##### 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 June 30, 2006                                                
|           |  | 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


12b-2


o þ o


12b-2 o þ












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HORIZON OFFSHORE, INC. AND SUBSIDIARIES


QUARTERLY REPORT ON
FORM 10-Q


For the Quarter Ended June 30, 2006


|                                      |  |                                                                                                     |    |      |    | 
|------------------------------------- |  | --------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|Description                           |  |                                                                                                     |    | Page |   
|                                      |  |                                                                                                     |    |      |   
|PART I. FINANCIAL
    INFORMATION    
|Item 1.                               |  | Financial Statements                                                                                |    |      | 3  | 
|                                      |  | Consolidated Balance Sheets as of
    June 30, 2006 and December 31, 2005                           |    |      | 3  | 
|                                      |  | Consolidated Statements of Operations for
    the Three and Six Months Ended June 30, 2006 and 2005 |    |      | 4  | 
|                                      |  | Consolidated Statements of Cash Flows for
    the Six Months Ended June 30, 2006 and 2005           |    |      | 5  | 
|                                      |  | Notes to Consolidated Financial
    Statements                                                      |    |      | 6  | 
|Item 2.                               |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations           |    |      | 24 | 
|Item 3.                               |  | Quantitative and Qualitative Disclosures
    About Market Risk                                      |    |      | 35 | 
|Item 4.                               |  | Controls and Procedures                                                                             |    |      | 36 | 
|                                     
|PART II. OTHER INFORMATION           
|Item 1.                               |  | Legal Proceedings                                                                                   |    |      | 36 | 
|Item 1A.                              |  | Risk Factors                                                                                        |    |      | 37 | 
|Item 6.                               |  | Exhibits                                                                                            |    |      | 43 | 
|Signatures                            |  |                                                                                                     | 44 |     
|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


|                                          |                                                                                                                                                              |                                  |                            |          |              |         |         |          |        |         | 
|----------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------------- | -------------------------- | -------- | ------------ | ------- | ------- | -------- | ------ | ------- | 
|                                          |                                                                                                                                                              | June 30,                         |                            |          | December 31, |        
|                                          |                                                                                                                                                              | 2006                             |                            |          | 2005         |        
|                                          |                                                                                                                                                              |                                  |                            |          |              |        
|                                          |                                                                                                                                                              | (Unaudited)                      |                           
|                                          |                                                                                                                                                              | (In thousands, except            |                           
|                                          |                                                                                                                                                              | share data)                      |                           
|ASSETS                                   
|CURRENT ASSETS:                           |                                                                                                                                                              |                                  |                            |          |              |         |         |         
|                                          | Cash and cash equivalents                                                                                                                                    |                                  | $                          | 57,052   |              |         | $       | 42,960   |       
|                                          | Restricted cash                                                                                                                                              |                                  |                            | 1,775    |              |         |         | 4,055    |       
|                                          | Accounts receivable                                                                                                                                         |                                  |                            |          |              |         |         |          |       
|                                          |                                                                                                                                                              | Contract receivables             |                            |          | 66,675       |         |         |          | 43,423 |        
|                                          |                                                                                                                                                              | Costs in excess of billings, net |                            |          | 107,704      |         |         |          | 90,229 |        
|                                          |                                                                                                                                                              | Insurance receivable             |                            |          | 14,300       |         |         |          |       |        
|                                          |                                                                                                                                                              | Other                            |                            |          | 2,748        |         |         |          | 1,209  |        
|                                          | Other current assets                                                                                                                                         |                                  |                            | 3,657    |              |         |         | 6,622    |       
|                                          |                                                                                                                                                              |                                  |                            |          |              |        
|                                          |                                                                                                                                                              |                                  | Total current assets       |          |              | 253,911 |         |          |        | 188,498 | 
|PROPERTY AND EQUIPMENT, net               |                                                                                                                                                              |                                  | 204,623                    |          |              |         | 186,416 |         
|RESTRICTED CASH                           |                                                                                                                                                              |                                  | 7,967                      |          |              |         | 7,967   |         
|OTHER ASSETS                              |                                                                                                                                                              |                                  | 21,534                     |          |              |         | 19,840  |         
|                                          |                                                                                                                                                              |                                  |                            |          |              |        
|                                          |                                                                                                                                                              | $                                | 488,035                    |          |              | $       | 402,721 |         
|                                          |                                                                                                                                                              |                                  |                            |          |              |        
|                                         
|LIABILITIES AND STOCKHOLDERS EQUITY     
|CURRENT LIABILITIES:                      |                                                                                                                                                              |                                  |                            |          |              |         |         |         
|                                          | Accounts payable                                                                                                                                             |                                  | $                          | 13,491   |              |         | $       | 15,474   |       
|                                          | Accrued liabilities                                                                                                                                          |                                  |                            | 10,265   |              |         |         | 6,617    |       
|                                          | Accrued job costs                                                                                                                                            |                                  |                            | 61,127   |              |         |         | 56,085   |       
|                                          | Billings in excess of costs                                                                                                                                  |                                  |                            | 2,715    |              |         |         | 7,386    |       
|                                          | Current maturities of long-term debt                                                                                                                         |                                  |                            | 20,342   |              |         |         | 26,130   |       
|                                          | Current taxes payable                                                                                                                                        |                                  |                            | 4,384    |              |         |         | 2,687    |       
|                                          |                                                                                                                                                              |                                  |                            |          |              |        
|                                          |                                                                                                                                                              |                                  | Total current liabilities  |          |              | 112,324 |         |          |        | 114,379 | 
|LONG-TERM DEBT, net of current maturities |                                                                                                                                                              |                                  | 97,977                     |          |              |         | 27,340  |         
|RELATED PARTY TERM DEBT                   |                                                                                                                                                              |                                  |                           |          |              |         | 63,794  |         
|SUBORDINATED NOTES                        |                                                                                                                                                              |                                  | 13,364                     |          |              |         | 12,845  |         
|DEFERRED INCOME TAXES                     |                                                                                                                                                              |                                  | 4,863                      |          |              |         |        |         
|OTHER LIABILITIES                         |                                                                                                                                                              |                                  | 677                        |          |              |         | 877     |         
|                                          |                                                                                                                                                              |                                  |                            |          |              |        
|                                          |                                                                                                                                                              |                                  | Total liabilities          |          |              | 229,205 |         |          |        | 219,235 | 
|COMMITMENTS AND CONTINGENCIES             |                                                                                                                                                              |                                  |                            |          |              |         |         |         
|STOCKHOLDERS EQUITY:                     |                                                                                                                                                              |                                  |                            |          |              |         |         |         
|                                          | Preferred stock, $0.00001 par value, 5,000,000 shares
    authorized, none issued and outstanding                                                            |                                  |                            |         |              |         |         |         |       
|                                          | Common stock, $0.00001 par value, 100,000,000 shares
    authorized, 32,375,258 shares issued and outstanding and
    30,384,871 shares issued, respectively |                                  |                            |         |              |         |         |         |       
|                                          | Deferred compensation                                                                                                                                        |                                  |                            |         |              |         |         | (8,333   | )     
|                                          | Additional paid-in capital                                                                                                                                   |                                  |                            | 415,261  |              |         |         | 382,239  |       
|                                          | Accumulated deficit                                                                                                                                          |                                  |                            | (156,435 | )            |         |         | (188,776 | )     
|                                          | Treasury stock, none and 10,031 shares, respectively                                                                                                         |                                  |                            |         |              |         |         | (1,644   | )     
|                                          | Accumulated other comprehensive income                                                                                                                       |                                  |                            | 4        |              |         |         |         |       
|                                          |                                                                                                                                                              |                                  |                            |          |              |        
|                                          |                                                                                                                                                              |                                  | Total stockholders equity |          |              | 258,830 |         |          |        | 183,486 | 
|                                          |                                                                                                                                                              |                                  |                            |          |              |        
|                                          |                                                                                                                                                              | $                                | 488,035                    |          |              | $       | 402,721 |         
|                                          |                                                                                                                                                              |                                  |                            |          |              |        



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HORIZON OFFSHORE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


|                                                                         |                    |                                                 |         |            |                  |   |         |           |         |   |         |            |        |   |         |           |         |  
|------------------------------------------------------------------------ | ------------------ | ----------------------------------------------- | ------- | ---------- | ---------------- | - | ------- | --------- | ------- | - | ------- | ---------- | ------ | - | ------- | --------- | ------- | -
|                                                                         |                    | Three Months Ended                              |         |            | Six Months Ended |  
|                                                                         |                    | June 30,                                        |         |            | June 30,         |  
|                                                                         |                    |                                                 |         |            |                  |  
|                                                                         |                    | 2006                                            |         |            | 2005             |   |         | 2006      |         |   | 2005    |           
|                                                                         |                    |                                                 |         |            |                  |   |         |           |         |   |         |           
|                                                                         |                    | (Unaudited)                                     |        
|                                                                         |                    | (In thousands, except share and per share data) |        
|CONTRACT REVENUES                                                        |                    | $                                               | 156,940 |            |                  | $ | 70,504  |           |         | $ | 286,885 |            |        | $ | 107,850 |          
|COST OF CONTRACT REVENUES                                                |                    |                                                 | 117,654 |            |                  |   | 61,380  |           |         |   | 209,208 |            |        |   | 96,130  |          
|                                                                         |                    |                                                 |         |            |                  |   |         |           |         |   |         |           
|                                                                         |                    | Gross profit                                    |         |            | 39,286           |   |         |           | 9,124   |   |         |            | 77,677 |   |         |           | 11,720  |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                             |                    |                                                 | 9,065   |            |                  |   | 6,994   |           |         |   | 17,323  |            |        |   | 12,562  |          
|GAIN ON INSURANCE SETTLEMENT                                             |                    |                                                 | (14,300 | )          |                  |   |        |           |         |   | (14,300 | )          |        |   |        |          
|RESERVE FOR CLAIMS AND RECEIVABLES                                       |                    |                                                 | 18,458  |            |                  |   | 1,711   |           |         |   | 18,458  |            |        |   | 1,711   |          
|                                                                         |                    |                                                 |         |            |                  |   |         |           |         |   |         |           
|                                                                         |                    | Operating income (loss)                         |         |            | 26,063           |   |         |           | 419     |   |         |            | 56,196 |   |         |           | (2,553  | )
|OTHER:                                                                   |                    |                                                 |         |            |                  |   |         |           |         |   |         |            |        |   |         |          
|                                                                         |                    | Interest expense                                |         |            | (3,540           | ) |         |           | (6,555  | ) |         |            | (7,625 | ) |         |           | (16,869 | )
|                                                                         |                    | Interest income                                 |         |            | 399              |   |         |           | 264     |   |         |            | 792    |   |         |           | 302     |  
|                                                                         |                    | Loss on debt extinguishment                     |         |            |                 |   |         |           | (21,875 | ) |         |            | (2,402 | ) |         |           | (23,138 | )
|                                                                         |                    | Other income (expense), net                     |         |            | (12              | ) |         |           | 20      |   |         |            | (37    | ) |         |           | (37     | )
|                                                                         |                    |                                                 |         |            |                  |   |         |           |         |   |         |           
|NET INCOME (LOSS) BEFORE INCOME TAXES                                    |                    |                                                 | 22,910  |            |                  |   | (27,727 | )         |         |   | 46,924  |            |        |   | (42,295 | )        
|INCOME TAX PROVISION                                                     |                    |                                                 | 6,040   |            |                  |   | 11      |           |         |   | 14,583  |            |        |   | 916     |          
|                                                                         |                    |                                                 |         |            |                  |   |         |           |         |   |         |           
|NET INCOME (LOSS)                                                        |                    | $                                               | 16,870  |            |                  | $ | (27,738 | )         |         | $ | 32,341  |            |        | $ | (43,211 | )        
|                                                                         |                    |                                                 |         |            |                  |   |         |           |         |   |         |           
|EARNINGS (LOSS) PER SHARE                                               |                    |                                                 |         |            |                  |   |         |           |         |   |         |            |        |   |         |          
|                                                                         | BASIC AND DILUTED: |                                                 |         |            |                  |   |         |           |         |   |         |            |        |   |         |           |        
|                                                                         |                    | Net income (loss) per share  basic             |         | $          | 0.57             |   |         | $         | (15.24  | ) |         | $          | 1.09   |   |         | $         | (27.77  | )
|                                                                         |                    |                                                 |         |            |                  |   |         |           |         |   |         |           
|                                                                         |                    | Net income (loss) per share  diluted           |         | $          | 0.55             |   |         | $         | (15.24  | ) |         | $          | 1.06   |   |         | $         | (27.77  | )
|                                                                         |                    |                                                 |         |            |                  |   |         |           |         |   |         |           
|WEIGHTED AVERAGE SHARES USED IN COMPUTING EARNINGS
    (LOSS) PER SHARE: |                    |                                                 |         |            |                  |   |         |           |         |   |         |            |        |   |         |          
|                                                                         | BASIC              |                                                 |         | 29,604,003 |                  |   |         | 1,820,398 |         |   |         | 29,582,058 |        |   |         | 1,556,051 |        
|                                                                         | DILUTED            |                                                 |         | 30,419,709 |                  |   |         | 1,820,398 |         |   |         | 30,397,567 |        |   |         | 1,556,051 |        



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HORIZON OFFSHORE, INC. AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                                         |                                                                                      |                               |                                                     |         |         |         |         |        |         |         |  
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------ | ----------------------------- | --------------------------------------------------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | -
|                                                     |                                                                                                         | Six Months Ended                                                                     |                              
|                                                     |                                                                                                         | June 30,                                                                             |                              
|                                                     |                                                                                                         |                                                                                      |                              
|                                                     |                                                                                                         | 2006                                                                                 |                               |                                                     | 2005    |        
|                                                     |                                                                                                         |                                                                                      |                               |                                                     |         |        
|                                                     |                                                                                                         | (Unaudited)                                                                          |                              
|                                                     |                                                                                                         | (In thousands)                                                                       |                              
|CASH FLOWS FROM OPERATING ACTIVITIES:                |                                                                                                         |                                                                                      |                               |                                                     |         |         |         |        
|                                                     | Net income (loss)                                                                                       |                                                                                      | $                             | 32,341                                              |         |         | $       | (43,211 | )     
|                                                     | Adjustments to reconcile net income (loss) to net cash provided
    by (used in) operating activities  |                                                                                      |                               |                                                     |         |         |         |         |       
|                                                     |                                                                                                         | Depreciation and amortization                                                        |                               |                                                     | 13,034  |         |         |         | 8,620  |        
|                                                     |                                                                                                         | Gain on insurance settlement                                                         |                               |                                                     | (14,300 | )       |         |         |       |        
|                                                     |                                                                                                         | Net gain on sale of assets                                                           |                               |                                                     | (25     | )       |         |         | (13    | )      
|                                                     |                                                                                                         | Reserve for claims and receivables                                                   |                               |                                                     | 18,458  |         |         |         | 1,711  |        
|                                                     |                                                                                                         | Deferred income taxes                                                                |                               |                                                     | 4,863   |         |         |         |       |        
|                                                     |                                                                                                         | Paid in-kind interest on subordinated notes and related party
    term debt          |                               |                                                     | 842     |         |         |         | 4,934  |        
|                                                     |                                                                                                         | Amortization of subordinated debt discount recorded as interest
    expense          |                               |                                                     |        |         |         |         | 3,320  |        
|                                                     |                                                                                                         | Amortization of deferred loan fees recorded as interest expense                      |                               |                                                     | 518     |         |         |         | 2,031  |        
|                                                     |                                                                                                         | Adjustment of mandatorily redeemable preferred stock charged to
    interest expense |                               |                                                     |        |         |         |         | 855    |        
|                                                     |                                                                                                         | Stock-based compensation expense                                                     |                               |                                                     | 4,430   |         |         |         |       |        
|                                                     |                                                                                                         | Expense recognized for issuance of treasury stock for 401(k)
    plan contributions  |                               |                                                     |        |         |         |         | 98     |        
|                                                     |                                                                                                         | Loss on debt extinguishment                                                          |                               |                                                     | 2,402   |         |         |         | 23,138 |        
|                                                     |                                                                                                         | Changes in operating assets and liabilities                                         |                               |                                                     |         |         |         |         |        |        
|                                                     |                                                                                                         |                                                                                      | Restricted cash               |                                                     |         | 2,280   |         |         |        | (126    | )      
|                                                     |                                                                                                         |                                                                                      | Accounts receivable           |                                                     |         | (24,791 | )       |         |        | 20,206  |        
|                                                     |                                                                                                         |                                                                                      | Costs in excess of billings   |                                                     |         | (35,933 | )       |         |        | (14,837 | )      
|                                                     |                                                                                                         |                                                                                      | Billings in excess of costs   |                                                     |         | (4,671  | )       |         |        | (6,973  | )      
|                                                     |                                                                                                         |                                                                                      | Other assets                  |                                                     |         | 447     |         |         |        | (6,562  | )      
|                                                     |                                                                                                         |                                                                                      | Accounts payable              |                                                     |         | (1,983  | )       |         |        | (18,545 | )      
|                                                     |                                                                                                         |                                                                                      | Accrued and other liabilities |                                                     |         | 278     |         |         |        | (2,705  | )      
|                                                     |                                                                                                         |                                                                                      | Accrued job costs             |                                                     |         | 5,042   |         |         |        | 3,480   |        
|                                                     |                                                                                                         |                                                                                      | Current taxes payable         |                                                     |         | 1,697   |         |         |        | 351     |        
|                                                     |                                                                                                         |                                                                                      |                               |                                                     |         |        
|                                                     |                                                                                                         |                                                                                      |                               | Net cash provided by (used in) operating activities |         |         | 4,929   |         |        |         | (24,228 | )
|CASH FLOWS FROM INVESTING ACTIVITIES:                |                                                                                                         |                                                                                      |                               |                                                     |         |         |         |        
|                                                     | Purchases and additions to property and equipment                                                       |                                                                                      |                               | (15,750                                             | )       |         |         | (539    | )     
|                                                     | Proceeds from sale of assets                                                                            |                                                                                      |                               | 25                                                  |         |         |         | 300     |       
|                                                     |                                                                                                         |                                                                                      |                               |                                                     |         |        
|                                                     |                                                                                                         |                                                                                      |                               | Net cash used in investing activities               |         |         | (15,725 | )       |        |         | (239    | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                |                                                                                                         |                                                                                      |                               |                                                     |         |         |         |        
|                                                     | Principal payments on term debt                                                                         |                                                                                      |                               | (12,730                                             | )       |         |         | (6,596  | )     
|                                                     | Principal payments under related party term debt                                                        |                                                                                      |                               | (548                                                | )       |         |         |        |       
|                                                     | Proceeds from issuance of related party term debt                                                       |                                                                                      |                               |                                                    |         |         |         | 44,233  |       
|                                                     | Payments on revolving credit facilities                                                                 |                                                                                      |                               |                                                    |         |         |         | (27,299 | )     
|                                                     | Principal payments on subordinated notes                                                                |                                                                                      |                               |                                                    |         |         |         | (3,481  | )     
|                                                     | Deferred loan fees                                                                                      |                                                                                      |                               | (403                                                | )       |         |         | (3,077  | )     
|                                                     | Proceeds from issuance of common and preferred stock, net                                               |                                                                                      |                               | 38,561                                              |         |         |         | 1       |       
|                                                     | Stock option and warrant transactions and other                                                         |                                                                                      |                               | 8                                                   |         |         |         | 32      |       
|                                                     |                                                                                                         |                                                                                      |                               |                                                     |         |        
|                                                     |                                                                                                         |                                                                                      |                               | Net cash provided by financing activities           |         |         | 24,888  |         |        |         | 3,813   |  
|                                                     |                                                                                                         |                                                                                      |                               |                                                     |         |        
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |                                                                                                         |                                                                                      | 14,092                        |                                                     |         |         | (20,654 | )      
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD     |                                                                                                         |                                                                                      | 42,960                        |                                                     |         |         | 37,975  |        
|                                                     |                                                                                                         |                                                                                      |                               |                                                     |         |        
|CASH AND CASH EQUIVALENTS AT END OF PERIOD           |                                                                                                         | $                                                                                    | 57,052                        |                                                     |         | $       | 17,321  |        
|                                                     |                                                                                                         |                                                                                      |                               |                                                     |         |        
|SUPPLEMENTAL DISCLOSURES:                            |                                                                                                         |                                                                                      |                               |                                                     |         |         |         |        
|                                                     | Cash paid for interest                                                                                  |                                                                                      | $                             | 6,381                                               |         |         | $       | 4,698   |       
|                                                     | Cash paid for income taxes                                                                              |                                                                                      | $                             | 8,023                                               |         |         | $       | 540     |       
|NON-CASH INVESTING AND FINANCING ACTIVITIES:         |                                                                                                         |                                                                                      |                               |                                                     |         |         |         |        
|                                                     | Repayment of debt and accrued interest with proceeds of
    additional debt                             |                                                                                      | $                             | 74,679                                              |         |         | $       | 25,767  |       
|                                                     | Purchase of vessel with long term debt                                                                  |                                                                                      | $                             | 11,000                                              |         |         | $       |        |       
|                                                     | Capital expenditures for property and equipment included in
    accrued liabilities                     |                                                                                      | $                             | 3,507                                               |         |         | $       | 500     |       
|                                                     | Payment of deferred loan fees, closing costs and fees through
    issuance of term debt                 |                                                                                      | $                             | 2,721                                               |         |         | $       |        |       



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HORIZON OFFSHORE, INC. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




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



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

hook-up


10-K 10-K), 8-K


10-Q




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HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|           |  |                    |    |   |                  |  |    |      |  |  |      |   |  |  |    |  
|---------- |  | ------------------ | -- | - | ---------------- |  | -- | ---- |  |  | ---- | - |  |  | -- | -
|           |  | Three Months Ended |    |   | Six Months Ended | 
|           |  | June 30,           |    |   | June 30,         | 
|           |  |                    |    |   |                  | 
|Customer   |  | 2006               |    |   | 2005             |  |    | 2006 |  |  | 2005 |  
|           |  |                    |    |   |                  |  |    |      |  |  |      |  
|Customer A |  |                    | 35 | % |                  |  |   | %    |  |  | 23   | % |  |  |   | %
|Customer B |  |                    | 12 | % |                  |  | 25 | %    |  |  | 22   | % |  |  | 24 | %
|Customer C |  |                    | 17 | % |                  |  |   | %    |  |  | 15   | % |  |  |   | %
|Customer D |  |                    | 4  | % |                  |  | 34 | %    |  |  | 10   | % |  |  | 23 | %
|Customer E |  |                    |   | % |                  |  | 6  | %    |  |  | 2    | % |  |  | 14 | %
|Customer F |  |                    |   | % |                  |  | 16 | %    |  |  |     | % |  |  | 11 | %

Sea Horizon




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





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



7



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





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

percentage-of percentage-of percentage-of




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





8



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





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

percentage-of








9



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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



|                           |  |          |        |  |              |   |        | 
|-------------------------- |  | -------- | ------ |  | ------------ | - | ------ | 
|                           |  | June 30, |        |  | December 31, |  
|                           |  | 2006     |        |  | 2005         |  
|                           |  |          |        |  |              |  
|Capitalized dry-dock costs |  | $        | 16,668 |  |              | $ | 15,770 | 
|Deferred loan fees         |  |          | 2,611  |  |              |   | 2,408  | 
|Deposits                   |  |          | 319    |  |              |   | 276    | 
|Inventory                  |  |          | 92     |  |              |   | 167    | 
|Other                      |  |          | 1,844  |  |              |   | 1,219  | 
|                           |  |          |        |  |              |  
|                           |  | $        | 21,534 |  |              | $ | 19,840 | 
|                           |  |          |        |  |              |  

Pecos Horizon, Lone
Star Horizon American Horizon Sea Horizon Pacific Horizon








10



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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





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









|                               |  |                    |     |  |                  |   |     | 
|------------------------------ |  | ------------------ | --- |  | ---------------- | - | --- | 
|                               |  | Three Months Ended |     |  | Six Months Ended |  
|                               |  | June 30, 2006      |     |  | June 30, 2006    |  
|                               |  |                    |     |  |                  |  
|Operating income               |  | $                  | 190 |  |                  | $ | 221 | 
|Net income before income taxes |  | $                  | 190 |  |                  | $ | 221 | 
|Net income                     |  | $                  | 125 |  |                  | $ | 156 | 
|Net income per share  basic   |  | $                  |    |  |                  | $ |    | 
|Net income per share  diluted |  | $                  |    |  |                  | $ |    | 

11



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








|                                                                                                                                           |             |                    |         |        |                  |   |         |        |  
|------------------------------------------------------------------------------------------------------------------------------------------ | ----------- | ------------------ | ------- | ------ | ---------------- | - | ------- | ------ | -
|                                                                                                                                           |             | Three Months Ended |         |        | Six Months Ended |  
|                                                                                                                                           |             | June 30, 2005      |         |        | June 30, 2005    |  
|                                                                                                                                           |             |                    |         |        |                  |  
|Net loss, as reported                                                                                                                      |             | $                  | (27,738 | )      |                  | $ | (43,211 | )     
|Deduct: Total stock-based compensation expense determined under
    fair value based method for all awards, net of related tax
    effects |             |                    | (76     | )      |                  |   | (208    | )     
|                                                                                                                                           |             |                    |         |        |                  |  
|Pro forma net loss                                                                                                                         |             | $                  | (27,814 | )      |                  | $ | (43,419 | )     
|                                                                                                                                           |             |                    |         |        |                  |  
|Earnings (loss) per share  Basic and Diluted:                                                                                             |             |                    |         |        |                  |   |         |       
|                                                                                                                                           | As reported |                    | $       | (15.24 | )                |   | $       | (27.77 | )
|                                                                                                                                           | Pro forma   |                    | $       | (15.28 | )                |   | $       | (27.90 | )





|                                |  |                    |      |   |                  |  |      |  
|------------------------------- |  | ------------------ | ---- | - | ---------------- |  | ---- | -
|                                |  | Three Months Ended |      |   | Six Months Ended | 
|                                |  | June 30, 2006      |      |   | June 30, 2006    | 
|                                |  |                    |      |   |                  | 
|Expected option life (in years) |  |                    | 5    |   |                  |  | 5    |  
|Expected volatility             |  |                    | 105  | % |                  |  | 105  | %
|Risk-free interest rate         |  |                    | 4.84 | % |                  |  | 4.84 | %



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



12



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)








| |                           
| | --------------------------
| | Other Comprehensive Income



Interest Rate Swap


13



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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





| |                                 
| | --------------------------------
| | Recent Accounting Pronouncements

, Accounting
Changes and Error Corrections  a replacement of APB
Opinion No. 20 and FASB Statement No. 3






14



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



|                                       |  |          |         |   |              |   |         |  
|-------------------------------------- |  | -------- | ------- | - | ------------ | - | ------- | -
|                                       |  | June 30, |         |   | December 31, |  
|                                       |  | 2006     |         |   | 2005         |  
|                                       |  |          |         |   |              |  
|Barges, vessels, and related equipment |  | $        | 250,613 |   |              | $ | 223,232 |  
|Land and buildings                     |  |          | 19,694  |   |              |   | 19,694  |  
|Machinery and equipment                |  |          | 245     |   |              |   | 245     |  
|Office furniture and equipment         |  |          | 6,808   |   |              |   | 6,509   |  
|Leasehold improvements                 |  |          | 4,192   |   |              |   | 4,192   |  
|                                       |  |          |         |   |              |  
|                                       |  |          | 281,552 |   |              |   | 253,872 |  
|Less  accumulated depreciation        |  |          | (76,929 | ) |              |   | (67,456 | )
|                                       |  |          |         |   |              |  
|Property and equipment, net            |  | $        | 204,623 |   |              | $ | 186,416 |  
|                                       |  |          |         |   |              |  

Texas Horizon


units-of units-of




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



|                                             |  |                    |       |  |                  |   |       |      |  |   |       |  |  |   |       | 
|-------------------------------------------- |  | ------------------ | ----- |  | ---------------- | - | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                                             |  | Three Months Ended |       |  | Six Months Ended |  
|                                             |  | June 30,           |       |  | June 30,         |  
|                                             |  |                    |       |  |                  |  
|                                             |  | 2006               |       |  | 2005             |   |       | 2006 |  |   | 2005  | 
|                                             |  |                    |       |  |                  |   |       |      |  |   |       | 
|Cost of contract revenues                    |  | $                  | 4,646 |  |                  | $ | 2,630 |      |  | $ | 8,916 |  |  | $ | 4,501 | 
|Selling, general and administrative expenses |  |                    | 275   |  |                  |   | 317   |      |  |   | 557   |  |  |   | 647   | 
|                                             |  |                    |       |  |                  |   |       |      |  |   |       | 
|                                             |  | $                  | 4,921 |  |                  | $ | 2,947 |      |  | $ | 9,473 |  |  | $ | 5,148 | 
|                                             |  |                    |       |  |                  |   |       |      |  |   |       | 

15



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




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



| |                                          
| | -----------------------------------------
| | Authorized Shares and Reverse Stock Split





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





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



16



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|                                                                 |  |                    |        |  |                  |   |         |      |  |   |        |  |  |   |         |  
|---------------------------------------------------------------- |  | ------------------ | ------ |  | ---------------- | - | ------- | ---- |  | - | ------ |  |  | - | ------- | -
|                                                                 |  | Three Months Ended |        |  | Six Months Ended |  
|                                                                 |  | June 30,           |        |  | June 30,         |  
|                                                                 |  |                    |        |  |                  |  
|                                                                 |  | 2006               |        |  | 2005             |   |         | 2006 |  |   | 2005   | 
|                                                                 |  |                    |        |  |                  |   |         |      |  |   |        | 
|Net income (loss)                                                |  | $                  | 16,870 |  |                  | $ | (27,738 | )    |  | $ | 32,341 |  |  | $ | (43,211 | )
|Average common shares outstanding                                |  |                    | 29,604 |  |                  |   | 1,820   |      |  |   | 29,582 |  |  |   | 1,556   |  
|                                                                 |  |                    |        |  |                  |   |         |      |  |   |        | 
|Basic earnings (loss) per share                                  |  | $                  | 0.57   |  |                  | $ | (15.24  | )    |  | $ | 1.09   |  |  | $ | (27.77  | )
|                                                                 |  |                    |        |  |                  |   |         |      |  |   |        | 
|Average common and dilutive potential common shares outstanding: |  |                    |        |  |                  |   |         |      |  |   |        |  |  |   |         |  
|Average common shares outstanding                                |  |                    | 29,604 |  |                  |   | 1,820   |      |  |   | 29,582 |  |  |   | 1,556   |  
|Unvested restricted stock and assumed exercise of stock options  |  |                    | 816    |  |                  |   |        |      |  |   | 816    |  |  |   |        |  
|                                                                 |  |                    |        |  |                  |   |         |      |  |   |        | 
|                                                                 |  |                    | 30,420 |  |                  |   | 1,820   |      |  |   | 30,398 |  |  |   | 1,556   |  
|                                                                 |  |                    |        |  |                  |   |         |      |  |   |        | 
|Diluted earnings (loss) per share                                |  | $                  | 0.55   |  |                  | $ | (15.24  | )    |  | $ | 1.06   |  |  | $ | (27.77  | )
|                                                                 |  |                    |        |  |                  |   |         |      |  |   |        | 



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







17



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






| |                            
| | ---------------------------
| | Exchange of Debt for Equity









| |                                  
| | ---------------------------------
| | Private Placement of Common Stock





| |                                
| | -------------------------------
| | Public Offering of Common Stock







| |                    
| | -------------------
| | 2005 Incentive Plan



18



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)












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





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



|                         |  |                  |     |  |      |   |     | 
|------------------------ |  | ---------------- | --- |  | ---- | - | --- | 
|                         |  | Six Months Ended |    
|                         |  | June 30,         |    
|                         |  |                  |    
|                         |  | 2006             |     |  | 2005 |  
|                         |  |                  |     |  |      |  
|Amount billed to Horizon |  | $                | 9.2 |  |      | $ | 3.0 | 
|Amount paid to Odyssea   |  | $                | 8.5 |  |      | $ | 4.7 | 





19



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






|                         |  |   |      | 
|------------------------ |  | - | ---- | 
|Elliott Associates, L.P. |  | $ | 4.8  | 
|Miller                   |  |   | 3.6  | 
|Other                    |  |   | 5.0  | 
|                         |  |   |     
|                         |  | $ | 13.4 | 
|                         |  |   |     

5.     DEBT:


Texas Horizon


Texas Horizon




20



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




successor-in








|   |                              
|-- | -----------------------------
|6. | GAIN ON INSURANCE SETTLEMENT:

Gulf
Horizon Gulf Horizon Gulf Horizon Gulf Horizon.




|   |                             
|-- | ----------------------------
|7. | LOSS ON DEBT EXTINGUISHMENT:



21



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)






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



| |                 
| | ----------------
| | Operating Leases





| |                                    
| | -----------------------------------
| | Contractual Disputes and Litigation





22



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##### Table of Contents



HORIZON OFFSHORE, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)




|   |                        
|-- | -----------------------
|9. | GEOGRAPHIC INFORMATION:



|                 |                               |                    |   |      |                  |  |   |      |      |  |      |       |       |  |   |      |       | 
|---------------- | ----------------------------- | ------------------ | - | ---- | ---------------- |  | - | ---- | ---- |  | ---- | ----- | ----- |  | - | ---- | ----- | 
|                 |                               | Three Months Ended |   |      | Six Months Ended | 
|                 |                               | June 30,           |   |      | June 30,         | 
|                 |                               |                    |   |      |                  | 
|                 |                               | 2006               |   |      | 2005             |  |   | 2006 |      |  | 2005 |      
|                 |                               |                    |   |      |                  |  |   |      |      |  |      |      
|Revenues:        |                               |                    |   |      |                  |  |   |      |      |  |      |       |       |  |   |     
|                 | Domestic                      |                    | $ | 66.6 |                  |  | $ | 50.3 |      |  | $    | 139.8 |       |  | $ | 62.6 |      
|                 | Latin America                 |                    |   | 70.0 |                  |  |   |     |      |  |      | 80.2  |       |  |   | 0.3  |      
|                 | West Africa                   |                    |   | 19.5 |                  |  |   | 17.9 |      |  |      | 62.2  |       |  |   | 26.5 |      
|                 | Southeast Asia/ Mediterranean |                    |   | 0.8  |                  |  |   | 2.3  |      |  |      | 4.7   |       |  |   | 18.5 |      
|                 |                               |                    |   |      |                  |  |   |      |      |  |      |      
|                 |                               | Total              |   | $    | 156.9            |  |   | $    | 70.5 |  |      | $     | 286.9 |  |   | $    | 107.9 | 
|                 |                               |                    |   |      |                  |  |   |      |      |  |      |      
|Gross Profit(1): |                               |                    |   |      |                  |  |   |      |      |  |      |       |       |  |   |     
|                 | Domestic                      |                    | $ | 26.4 |                  |  | $ | 11.2 |      |  | $    | 53.8  |       |  | $ | 10.0 |      
|                 | Latin America                 |                    |   | 19.9 |                  |  |   | (1.7 | )    |  |      | 19.9  |       |  |   | (3.1 | )    
|                 | West Africa                   |                    |   | (6.8 | )                |  |   | 2.1  |      |  |      | 1.8   |       |  |   | 3.0  |      
|                 | Southeast Asia/ Mediterranean |                    |   | (0.2 | )                |  |   | (2.5 | )    |  |      | 2.2   |       |  |   | 1.8  |      
|                 |                               |                    |   |      |                  |  |   |      |      |  |      |      
|                 |                               | Total              |   | $    | 39.3             |  |   | $    | 9.1  |  |      | $     | 77.7  |  |   | $    | 11.7  | 
|                 |                               |                    |   |      |                  |  |   |      |      |  |      |      

|                           |                               |          |   |              |       |  |   |       |       | 
|-------------------------- | ----------------------------- | -------- | - | ------------ | ----- |  | - | ----- | ----- | 
|                           |                               | As of   
|                           |                               |         
|                           |                               | June 30, |   | December 31,
|                           |                               | 2006     |   | 2005        
|                           |                               |          |   |             
|Property and Equipment(2): |                               |          |   |              |       |  |   |      
|                           | Domestic                      |          | $ | 122.6        |       |  | $ | 109.6 |      
|                           | Latin America                 |          |   | 43.6         |       |  |   | 0.1   |      
|                           | West Africa                   |          |   | 0.4          |       |  |   | 58.2  |      
|                           | Southeast Asia/ Mediterranean |          |   | 38.0         |       |  |   | 18.5  |      
|                           |                               |          |   |              |       |  |   |      
|                           |                               | Total    |   | $            | 204.6 |  |   | $     | 186.4 | 
|                           |                               |          |   |              |       |  |   |      






|    |                                                                                                                                                                                                                                                                                                                                                                                       
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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
    June 30, 2006 and December 31, 2005. 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:

Texas Horizon




23



---



##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion And Analysis Of Financial
    Condition And Results Of Operations

10-K,


General








| |   |                                                                           
| | - | --------------------------------------------------------------------------
| |  | laying, burying or repairing marine pipelines;                            
|
| |  | providing hook-up and
    commissioning services;                         
|
| |  | installing production platforms and other structures; and                 
|
| |  | disassembling and salvaging production platforms and other
    structures.





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





24



---



##### Table of Contents



Overview




Gulf
Horizon. Gulf Horizon.






25



---



##### Table of Contents



Results of Operations




|                 |                               |                |   |      |                |  |   |      |      |  |      |       |       |  |   |      |       | 
|---------------- | ----------------------------- | -------------- | - | ---- | -------------- |  | - | ---- | ---- |  | ---- | ----- | ----- |  | - | ---- | ----- | 
|                 |                               | Three Months   |   |      | Six Months     | 
|                 |                               | Ended June 30, |   |      | Ended June 30, | 
|                 |                               |                |   |      |                | 
|                 |                               | 2006           |   |      | 2005           |  |   | 2006 |      |  | 2005 |      
|                 |                               |                |   |      |                |  |   |      |      |  |      |      
|Revenues:        |                               |                |   |      |                |  |   |      |      |  |      |       |       |  |   |     
|                 | Domestic                      |                | $ | 66.6 |                |  | $ | 50.3 |      |  | $    | 139.8 |       |  | $ | 62.6 |      
|                 | Latin America                 |                |   | 70.0 |                |  |   |     |      |  |      | 80.2  |       |  |   | 0.3  |      
|                 | West Africa                   |                |   | 19.5 |                |  |   | 17.9 |      |  |      | 62.2  |       |  |   | 26.5 |      
|                 | Southeast Asia/ Mediterranean |                |   | 0.8  |                |  |   | 2.3  |      |  |      | 4.7   |       |  |   | 18.5 |      
|                 |                               |                |   |      |                |  |   |      |      |  |      |      
|                 |                               | Total          |   | $    | 156.9          |  |   | $    | 70.5 |  |      | $     | 286.9 |  |   | $    | 107.9 | 
|                 |                               |                |   |      |                |  |   |      |      |  |      |      
|Gross Profit(1): |                               |                |   |      |                |  |   |      |      |  |      |       |       |  |   |     
|                 | Domestic                      |                | $ | 26.4 |                |  | $ | 11.2 |      |  | $    | 53.8  |       |  | $ | 10.0 |      
|                 | Latin America                 |                |   | 19.9 |                |  |   | (1.7 | )    |  |      | 19.9  |       |  |   | (3.1 | )    
|                 | West Africa                   |                |   | (6.8 | )              |  |   | 2.1  |      |  |      | 1.8   |       |  |   | 3.0  |      
|                 | Southeast Asia/ Mediterranean |                |   | (0.2 | )              |  |   | (2.5 | )    |  |      | 2.2   |       |  |   | 1.8  |      
|                 |                               |                |   |      |                |  |   |      |      |  |      |      
|                 |                               | Total          |   | $    | 39.3           |  |   | $    | 9.1  |  |      | $     | 77.7  |  |   | $    | 11.7  | 
|                 |                               |                |   |      |                |  |   |      |      |  |      |      






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

Quarter Ended June 30, 2006 Compared to the Quarter
Ended June 30, 2005


Contract Revenues. Texas Horizon Atlantic
Horizon




Sea Horizon


Sea Horizon


26



---



##### Table of Contents



Gross Profit.


Selling, General and Administrative Expenses. Gulf Horizon


Gain on Insurance Settlement. Gulf
Horizon.


Reserves for claims and receivables.


Interest Expense.


|                            |  |                |     |  |      |   |     | 
|--------------------------- |  | -------------- | --- |  | ---- | - | --- | 
|                            |  | Three Months   |    
|                            |  | Ended June 30, |    
|                            |  |                |    
|                            |  | 2006           |     |  | 2005 |  
|                            |  |                |     |  |      |  
|Cash paid for interest      |  | $              | 2.9 |  |      | $ | 2.4 | 
|Interest paid in-kind       |  |                | 0.3 |  |      |   | 0.7 | 
|Other non-cash charges, net |  |                | 0.3 |  |      |   | 3.5 | 
|                            |  |                |     |  |      |  
|                            |  | $              | 3.5 |  |      | $ | 6.6 | 
|                            |  |                |     |  |      |  



27



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##### Table of Contents





Interest Income.


Loss on Debt Extinguishment.


Other Income (Expense), Net.


Income Taxes. Gulf
Horizon


Net Income (Loss). Gulf
Horizon


Six Months Ended June 30, 2006 Compared to the Six
Months Ended June 30, 2005


Contract Revenues.


Gross Profit.


Selling, General and Administrative Expenses.


28



---



##### Table of Contents





Gain on Insurance Settlement. Gulf
Horizon.


Reserves for claims and receivables.


Interest Expense.


|                                                            |  |                |     |  |      |   |      | 
|----------------------------------------------------------- |  | -------------- | --- |  | ---- | - | ---- | 
|                                                            |  | Six Months     |    
|                                                            |  | Ended June 30, |    
|                                                            |  |                |    
|                                                            |  | 2006           |     |  | 2005 |  
|                                                            |  |                |     |  |      |  
|Cash paid for interest                                      |  | $              | 6.4 |  |      | $ | 4.7  | 
|Interest paid in-kind                                       |  |                | 0.8 |  |      |   | 4.9  | 
|Accretion in the fair value of the Series A Preferred Stock |  |                |    |  |      |   | 0.9  | 
|Other non-cash charges, net                                 |  |                | 0.4 |  |      |   | 6.4  | 
|                                                            |  |                |     |  |      |  
|                                                            |  | $              | 7.6 |  |      | $ | 16.9 | 
|                                                            |  |                |     |  |      |  



Interest Income.


Loss on Debt Extinguishment.


Other Income (Expense), Net.


29



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##### Table of Contents



Income Taxes. Gulf Horizon


Net Income (Loss). Gulf
Horizon


Liquidity and Capital Resources




| |        
| | -------
| | General



start-up start-up




| |              
| | -------------
| | Recent Events

Texas Horizon


30



---



##### Table of Contents











| |           
| | ----------
| | Cash Flows



Texas Horizon






| |                
| | ---------------
| | Working Capital

Gulf Horizon.


31



---



##### Table of Contents







| |             
| | ------------
| | Indebtedness

Texas Horizon


Texas Horizon






successor-in


32



---



##### Table of Contents











| |                      
| | ---------------------
| | Claims and Litigation







| |                               
| | ------------------------------
| | Off-Balance Sheet Arrangements





| |                                                 
| | ------------------------------------------------
| | Contractual Obligations and Capital Expenditures



|                                        |  |           |        |  |      |   |        |      |  |   |        |  |  |      |        |  |            |   |        |       |  |   |        |  |  |   |         | 
|--------------------------------------- |  | --------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ |  |  | ---- | ------ |  | ---------- | - | ------ | ----- |  | - | ------ |  |  | - | ------- | 
|                                        |  | Remainder |        |  |      |   |        |      |  |   |        |  |  |      |       
|                                        |  | of 2006   |        |  | 2007 |   |        | 2008 |  |   | 2009   |  |  | 2010 |        |  | Thereafter |   |        | Total | 
|                                        |  |           |        |  |      |   |        |      |  |   |        |  |  |      |        |  |            |   |        |       | 
|Principal and interest payments on debt |  | $         | 16,398 |  |      | $ | 28,990 |      |  | $ | 27,239 |  |  | $    | 19,852 |  |            | $ | 48,009 |       |  | $ | 29,991 |  |  | $ | 170,479 | 
|Operating leases                        |  |           | 1,227  |  |      |   | 2,391  |      |  |   | 2,200  |  |  |      | 757    |  |            |   | 1,879  |       |  |   | 8,855  |  |  |   | 17,309  | 
|                                        |  |           |        |  |      |   |        |      |  |   |        |  |  |      |        |  |            |   |        |       | 
|                                        |  | $         | 17,625 |  |      | $ | 31,381 |      |  | $ | 29,439 |  |  | $    | 20,609 |  |            | $ | 49,888 |       |  | $ | 38,846 |  |  | $ | 187,788 | 
|                                        |  |           |        |  |      |   |        |      |  |   |        |  |  |      |        |  |            |   |        |       | 

33



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##### Table of Contents





Forward-Looking Statements






| |   |                                                                                                                                                                                                                                                                                     
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our ability to finance our debt obligations and finance our
    capital requirements;                                                                                                                                                                                               
|
| |  | our ability to obtain additional financing needed in the future;                                                                                                                                                                                                                    
|
| |  | our ability to comply with our financial and other covenants in
    the future;                                                                                                                                                                                                     
|
| |  | the potential impairment of our assets in the future;                                                                                                                                                                                                                               
|
| |  | our potential to incur operating losses in the future;                                                                                                                                                                                                                              
|
| |  | our largest stockholders continuing to have a significant degree
    of influence over us;                                                                                                                                                                                          
|
| |  | oil and gas prices are volatile and price declines may affect 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;                                                                                            
|
| |  | 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;                                      
|
| |  | our ability to obtain performance bonds and letters of credit if
    required to secure our performance under new international
    contracts;                                                                                                                                      
|
| |  | the highly competitive nature of the marine construction
    business;                                                                                                                                                                                                              
|
| |  | our operations in the U.S. Gulf of Mexico may be adversely
    impacted by tropical storms and hurricanes;                                                                                                                                                                          
|
| |  | operating hazards, including the unpredictable effect of natural
    occurrences on operations, such as hurricanes and other hazards
    associated with maritime activities, and the significant
    possibility of accidents resulting in personal injury and
    property damage;
|
| |  | 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 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;                                                                                                                                                                                       
|
| |  | our ability to obtain and retain highly skilled personnel;                                                                                                                                                                                                                          
|
| |  | the effect on our performance of regulatory programs and
    environmental matters; and                                                                                                                                                                                             
|
| |  | a possible terrorist attack or armed conflict.                                                                                                                                                                                                                                      

34



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##### Table of Contents





10-K, 10-K,







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











35



---



##### Table of Contents








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

13a-15(b) 13a-15(e)







PART II. OTHER INFORMATION







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



Gulf
Horizon Gulf Horizon Gulf
Horizon.




36



---



##### Table of Contents








|         |             
|-------- | ------------
|Item 1A. | Risk Factors

10-K, 10-K,




| |                                 
| | --------------------------------
| | Our business is highly cyclical.





| |   |                                                                                               
| | - | ----------------------------------------------------------------------------------------------
| |  | revenues, profitability and cash flows;                                                       
|
| |  | the fair market value of our fleet of marine equipment;                                       
|
| |  | our ability to maintain or increase our borrowing
    capacity; and                           
|
| |  | our ability to obtain additional capital to finance our
    business, and the cost of capital.



| |                                                                      
| | ---------------------------------------------------------------------
| | Oil and gas prices are volatile and price declines may
    affect us.





| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | the cost of exploring for, producing and delivering oil and gas;                           
|
| |  | the discovery rate of new oil and gas reserves;                                            
|
| |  | the rate of decline of existing and new oil and gas reserves;                              
|
| |  | available pipeline and other oil and natural gas transportation
    capacity;              
|
| |  | the ability of oil and natural gas companies to raise capital;                             
|
| |  | actions by OPEC, the Organization of Petroleum Exporting
    Countries;                    
|
| |  | political instability in the Middle East and other major oil and
    gas producing regions;
|
| |  | economic conditions in the United States and elsewhere;                                    
|
| |  | governmental regulations, both domestic and foreign;                                       
|
| |  | domestic and foreign tax policy;                                                           

37



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##### Table of Contents





| |   |                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------
| |  | weather conditions in the United States and elsewhere;                                                                    
|
| |  | the pace adopted by foreign governments for the exploration,
    development and production of their oil and gas reserves;
|
| |  | the price of foreign imports of oil and gas; and                                                                          
|
| |  | the overall supply and demand for oil and gas.                                                                            



| |                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to finance our debt obligations and capital
    requirements depends on generating sufficient cash flow from our
    operations.







| |                                                                    
| | -------------------------------------------------------------------
| | We have a history of losses and may incur losses in the
    future.





| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | We incur risks associated with bidding and performing work
    under fixed-price contracts.





| |                                                                            
| | ---------------------------------------------------------------------------
| | Our operations may be adversely impacted by extreme
    weather conditions.



38



---



##### Table of Contents







| |                                                                                       
| | --------------------------------------------------------------------------------------
| | We operate in a highly competitive industry in which price
    competition is intense.







| |                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------
| | The outcome of arbitration or litigation to recover claims
    for work performed may adversely affect our liquidity and
    financing requirements.





| |                                                                                                     
| | ----------------------------------------------------------------------------------------------------
| | If we are unable to attract and retain skilled workers,
    our business will be adversely affected.





| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | The seasonality of the marine construction industry may
    adversely affect our operations.



39



---



##### Table of Contents







| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Operating hazards may increase our operating costs and we
    have limited insurance coverage.





| |                                                                                   
| | ----------------------------------------------------------------------------------
| | We may incur significant expenditures to comply with
    governmental regulations.







| |                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our international operations subject us to the
    U.S. Foreign Corrupt Practices Act, or FCPA, and our
    failure to comply with the laws and regulations thereunder could
    subject us to criminal and civil penalties.



40



---



##### Table of Contents





| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | Our international operations are subject to significant
    risks inherent in operating in foreign countries.





| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | political, social, and economic instability;                                                                                         
|
| |  | potential seizure or nationalization of assets;                                                                                      
|
| |  | increased operating costs;                                                                                                           
|
| |  | modification, renegotiation or nullification of contracts;                                                                           
|
| |  | import-export quotas;                                                                                                                
|
| |  | other forms of government regulation which are beyond our
    control;                                                               
|
| |  | war or terrorist activity; and                                                                                                       
|
| |  | fluctuating currency values, hard currency shortages and
    controls on currency exchange and repatriation of income or
    capital.







| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | the awarding of contracts to local contractors;                                                                                              
|
| |  | the employment of local citizens; and                                                                                                        
|
| |  | the establishment of foreign subsidiaries with significant
    ownership positions reserved by the foreign government for local
    citizens.





| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our ability to obtain performance bonds and letters of
    credit required to secure our performance under contracts may
    affect our ability to bid and obtain contract awards.





| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | Our future financial results could be adversely impacted
    by asset impairments or other charges.



41



---



##### Table of Contents





| |                                                                  
| | -----------------------------------------------------------------
| | We may be further limited in our use of net operating
    losses.





| |                                                        
| | -------------------------------------------------------
| | We utilize
    percentage-of-completion
    accounting.

percentage-of




| |                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------
| | Estimates and assumptions that we use to prepare our
    financial statements could differ materially from actual future
    results.





| |                                                                           
| | --------------------------------------------------------------------------
| | A possible terrorist attack or armed conflict could harm
    our business.





| |                            
| | ---------------------------
| | We depend on key personnel.



42



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##### Table of Contents








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

|         |    |    |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|-------- | -- | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |    |   
|         |    |   
|         | 3  | .1 |  | Amended and Restated Certificate of Incorporation of the Company
    (Incorporated by reference to the Companys Current Report
    on Form 8-K filed September 19, 2005)                                                                                                                                                                                                                                       
|        
|         | 3  | .2 |  | Certificate of Amendment to the Amended and Restated Certificate
    of Incorporation of the Company (Incorporated by reference to
    the Companys Current Report on Form 8-K filed
    April 13, 2006)                                                                                                                                                                                                       
|        
|         | 3  | .3 |  | Bylaws of the Company (Incorporated by reference to the
    Companys Current Report on Form 8-K filed
    September 19, 2005)                                                                                                                                                                                                                                                                                  
|        
|         | 4  | .1 |  | Specimen of Common Stock Certificate (Incorporated by reference
    to the Companys Current Report on Form 8-K filed
    April 13, 2006)                                                                                                                                                                                                                                                                       
|        
|         | 10 | .1 |  | Third Amendment to Amended and Restated Loan Agreement and
    Promissory Notes, effective as of June 29, 2006, by and
    among Horizon Offshore, Inc., Horizon Vessels, Inc., Horizon
    Offshore Contractors, Inc. and General Electric Capital
    Corporation, successor-in-interest to SouthTrust Bank
    (Incorporated by reference to the Companys Current Report
    on Form 8-K filed July 6, 2006)
|        
|         | 10 | .2 |  | Horizon Offshore, Inc. 2006 Director Stock Plan (Incorporated by
    reference to Appendix A of the Companys Definitive
    Proxy Statement on Schedule 14A filed July 11, 2006)*                                                                                                                                                                                                                              
|        
|         | 31 | .1 |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 (Filed herewith)                                                                                                                                                                                                                                                                                                                    
|        
|         | 31 | .2 |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 (Filed herewith)                                                                                                                                                                                                                                                                                                                    
|        
|         | 32 | .1 |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002 (Filed herewith)                                                                                                                                                                                                                                                                                                                    
|        
|         | 32 | .2 |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002 (Filed herewith)                                                                                                                                                                                                                                                                                                                    






43



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##### Table of Contents






SIGNATURES






| |                       
| | ----------------------
| | HORIZON OFFSHORE, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ Ronald D. Mogel

| |                                           
| | ------------------------------------------
| |                                           
| | Ronald D. Mogel                           
| | Vice President and Chief Financial Officer



44



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##### Table of Contents



INDEX TO EXHIBITS


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                 
|------- | -- | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    | Description
|        |    |            
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation of the Company
    (Incorporated by reference to the Companys Current Report
    on Form 8-K filed September 19, 2005)                                                                                                                                                                                                                                       
|        | 3  | .2          |  | Certificate of Amendment to the Amended and Restated Certificate
    of Incorporation of the Company (Incorporated by reference to
    the Companys Current Report on Form 8-K filed
    April 13, 2006)                                                                                                                                                                                                       
|        | 3  | .3          |  | Bylaws of the Company (Incorporated by reference to the
    Companys Current Report on Form 8-K filed
    September 19, 2005)                                                                                                                                                                                                                                                                                  
|        | 4  | .1          |  | Specimen of Common Stock Certificate (Incorporated by reference
    to the Companys Current Report on Form 8-K filed
    April 13, 2006)                                                                                                                                                                                                                                                                       
|        | 10 | .1          |  | Third Amendment to Amended and Restated Loan Agreement and
    Promissory Notes, effective as of June 29, 2006, by and
    among Horizon Offshore, Inc., Horizon Vessels, Inc., Horizon
    Offshore Contractors, Inc. and General Electric Capital
    Corporation, successor-in-interest to SouthTrust Bank
    (Incorporated by reference to the Companys Current Report
    on Form 8-K filed July 6, 2006)
|        | 10 | .2          |  | Horizon Offshore, Inc. 2006 Director Stock Plan (Incorporated by
    reference to Appendix A of the Companys Definitive
    Proxy Statement on Schedule 14A filed July 11, 2006)*                                                                                                                                                                                                                              
|       
|        | 31 | .1          |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 (Filed herewith)                                                                                                                                                                                                                                                                                                                    
|        | 31 | .2          |  | Certification Pursuant to Section 302 of the Sarbanes-Oxley
    Act of 2002 (Filed herewith)                                                                                                                                                                                                                                                                                                                    
|        | 32 | .1          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002 (Filed herewith)                                                                                                                                                                                                                                                                                                                    
|        | 32 | .2          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley
    Act of 2002 (Filed herewith)                                                                                                                                                                                                                                                                                                                    






45