|Elliott Entities                |  |              | 23,943,775 |              |             |  | 25.9      | %               |      |             | 399,062.93      |  |  |  | 39.9  | %
|Miller                          |  |              | 12,679,448 |              |             |  | 13.7      | %               |      |             | 211,324.04      |  |  |  | 21.1  | %
|Falcon                          |  |              | 7,280,340  |              |             |  | 7.9       | %               |      |             | 121,338.99      |  |  |  | 12.2  | %
|Riley                           |  |              | 5,771,274  |              |             |  | 6.3       | %               |      |             | 96,187.86       |  |  |  | 9.6   | %
|Highland                        |  |              | 5,107,471  |              |             |  | 5.5       | %               |      |             | 85,124.50       |  |  |  | 8.5   | %
|Other Subordinated Note holders |  |              | 5,217,707  |              |             |  | 5.7       | %               |      |             | 86,961.68       |  |  |  | 8.7   | %
|                                |  |              |            |              |             |  |           |                 |      |             |                 | 
|                                |  |              | 60,000,015 |              |             |  | 65.0      | %               |      |             | 1,000,000.00    |  |  |  | 100.0 | %
|                                |  |              |            |              |             |  |           |                 |      |             |                 | 



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                |  |        |      | 
|------------------------------- |  | ------ | ---- | 
|                                |  | Amount |     
|                                |  |        |     
|Elliott Entities                |  | $      | 6.2  | 
|Miller                          |  |        | 4.8  | 
|Falcon                          |  |        | 6.6  | 
|Riley                           |  |        | 2.3  | 
|Highland                        |  |        | 1.4  | 
|Other Subordinated Note holders |  |        | 3.7  | 
|                                |  |        |     
|                                |  | $      | 25.0 | 
|                                |  |        |     





|   |      
|-- | -----
|5. | DEBT:







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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












Gulf Horizon




| |   |                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a ratio of current assets to current liabilities, as defined in
    our loan agreements, of 1.10 to 1 for the period ending
    September 30, 2005 (actual was 1.86 at September 30,
    2005), and each period

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HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | thereafter, each computed by excluding any revolving credit
    facilities and balloon payments from current liabilities;                                                                                                                                                                                                                                                                                                                                                                                
|
| |  | a fixed charge coverage ratio, as defined in our loan
    agreements, of 1.33 to 1 for the twelve-month period ending
    September 30, 2005, (actual was 1.72 to 1 at
    September 30, 2005), and for each period thereafter on a
    rolling four quarter basis; and                                                                                                                                                                                                                                  
|
| |  | a tangible net worth, as defined in our loan agreements, in an
    amount not less than the sum of $110 million plus 75% of
    our consolidated net income for each fiscal quarter which has
    been completed as of the date of calculation, commencing with
    the fiscal quarter ending March 31, 2004 plus 90% of the
    net proceeds of any common stock or other equity issued after
    December 31, 2003 (requirement of $189 million and
    actual was $218 million at September 30, 2005).





|   |                             
|-- | ----------------------------
|6. | LOSS ON DEBT EXTINGUISHMENT:





|   |                                     
|-- | ------------------------------------
|7. | SEVERANCE AND RESTRUCTURING CHARGES:



|                                    |  |   |        |  
|----------------------------------- |  | - | ------ | -
|Balance, December 31, 2004.         |  | $ | 2,198  |  
|Severance and restructuring expense |  |   | 443    |  
|Payments                            |  |   | (2,480 | )
|                                    |  |   |       
|Balance, September 30, 2005.        |  | $ | 161    |  
|                                    |  |   |       



|   |                               
|-- | ------------------------------
|8. | COMMITMENTS AND CONTINGENCIES:



| |           
| | ----------
| | Litigation



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




Gulf Horizon, Gulf Horizon




9.     GEOGRAPHIC INFORMATION:




|                 |                              |               |   |      |               |  |   |      |      |  |      |       |       |  |   |      |       | 
|---------------- | ---------------------------- | ------------- | - | ---- | ------------- |  | - | ---- | ---- |  | ---- | ----- | ----- |  | - | ---- | ----- | 
|                 |                              | Three Months  |   |      | Nine Months   | 
|                 |                              | Ended         |   |      | Ended         | 
|                 |                              | September 30, |   |      | September 30, | 
|                 |                              |               |   |      |               | 
|                 |                              | 2005          |   |      | 2004          |  |   | 2005 |      |  | 2004 |      
|                 |                              |               |   |      |               |  |   |      |      |  |      |      
|Revenues:        |                              |               |   |      |               |  |   |      |      |  |      |       |       |  |   |     
|                 | Domestic                     |               | $ | 64.6 |               |  | $ | 18.1 |      |  | $    | 127.2 |       |  | $ | 52.4 |      
|                 | Latin America                |               |   | 8.6  |               |  |   | 30.2 |      |  |      | 8.9   |       |  |   | 46.1 |      
|                 | West Africa                  |               |   | 16.5 |               |  |   | 3.7  |      |  |      | 43.0  |       |  |   | 17.2 |      
|                 | Southeast Asia/Mediterranean |               |   | 3.1  |               |  |   | 42.6 |      |  |      | 21.6  |       |  |   | 66.3 |      
|                 |                              |               |   |      |               |  |   |      |      |  |      |      
|                 |                              | Total         |   | $    | 92.8          |  |   | $    | 94.6 |  |      | $     | 200.7 |  |   | $    | 182.0 | 
|                 |                              |               |   |      |               |  |   |      |      |  |      |      
|Gross Profit(1): |                              |               |   |      |               |  |   |      |      |  |      |       |       |  |   |     
|                 | Domestic                     |               | $ | 22.3 |               |  | $ | (1.0 | )    |  | $    | 32.3  |       |  | $ | (6.9 | )    
|                 | Latin America                |               |   | 0.4  |               |  |   | 7.7  |      |  |      | (2.7  | )     |  |   | 8.0  |      
|                 | West Africa                  |               |   | 0.7  |               |  |   | 1.5  |      |  |      | 3.7   |       |  |   | 2.3  |      
|                 | Southeast Asia/Mediterranean |               |   | (2.4 | )             |  |   | 7.7  |      |  |      | (0.6  | )     |  |   | 11.4 |      
|                 |                              |               |   |      |               |  |   |      |      |  |      |      
|                 |                              | Total         |   | $    | 21.0          |  |   | $    | 15.9 |  |      | $     | 32.7  |  |   | $    | 14.8  | 
|                 |                              |               |   |      |               |  |   |      |      |  |      |      

21



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)


|                           |                              |               |   |       |              |  |   |       |       | 
|-------------------------- | ---------------------------- | ------------- | - | ----- | ------------ |  | - | ----- | ----- | 
|                           |                              | As of         |  
|                           |                              |               |  
|                           |                              | September 30, |   |       | December 31, | 
|                           |                              | 2005          |   |       | 2004         | 
|                           |                              |               |   |       |              | 
|Property and Equipment(2): |                              |               |   |       |              |  |   |      
|                           | Domestic                     |               | $ | 112.6 |              |  | $ | 119.9 |      
|                           | Latin America                |               |   | 0.1   |              |  |   | 0.1   |      
|                           | West Africa                  |               |   | 59.0  |              |  |   | 18.8  |      
|                           | Southeast Asia/Mediterranean |               |   | 19.4  |              |  |   | 60.0  |      
|                           |                              |               |   |       |              | 
|                           |                              | Total         |   | $     | 191.1        |  |   | $     | 198.8 | 
|                           |                              |               |   |       |              | 






|    |                                                                                                                                                                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Gross profit for each geographic segment includes costs incurred
    related to idle and stacked equipment.                                                                                                                                                                                                                                                                                
|   
|(2) | Property and equipment includes vessels, property and related
    marine equipment. Amounts reflect the location of the assets at
    September 30, 2005 and December 31, 2004. Equipment
    location changes as necessary to meet working requirements.
    Other identifiable assets include inventory and other long-term
    assets, and are primarily located in the domestic region.

10.     SUBSEQUENT EVENTS:






22



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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 and Cautionary Statements included
in our 2004 Annual Report in Amendment No. 2 on
Form 10-K/ A. 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








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





| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | the price of oil and gas and industry perception of future
    prices;           
|
| |  | the ability of the oil and gas industry to access capital;                       
|
| |  | expectations about future demand and prices;                                     
|
| |  | the cost of exploring for, producing and developing oil and gas
    reserves;    
|
| |  | sale and expiration dates of offshore leases in the United
    States and abroad;
|
| |  | discovery rates of new oil and gas reserves in offshore areas;                   
|
| |  | local and international political and economic conditions;                       
|
| |  | governmental regulations; and                                                    
|
| |  | the availability and cost of capital.                                            



Overview




23



---



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Results of Operations




24



---



##### Table of Contents







Sea Horizon Brazos Horizon


Lone Star
Horizon


Sea Horizon Canyon
Horizon




25



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|                 |                              |               |   |      |               |  |   |      |      |  |      |       |       |  |   |      |       | 
|---------------- | ---------------------------- | ------------- | - | ---- | ------------- |  | - | ---- | ---- |  | ---- | ----- | ----- |  | - | ---- | ----- | 
|                 |                              | Three Months  |   |      | Nine Months   | 
|                 |                              | Ended         |   |      | Ended         | 
|                 |                              | September 30, |   |      | September 30, | 
|                 |                              |               |   |      |               | 
|                 |                              | 2005          |   |      | 2004          |  |   | 2005 |      |  | 2004 |      
|                 |                              |               |   |      |               |  |   |      |      |  |      |      
|Revenues:        |                              |               |   |      |               |  |   |      |      |  |      |       |       |  |   |     
|                 | Domestic                     |               | $ | 64.6 |               |  | $ | 18.1 |      |  | $    | 127.2 |       |  | $ | 52.4 |      
|                 | Latin America                |               |   | 8.6  |               |  |   | 30.2 |      |  |      | 8.9   |       |  |   | 46.1 |      
|                 | West Africa                  |               |   | 16.5 |               |  |   | 3.7  |      |  |      | 43.0  |       |  |   | 17.2 |      
|                 | Southeast Asia/Mediterranean |               |   | 3.1  |               |  |   | 42.6 |      |  |      | 21.6  |       |  |   | 66.3 |      
|                 |                              |               |   |      |               |  |   |      |      |  |      |      
|                 |                              | Total         |   | $    | 92.8          |  |   | $    | 94.6 |  |      | $     | 200.7 |  |   | $    | 182.0 | 
|                 |                              |               |   |      |               |  |   |      |      |  |      |      
|Gross Profit(1): |                              |               |   |      |               |  |   |      |      |  |      |       |       |  |   |     
|                 | Domestic                     |               | $ | 22.3 |               |  | $ | (1.0 | )    |  | $    | 32.3  |       |  | $ | (6.9 | )    
|                 | Latin America                |               |   | 0.4  |               |  |   | 7.7  |      |  |      | (2.7  | )     |  |   | 8.0  |      
|                 | West Africa                  |               |   | 0.7  |               |  |   | 1.5  |      |  |      | 3.7   |       |  |   | 2.3  |      
|                 | Southeast Asia/Mediterranean |               |   | (2.4 | )             |  |   | 7.7  |      |  |      | (0.6  | )     |  |   | 11.4 |      
|                 |                              |               |   |      |               |  |   |      |      |  |      |      
|                 |                              | Total         |   | $    | 21.0          |  |   | $    | 15.9 |  |      | $     | 32.7  |  |   | $    | 14.8  | 
|                 |                              |               |   |      |               |  |   |      |      |  |      |      






|    |                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------
|(1) | Gross profit for each geographic segment includes costs incurred
    related to idle and stacked equipment.

Quarter Ended September 30, 2005 Compared to the Quarter
Ended September 30, 2004


Contract Revenues.


Gross Profit.


26



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Selling, General and Administrative Expenses.


Impairment of Property and Equipment. Gulf Horizon


Impairment Loss on Assets Held For Sale.


Interest Expense.


|                                                            |  |               |     |  |      |   |     | 
|----------------------------------------------------------- |  | ------------- | --- |  | ---- | - | --- | 
|                                                            |  | Three Months  |    
|                                                            |  | Ended         |    
|                                                            |  | September 30, |    
|                                                            |  |               |    
|                                                            |  | 2005          |     |  | 2004 |  
|                                                            |  |               |     |  |      |  
|Cash paid for interest                                      |  | $             | 3.5 |  |      | $ | 1.7 | 
|Interest paid in-kind                                       |  |               | 1.0 |  |      |   | 3.7 | 
|Accretion in the fair value of the Series B Preferred Stock |  |               | 1.0 |  |      |   |    | 
|Other non-cash charges, net                                 |  |               | 0.1 |  |      |   | 2.7 | 
|                                                            |  |               |     |  |      |  
|                                                            |  | $             | 5.6 |  |      | $ | 8.1 | 



Interest Income.


Loss on Debt Extinguishment.


Other Income (Expense), Net. Cajun Horizon,


27



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Income Taxes.


Net Income (Loss).


Nine Months Ended September 30, 2005 Compared to the
Nine Months Ended September 30, 2004


Contract Revenues.


Gross Profit.


Selling, General and Administrative Expenses.


Reserves for Claims and Receivables.


Impairment of Property and Equipment. Gulf Horizon


28



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##### Table of Contents



Impairment Loss on Assets Held For Sale.


Interest Expense.


|                                                                             |  |               |      |  |      |   |      | 
|---------------------------------------------------------------------------- |  | ------------- | ---- |  | ---- | - | ---- | 
|                                                                             |  | Nine Months   |     
|                                                                             |  | Ended         |     
|                                                                             |  | September 30, |     
|                                                                             |  |               |     
|                                                                             |  | 2005          |      |  | 2004 |  
|                                                                             |  |               |      |  |      |  
|Cash paid for interest                                                       |  | $             | 8.2  |  |      | $ | 6.1  | 
|Interest paid in-kind                                                        |  |               | 6.0  |  |      |   | 7.2  | 
|Accretion in the fair value of the Series A and
    Series B Preferred Stock |  |               | 1.9  |  |      |   |     | 
|Other non-cash charges, net                                                  |  |               | 6.4  |  |      |   | 5.3  | 
|                                                                             |  |               |      |  |      |  
|                                                                             |  | $             | 22.5 |  |      | $ | 18.6 | 
|                                                                             |  |               |      |  |      |  



Interest Income.


Loss on Debt Extinguishment.


Other Income (Expense), Net.


Income Taxes.


29



---



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Net Loss.


Liquidity and Capital Resources


General




Cash Flows








Working Capital




30



---



##### Table of Contents



Indebtedness












31



---



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Gulf Horizon


Litigation




Gulf Horizon




32



---



##### Table of Contents







Off-Balance Sheet
Arrangements




Contractual Obligations and
Capital Expenditures




|                                        |  |           |       |  |      |   |        |      |  |   |        |  |  |      |       |  |            |   |       |       |  |   |         |  |  |   |         | 
|--------------------------------------- |  | --------- | ----- |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ----- |  | ---------- | - | ----- | ----- |  | - | ------- |  |  | - | ------- | 
|                                        |  | Remainder |       |  |      |   |        |      |  |   |        |  |  |      |      
|                                        |  | of 2005   |       |  | 2006 |   |        | 2007 |  |   | 2008   |  |  | 2009 |       |  | Thereafter |   |       | Total | 
|                                        |  |           |       |  |      |   |        |      |  |   |        |  |  |      |       |  |            |   |       |       | 
|Principal and interest payments on debt |  | $         | 6,870 |  |      | $ | 42,428 |      |  | $ | 68,130 |  |  | $    | 6,101 |  |            | $ | 5,840 |       |  | $ | 56,856  |  |  | $ | 186,225 | 
|Operating leases                        |  |           | 670   |  |      |   | 2,537  |      |  |   | 2,491  |  |  |      | 2,288 |  |            |   | 153   |       |  |   | 269     |  |  |   | 8,408   | 
|Other long-term liabilities             |  |           |      |  |      |   |       |      |  |   |       |  |  |      |      |  |            |   |      |       |  |   | 70,608  |  |  |   | 70,608  | 
|                                        |  |           |       |  |      |   |        |      |  |   |        |  |  |      |       |  |            |   |       |       | 
|                                        |  | $         | 7,540 |  |      | $ | 44,965 |      |  | $ | 70,621 |  |  | $    | 8,389 |  |            | $ | 5,993 |       |  | $ | 127,733 |  |  | $ | 265,241 | 
|                                        |  |           |       |  |      |   |        |      |  |   |        |  |  |      |       |  |            |   |       |       | 



Critical Accounting Policies And Estimates




33



---



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Revenue Recognition








34



---



##### Table of Contents





Accounts Receivable






Other Assets




Property and
Equipment






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



35



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Stock-Based
Compensation






Federal Income Taxes






36



---



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Forward-Looking Statements






| |   |                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to meet our significant debt service and other
    obligations;                                                                                                                            
|
| |  | our ability to finance our capital requirements;                                                                                                                                                       
|
| |  | our ability to obtain additional financing needed in the future;                                                                                                                                       
|
| |  | our substantial debt of approximately $152.8 million as of
    September 30, 2005 continues to adversely affect our
    financial condition;                                                           
|
| |  | our ability to comply with our financial and other covenants in
    the future;                                                                                                                        
|
| |  | the potential impairment of our assets in the future;                                                                                                                                                  
|
| |  | we have had operating losses for 2002, 2003 and 2004, and may
    incur operating losses in the future;                                                                                                
|
| |  | the outcome of the arbitration of our claims against Pemex;                                                                                                                                            
|
| |  | the outcome of litigation with the underwriters of the insurance
    coverage on the Gulf Horizon;                                                                                                     
|
| |  | our common stock was delisted from the Nasdaq National Market,
    effective as of the close of business on April 1, 2005;                                                                             
|
| |  | the potential receipt of an audit opinion with a going
    concern explanatory paragraph from our independent
    registered public accounting firm would likely adversely affect
    our operations;
|
| |  | our largest stockholders may continue to have a significant
    degree of influence over us;                                                                                                           
|
| |  | 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;                
|
| |  | our ability to obtain performance bonds and letters of credit if
    required to secure our performance under new international
    contracts;                                                         

37



---



##### Table of Contents





| |   |                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | contract bidding risks, including those involved in performing
    projects on a fixed-price basis and extra work performed outside
    the original scope of work, and the successful negotiation and
    collection of such contract claims;
|
| |  | the highly competitive nature of the marine construction
    business;                                                                                                                                                                        
|
| |  | operating hazards, including the unpredictable effect of natural
    occurrences on operations and the significant possibility of
    accidents resulting in personal injury and property damage;                                             
|
| |  | seasonality of the offshore construction industry in the U.S.
    Gulf of Mexico;                                                                                                                                                             
|
| |  | risks involved in the expansion of our operations into
    international offshore oil and gas producing areas, where we
    have previously not been operating;                                                                               
|
| |  | our dependence on the continued strong working relationships
    with significant customers operating in the U.S. Gulf of Mexico;                                                                                                             
|
| |  | percentage-of-completion accounting;                                                                                                                                                                                                          
|
| |  | the continued active participation of our executive officers and
    key operating personnel;                                                                                                                                                 
|
| |  | the effect on our performance of regulatory programs and
    environmental matters;                                                                                                                                                           
|
| |  | the risks involved in joint venture operations required from the
    time to time on major international projects; and                                                                                                                        
|
| |  | a possible terrorist attack or armed conflict could harm our
    business.                                                                                                                                                                    










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







38



---



##### Table of Contents












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





39



---



##### Table of Contents






PART II. OTHER INFORMATION







|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings



Gulf Horizon, Gulf Horizon









|        |                                                         
|------- | --------------------------------------------------------
|Item 2. | Unregistered Sales of Securities and Use of
    Proceeds



40



---



##### Table of Contents










|        |                                                    
|------- | ---------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security Holders



(a)


|           |  |         |         |  |             |  |       | 
|---------- |  | ------- | ------- |  | ----------- |  | ----- | 
|For        |  | Against |         |  | Abstentions | 
|           |  |         |         |  |             | 
|82,825,487 |  |         | 215,794 |  |             |  | 9,500 | 



| |     |                                                                            
| | --- | ---------------------------------------------------------------------------
| | (b) | Each of the following persons was elected as a director of the
    company:

|                   |  |     |            |  |                    |  |           | 
|------------------ |  | --- | ---------- |  | ------------------ |  | --------- | 
|                   |  | For |            |  | Withhold Authority | 
|                   |  |     |            |  |                    | 
|Charles O. Buckner |  |     | 80,542,413 |  |                    |  | 2,508,368 | 
|John T. Mills      |  |     | 80,526,128 |  |                    |  | 2,524,653 | 
|Ken R. LeSuer      |  |     | 80,508,211 |  |                    |  | 2,542,570 | 
|David W. Sharp     |  |     | 80,525,003 |  |                    |  | 2,525,778 | 
|Raymond L. Steele  |  |     | 75,409,407 |  |                    |  | 7,641,374 | 



| |     |                                                                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (c) | The stockholders approved an amendment to our certificate of
    incorporation to increase the number of authorized shares of our
    common stock from 100 million to 1.5 billion.

|           |  |         |           |  |             |  |        | 
|---------- |  | ------- | --------- |  | ----------- |  | ------ | 
|For        |  | Against |           |  | Abstentions | 
|           |  |         |           |  |             | 
|79,703,524 |  |         | 3,306,638 |  |             |  | 40,619 | 



| |     |                                                                                                                                                                                             
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (d) | The stockholders approved an amendment to our certificate of
    incorporation to reduce the par value of our common stock and
    preferred stock from $1.00 per share to $0.001 per share.

|           |  |         |           |  |             |  |        |                  |  |  |            | 
|---------- |  | ------- | --------- |  | ----------- |  | ------ | ---------------- |  |  | ---------- | 
|For        |  | Against |           |  | Abstentions |  |        | Broker Non-Votes | 
|           |  |         |           |  |             |  |        |                  | 
|58,120,035 |  |         | 2,174,377 |  |             |  | 49,544 |                  |  |  | 22,706,825 | 



| |     |                                                                                                                                  
| | --- | ---------------------------------------------------------------------------------------------------------------------------------
| | (e) | The stockholders approved an amendment to our certificate of
    incorporation to eliminate all super majority vote requirements.

|           |  |         |         |  |             |  |         | 
|---------- |  | ------- | ------- |  | ----------- |  | ------- | 
|For        |  | Against |         |  | Abstentions | 
|           |  |         |         |  |             | 
|81,938,554 |  |         | 972,764 |  |             |  | 139,463 | 



| |     |                                                                             
| | --- | ----------------------------------------------------------------------------
| | (f) | The stockholders approved an amendment to our 2005 Stock
    Incentive Plan.

|           |  |         |           |  |             |  |        |                  |  |  |            | 
|---------- |  | ------- | --------- |  | ----------- |  | ------ | ---------------- |  |  | ---------- | 
|For        |  | Against |           |  | Abstentions |  |        | Broker Non-Votes | 
|           |  |         |           |  |             |  |        |                  | 
|57,225,099 |  |         | 3,048,306 |  |             |  | 70,551 |                  |  |  | 22,706,825 | 



| |     |                                                                                                                                 
| | --- | --------------------------------------------------------------------------------------------------------------------------------
| | (g) | The stockholders ratified the selection of Grant Thornton LLP as
    our independent registered public accounting firm for 2005.

|           |  |         |         |  |             |  |        | 
|---------- |  | ------- | ------- |  | ----------- |  | ------ | 
|For        |  | Against |         |  | Abstentions | 
|           |  |         |         |  |             | 
|82,789,970 |  |         | 163,275 |  |             |  | 97,536 | 

41



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|        |         
|------- | --------
|Item 6. | Exhibits

|         |    |    |  |                                                                               
|-------- | -- | -- |  | ------------------------------------------------------------------------------
|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)






|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys Current Report
    on Form 8-K dated September 19, 2005.
|   
|(2) | Filed herewith.                                                                                    

42



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##### Table of Contents






SIGNATURES






| |                                           
| | ------------------------------------------
| | HORIZON OFFSHORE, INC.                    
|
| | /s/ Ronald D. Mogel                       
| |                                           
| | Ronald D. Mogel                           
| | Vice President and Chief Financial Officer



43



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##### Table of Contents



INDEX TO EXHIBITS


|         |    |             |  |                                                                               
|-------- | -- | ----------- |  | ------------------------------------------------------------------------------
|Exhibits |    | Description
|         |    |            
|         | 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)






|    |                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to the Companys Current Report
    on Form 8-K dated September 19, 2005.
|   
|(2) | Filed herewith.                                                                                    

44