##### 









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-Q

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

Commission file number 0-23653

Horizon Offshore, Inc.

(Exact name of registrant as specified in its
charter)


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

2500 CityWest Boulevard,
Suite 2200

Houston, Texas 77042


(Address of principal executive
offices)


(Zip code)


(713) 361-2600

(Registrants telephone number, including
area code)


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for
the past 90 days.

Yes þ          No o

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

The number of shares of the registrants
common stock, $1.00 par value per share, outstanding as of
August 11, 2003 was 26,444,257.



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##### 

TABLE OF CONTENTS



|                                                   |                                                                                               |                                            |  |  |  |  |  | 
|-------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|PART I -- FINANCIAL INFORMATION                   
|                                                   | Item 1. Financial Statements                                                                 
|                                                   |                                                                                               | CONSOLIDATED BALANCE SHEETS               
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF OPERATIONS     
|                                                   |                                                                                               | CONSOLIDATED STATEMENTS OF CASH FLOWS     
|                                                   |                                                                                               | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|                                                   | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                   | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                   | Item 4. Controls and Procedures                                                              
|PART II -- OTHER INFORMATION                      
|                                                   | Item 4. Submission of Matters to a Vote of Security Holders                                  
|                                                   | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                         
|INDEX TO EXHIBITS                                 
|Loan Agreement                                    
|Amendment No.1 to Loan Agreement                  
|Loan Agreement                                    
|Amendment No.2 to Credit Agreement                
|Employment & Non- Competition Agreement - D. Sharp
|Emplyment & Non-Competition Agreement - W. Gibbens
|Certification of CEO Pursuant to Section 302      
|Certification of CFO Pursuant to Section 302      
|Certification of CEO Pursuant to Section 906      
|Certification of CFO Pursuant to Section 906      

HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

TABLE OF CONTENTS

|                              |  |                                                                                                     |    |  |    | 
|----------------------------- |  | --------------------------------------------------------------------------------------------------- | -- |  | -- | 
|                              |  |                                                                                                    
|Description                   |  | Page                                                                                               
|                              |  |                                                                                                    
|PART I. FINANCIAL INFORMATION |  |                                                                                                     |    | 
|Item 1.                       |  | Financial Statements                                                                                |    |  | 3  | 
|                              |  | Consolidated Balance Sheets as of June 30,
    2003 and December 31, 2002                           |    |  | 3  | 
|                              |  | Consolidated Statements of Operations for the
    Three and Six Months Ended June 30, 2003 and 2002 |    |  | 4  | 
|                              |  | Consolidated Statements of Cash Flows for the Six
    Months Ended June 30, 2003 and 2002           |    |  | 5  | 
|                              |  | Notes to Consolidated Financial Statements                                                          |    |  | 6  | 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations           |    |  | 15 | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                      |    |  | 26 | 
|Item 4.                       |  | Controls and Procedures                                                                             |    |  | 26 | 
|                             
|PART II. OTHER INFORMATION    |  |                                                                                                     |    | 
|Item 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                             |    |  | 26 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                                    |    |  | 27 | 
|Signature                     |  |                                                                                                     | 28 | 
|Index to Exhibits             |  |                                                                                                     | 29 | 

2



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##### 






PART I  FINANCIAL
INFORMATION






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

HORIZON OFFSHORE, INC. AND
SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


|                                          |                                                                                             |                             |                            |              |        |         |         |         |        |         | 
|----------------------------------------- | ------------------------------------------------------------------------------------------- | --------------------------- | -------------------------- | ------------ | ------ | ------- | ------- | ------- | ------ | ------- | 
|                                          |                                                                                             | June 30,                    |                            | December 31,
|                                          |                                                                                             | 2003                        |                            | 2002        
|                                          |                                                                                             |                             |                            |             
|                                          |                                                                                             | (Unaudited)                 |                            |             
|                                          |                                                                                             |                            
|                                          |                                                                                             | (In thousands,             
|                                          |                                                                                             | except share data)         
|ASSETS                                   
|CURRENT ASSETS:                           |                                                                                             |                             |                            |              |        |         |         |        
|                                          | Cash and cash equivalents                                                                   |                             | $                          | 18,276       |        |         | $       | 6,073   |       
|                                          | Accounts receivable                                                                        |                             |                            |              |        |         |         |         |       
|                                          |                                                                                             | Contract receivables        |                            |              | 57,075 |         |         |         | 52,362 |        
|                                          |                                                                                             | Costs in excess of billings |                            |              | 82,378 |         |         |         | 78,494 |        
|                                          |                                                                                             | Affiliated parties          |                            |              | 170    |         |         |         | 170    |        
|                                          | Other current assets                                                                        |                             |                            | 2,404        |        |         |         | 3,010   |       
|                                          |                                                                                             |                             |                            |              |        |         |         |        
|                                          |                                                                                             |                             | Total current assets       |              |        | 160,303 |         |         |        | 140,109 | 
|PROPERTY AND EQUIPMENT, net               |                                                                                             |                             | 263,880                    |              |        |         | 257,847 |        
|INVENTORY                                 |                                                                                             |                             | 7,944                      |              |        |         | 7,816   |        
|OTHER ASSETS                              |                                                                                             |                             | 14,367                     |              |        |         | 14,761  |        
|                                          |                                                                                             |                             |                            |              |        |         |         |        
|                                          |                                                                                             | $                           | 446,494                    |              |        | $       | 420,533 |        
|                                          |                                                                                             |                             |                            |              |        |         |         |        
|                                         
|LIABILITIES AND STOCKHOLDERS
    EQUITY 
|                                         
|CURRENT LIABILITIES:                      |                                                                                             |                             |                            |              |        |         |         |        
|                                          | Accounts payable                                                                            |                             | $                          | 29,203       |        |         | $       | 34,930  |       
|                                          | Accrued liabilities                                                                         |                             |                            | 8,142        |        |         |         | 10,641  |       
|                                          | Accrued job costs                                                                           |                             |                            | 48,489       |        |         |         | 54,866  |       
|                                          | Billings in excess of costs                                                                 |                             |                            | 1,203        |        |         |         | 602     |       
|                                          | Current maturities of long-term debt                                                        |                             |                            | 41,197       |        |         |         | 8,262   |       
|                                          | Related party debt                                                                          |                             |                            | 15,000       |        |         |         |        |       
|                                          | Current taxes payable                                                                       |                             |                            | 1,040        |        |         |         | 423     |       
|                                          |                                                                                             |                             |                            |              |        |         |         |        
|                                          |                                                                                             |                             | Total current liabilities  |              |        | 144,274 |         |         |        | 109,724 | 
|LONG-TERM DEBT, net of current maturities |                                                                                             |                             | 96,905                     |              |        |         | 90,062  |        
|DEFERRED INCOME TAXES, net                |                                                                                             |                             | 201                        |              |        |         | 9,072   |        
|                                          |                                                                                             |                             |                            |              |        |         |         |        
|                                          |                                                                                             |                             | Total liabilities          |              |        | 241,380 |         |         |        | 208,858 | 
|COMMITMENTS AND CONTINGENCIES             |                                                                                             |                             |                            |              |        |         |         |        
|STOCKHOLDERS EQUITY:                     |                                                                                             |                             |                            |              |        |         |         |        
|                                          | Preferred stock, $1 par value,
    5,000,000 shares authorized, none issued and outstanding |                             |                            |             |        |         |         |        |       
|                                          | Common stock, $1 par value,
    35,000,000 shares authorized, 27,290,582 shares issued      |                             |                            | 16,583       |        |         |         | 16,583  |       
|                                          | Additional paid-in capital                                                                  |                             |                            | 182,803      |        |         |         | 182,722 |       
|                                          | Retained earnings                                                                           |                             |                            | 11,348       |        |         |         | 18,353  |       
|                                          | Treasury stock, 856,934 and 912,207 shares,
    respectively                                |                             |                            | (5,620       | )      |         |         | (5,983  | )     
|                                          |                                                                                             |                             |                            |              |        |         |         |        
|                                          |                                                                                             |                             | Total stockholders equity |              |        | 205,114 |         |         |        | 211,675 | 
|                                          |                                                                                             |                             |                            |              |        |         |         |        
|                                          |                                                                                             | $                           | 446,494                    |              |        | $       | 420,533 |        
|                                          |                                                                                             |                             |                            |              |        |         |         |        

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

3



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                           |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |            |  
|-------------------------------------------------------------------------- | ------------------------------------------- | ----------------------------------------------- | ------- | ------------------------ | - | ---- | ------ | ---------- | - | - | ------- | ---------- | - | - | ------- | ---------- | -
|                                                                           |                                             |                                                 |         |                         
|                                                                           |                                             | For the Three Months Ended                      |         | For the Six Months Ended
|                                                                           |                                             | June 30,                                        |         | June 30,                
|                                                                           |                                             |                                                 |         |                         
|                                                                           |                                             | 2003                                            |         | 2002                     |   | 2003 |        | 2002      
|                                                                           |                                             |                                                 |         |                          |   |      |        |           
|                                                                           |                                             |                                                
|                                                                           |                                             | (Unaudited)                                    
|                                                                           |                                             | (In thousands, except share and per share data)
|CONTRACT REVENUES                                                          |                                             | $                                               | 57,928  |                          |   | $    | 64,291 |            |   | $ | 124,989 |            |   | $ | 130,394 |           
|COST OF CONTRACT REVENUES                                                  |                                             |                                                 | 58,678  |                          |   |      | 54,751 |            |   |   | 123,205 |            |   |   | 115,807 |           
|                                                                           |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|                                                                           | Gross profit                                |                                                 |         | (750                     | ) |      |        | 9,540      |   |   |         | 1,784      |   |   |         | 14,587     |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                               |                                             |                                                 | 6,481   |                          |   |      | 4,391  |            |   |   | 11,899  |            |   |   | 7,892   |           
|                                                                           |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|                                                                           | Operating income (loss)                     |                                                 |         | (7,231                   | ) |      |        | 5,149      |   |   |         | (10,115    | ) |   |         | 6,695      |  
|OTHER:                                                                     |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|                                                                           | Interest expense, net of amount capitalized |                                                 |         | (2,405                   | ) |      |        | (960       | ) |   |         | (3,948     | ) |   |         | (1,983     | )
|                                                                           | Interest income                             |                                                 |         | 10                       |   |      |        | 28         |   |   |         | 21         |   |   |         | 53         |  
|                                                                           | Other income (expense), net                 |                                                 |         | (658                     | ) |      |        | (428       | ) |   |         | (700       | ) |   |         | (430       | )
|                                                                           |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|NET INCOME (LOSS) BEFORE INCOME TAXES                                      |                                             |                                                 | (10,284 | )                        |   |      | 3,789  |            |   |   | (14,742 | )          |   |   | 4,335   |           
|INCOME TAX PROVISION (BENEFIT)                                             |                                             |                                                 | (6,227  | )                        |   |      | 1,175  |            |   |   | (7,737  | )          |   |   | 1,344   |           
|                                                                           |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|NET INCOME (LOSS)                                                          |                                             | $                                               | (4,057  | )                        |   | $    | 2,614  |            |   | $ | (7,005  | )          |   | $ | 2,991   |           
|                                                                           |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|EARNINGS PER SHARE:                                                        |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|Net income (loss) per share  BASIC                                        |                                             | $                                               | (0.15   | )                        |   | $    | 0.10   |            |   | $ | (0.27   | )          |   | $ | 0.12    |           
|                                                                           |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|Net income (loss) per share  DILUTED                                      |                                             | $                                               | (0.15   | )                        |   | $    | 0.10   |            |   | $ | (0.27   | )          |   | $ | 0.12    |           
|                                                                           |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|WEIGHTED AVERAGE SHARES USED IN COMPUTING NET
    INCOME (LOSS) PER SHARE: |                                             |                                                 |         |                          |   |      |        |            |   |   |         |            |   |   |         |           
|                                                                           | BASIC                                       |                                                 |         | 26,417,147               |   |      |        | 26,260,395 |   |   |         | 26,402,438 |   |   |         | 24,777,753 |  
|                                                                           | DILUTED                                     |                                                 |         | 26,417,147               |   |      |        | 26,925,664 |   |   |         | 26,402,438 |   |   |         | 25,269,999 |  

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

4



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |       |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------------------- | ------ | ------ | ------- | ------- | ----- | ------- | ------- | -
|                                                         |                                                                                                         |                                                                                    
|                                                         |                                                                                                         | Six Months Ended                                                                   
|                                                         |                                                                                                         | June 30,                                                                           
|                                                         |                                                                                                         |                                                                                    
|                                                         |                                                                                                         | 2003                                                                                |                             | 2002                                                   
|                                                         |                                                                                                         |                                                                                     |                             |                                                        
|                                                         |                                                                                                         |                                                                                    
|                                                         |                                                                                                         | (Unaudited)                                                                        
|                                                         |                                                                                                         | (In thousands)                                                                     
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|                                                         | Net income (loss)                                                                                       |                                                                                     | $                           | (7,005                                                  | )      |        | $       | 2,991   |      
|                                                         | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities  |                                                                                     |                             |                                                         |        |        |         |         |      
|                                                         |                                                                                                         | Depreciation and amortization                                                       |                             |                                                         | 9,294  |        |         |         | 7,004 |        
|                                                         |                                                                                                         | Deferred income tax expense (benefit)                                               |                             |                                                         | (8,871 | )      |         |         | 1,344 |        
|                                                         |                                                                                                         | Expense recognized for issuance of treasury stock
    for 401(k) plan contributions |                             |                                                         | 232    |        |         |         | 203   |        
|                                                         |                                                                                                         | Stock compensation expense                                                          |                             |                                                         | 212    |        |         |         |      |        
|                                                         |                                                                                                         | Loan prepayment penalty financed through
    additional debt                        |                             |                                                         | 569    |        |         |         |      |        
|                                                         |                                                                                                         | Changes in operating assets and
    liabilities                                    |                             |                                                         |        |        |         |         |       |        
|                                                         |                                                                                                         |                                                                                     | Accounts receivable         |                                                         |        | (4,713 | )       |         |       | 1,293   |        
|                                                         |                                                                                                         |                                                                                     | Costs in excess of billings |                                                         |        | (3,884 | )       |         |       | 7,194   |        
|                                                         |                                                                                                         |                                                                                     | Billings in excess of costs |                                                         |        | 601    |         |         |       | (204    | )      
|                                                         |                                                                                                         |                                                                                     | Inventory                   |                                                         |        | (128   | )       |         |       | (1,557  | )      
|                                                         |                                                                                                         |                                                                                     | Other assets                |                                                         |        | (1,142 | )       |         |       | (3,655  | )      
|                                                         |                                                                                                         |                                                                                     | Accounts payable            |                                                         |        | (5,727 | )       |         |       | 23,947  |        
|                                                         |                                                                                                         |                                                                                     | Accrued liabilities         |                                                         |        | (6,570 | )       |         |       | (6,012  | )      
|                                                         |                                                                                                         |                                                                                     | Accrued job costs           |                                                         |        | (6,377 | )       |         |       | (18,720 | )      
|                                                         |                                                                                                         |                                                                                     | Current taxes payable       |                                                         |        | 556    |         |         |       |        |        
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|                                                         |                                                                                                         |                                                                                     |                             | Net cash provided by (used in) operating
    activities |        |        | (32,953 | )       |       |         | 13,828  |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|                                                         | Purchases and additions to property and equipment                                                       |                                                                                     |                             | (8,412                                                  | )      |        |         | (22,679 | )    
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|                                                         |                                                                                                         |                                                                                     |                             | Net cash used in investing activities                   |        |        | (8,412  | )       |       |         | (22,679 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|                                                         | Borrowings under term debt                                                                              |                                                                                     |                             | 16,362                                                  |        |        |         | 4,045   |      
|                                                         | Principal payments on term debt                                                                         |                                                                                     |                             | (4,169                                                  | )      |        |         | (3,948  | )    
|                                                         | Borrowings under revolving credit facilities                                                            |                                                                                     |                             | 66,516                                                  |        |        |         | 56,524  |      
|                                                         | Payments on revolving credit facilities                                                                 |                                                                                     |                             | (39,500                                                 | )      |        |         | (83,300 | )    
|                                                         | Borrowings under related party debt                                                                     |                                                                                     |                             | 15,000                                                  |        |        |         |        |      
|                                                         | Loan fees                                                                                               |                                                                                     |                             | (641                                                    | )      |        |         | (155    | )    
|                                                         | Proceeds from issuance of common stock, net                                                             |                                                                                     |                             |                                                        |        |        |         | 30,844  |      
|                                                         | Stock option transactions and other                                                                     |                                                                                     |                             |                                                        |        |        |         | 282     |      
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|                                                         |                                                                                                         |                                                                                     |                             | Net cash provided by financing activities               |        |        | 53,568  |         |       |         | 4,292   |  
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS |                                                                                                         |                                                                                     | 12,203                      |                                                         |        |        | (4,559  | )      
|CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD         |                                                                                                         |                                                                                     | 6,073                       |                                                         |        |        | 7,864   |        
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|CASH AND CASH EQUIVALENTS AT END OF PERIOD               |                                                                                                         | $                                                                                   | 18,276                      |                                                         |        | $      | 3,305   |        
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|SUPPLEMENTAL DISCLOSURES:                                |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|                                                         | Cash paid for interest                                                                                  |                                                                                     | $                           | 2,948                                                   |        |        | $       | 2,774   |      
|                                                         | Cash paid for income taxes                                                                              |                                                                                     | $                           | 578                                                     |        |        | $       |        |      
|NON-CASH INVESTING AND FINANCING ACTIVITIES:             |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |        
|                                                         | Purchases and additions to property and equipment
    included in accrued liabilities                   |                                                                                     | $                           | 4,132                                                   |        |        | $       | 7,281   |      
|                                                         | Repayment of debt with proceeds from additional
    term debt                                           |                                                                                     | $                           | 14,069                                                  |        |        | $       |        |      

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

5



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS




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

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



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

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



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

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

|          |  |                |      |                |  |      |      |      |  |  |      |   |  |  |      |  
|--------- |  | -------------- | ---- | -------------- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | -
|          |  |                |      |               
|          |  | Three Months   |      | Six Months    
|          |  | Ended June 30, |      | Ended June 30,
|          |  |                |      |               
|Customer  |  | 2003           |      | 2002           |  | 2003 |      | 2002
|          |  |                |      |                |  |      |      |     
|Company A |  |                | 27.8 | %              |  |      | 6.5  | %    |  |  | 44.5 | % |  |  | 3.2  | %
|Company B |  |                | 24.1 | %              |  |      |     |      |  |  | 14.4 | % |  |  |     |  
|Company C |  |                | 10.4 | %              |  |      | 3.6  | %    |  |  | 9.7  | % |  |  | 4.1  | %
|Company D |  |                | 16.0 | %              |  |      |     |      |  |  | 7.4  | % |  |  |     |  
|Company E |  |                |     |                |  |      | 10.6 | %    |  |  |     |   |  |  | 12.3 | %

In addition to the list in the table above,
Petróleos Mexicanos (Pemex) accounted for 0.1% and 2.9% of
revenues for the three and six months ended June 30, 2003
compared to 38.9% and 39.1% for the three and six months ended
June 30, 2002, respectively. There were no other customers
accounting for more than 10% of consolidated revenues for the
three and six months ended June 30, 2003 and 2002.

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

6



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

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



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

Construction contract revenues are recognized on
the percentage-of-completion method, measured by the percentage
of costs incurred to date to the total estimated costs for each
construction contract. We consider the percentage-of-completion
method to be the best available measure of progress on these
contracts. We follow the guidance of American Institute of
Certified Public Accountants (AICPA) Statement of Position
(SOP) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts,
for our accounting policy relating to the use of the
percentage-of-completion method, estimated costs and claim
recognition for construction contracts. Contract revenue
reflects the original contract price adjusted for agreed upon
change orders and unapproved claims. We recognize unapproved
claims only when the collection is deemed probable and if the
amount can be reasonably estimated for purposes of calculating
total profit or loss on long-term contracts. We record revenue
and the unbilled receivable for claims to the extent of costs
incurred and include no profit on claims recorded. Changes in
job performance, job conditions and estimated profitability,
including those arising from final contract settlements, may
result in revisions to costs and revenues and are recognized in
the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period
in which such losses are determined. The asset Costs in
excess of billings represents revenues recognized in
excess of amounts billed as determined on an individual contract
basis. The liability Billings in excess of costs
represents amounts billed in excess of revenues recognized on an
individual contract basis.

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



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

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

7



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

Interest is capitalized on the average amount of
accumulated expenditures for equipment that is undergoing major
modifications and refurbishment prior to being placed into
service. Interest is capitalized using an effective rate based
on related debt until the equipment is placed into service.
Interest expense for the three and six months ended
June 30, 2003 was net of $13,000 and $123,000 of
capitalized interest, respectively. Interest expense for the
three and six months ended June 30, 2002 was net of
$490,000 and $1,013,000 of capitalized interest, respectively.



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

We have significant investments in billed and
unbilled receivables as of June 30, 2003. At June 30,
2003, we had $2.3 million in contract receivables and
$61.6 million in costs in excess of billings from Pemex,
including $53.0 million in claims related to weather and
other delays, totaling $63.9 million. We believe our
receivables are realizable; however, any changes will be
recognized in the period in which they are determined. We have
historically not experienced any significant losses on
receivables, but significant losses would adversely affect our
financial position and results of operations and perhaps our
overall liquidity.

Inventory

Inventory consists of production platforms and
other marine structures received from time to time as partial
consideration from salvage projects performed in the
U.S. Gulf of Mexico. No significant non-cash consideration
was received during the six months ended June 30, 2003 and
2002. These structures are held for resale. The inventory is
valued at amounts not in excess of the fair value of services
provided. Horizon assesses the net realizable value of its
inventory items at each balance sheet date. Inventory is
classified as long-term due to the uncertain timing of its sale.



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

Dry-dock costs are direct costs associated with
scheduled major maintenance on the marine construction vessels.
Costs incurred in connection with dry-dockings are deferred and
amortized over the five-year cycle to the next scheduled
dry-docking. On June 29, 2001, AICPA issued an exposure
draft of a proposed SOP, Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment. If
adopted, we would be required to expense regulatory maintenance
cost on our vessels as incurred. We incurred and capitalized
dry-dock costs of $1.4 million and $3.8 million for
the six months ended June 30, 2003 and 2002, respectively.
As of June 30, 2003, deferred dry-dock costs totaled
$12.4 million. Expensing dry-dock costs would likely result
in greater variability of our quarterly operating results as a
substantial portion of our dry-dock activities take place during
the first and fourth quarters.



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

At June 30, 2003, we had two stock-based
compensation plans. Pursuant to Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation, we have elected to account
for stock-based employee compensation under the recognition and
measurement principles of Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net
income (loss), as all options granted under those plans had an
exercise price equal to the market value of the underlying
common stock on the date of grant. Additionally, for stock-based
compensation grants to non-employees, we recognize as
compensation expense the fair market value of such grants as
calculated pursuant to SFAS No. 123, amortized ratably
over the lesser of the vesting period of the respective option
or the individuals expected

8



---



##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

service period. The following table illustrates
the effect on net income (loss) and earnings per share if we had
applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation (in
thousands, except per share data).

|                                                                                                                                                    |                       |                    |        |                  |   |      |        |      |  |   |        |       |   |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ------------------ | ------ | ---------------- | - | ---- | ------ | ---- |  | - | ------ | ----- | - | - | ------ | ---- | 
|                                                                                                                                                    |                       |                    |        |                 
|                                                                                                                                                    |                       | Three Months Ended |        | Six Months Ended
|                                                                                                                                                    |                       | June 30,           |        | June 30,        
|                                                                                                                                                    |                       |                    |        |                 
|                                                                                                                                                    |                       | 2003               |        | 2002             |   | 2003 |        | 2002
|                                                                                                                                                    |                       |                    |        |                  |   |      |        |     
|Net income (loss), as reported                                                                                                                      |                       | $                  | (4,057 | )                |   | $    | 2,614  |      |  | $ | (7,005 | )     |   | $ | 2,991  |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                    | (463   | )                |   |      | (1,314 | )    |  |   | (945   | )     |   |   | (2,096 | )   
|                                                                                                                                                    |                       |                    |        |                  |   |      |        |      |  |   |        |       |   |   |        |     
|Pro forma net income (loss)                                                                                                                         |                       | $                  | (4,520 | )                |   | $    | 1,300  |      |  | $ | (7,950 | )     |   | $ | 895    |     
|                                                                                                                                                    |                       |                    |        |                  |   |      |        |      |  |   |        |       |   |   |        |     
|Earnings per share:                                                                                                                                 |                       |                    |        |                  |   |      |        |      |  |   |        |       |   |   |        |     
|                                                                                                                                                    | Basic  as reported   |                    | $      | (0.15            | ) |      | $      | 0.10 |  |   | $      | (0.27 | ) |   | $      | 0.12 | 
|                                                                                                                                                    | Basic  pro forma     |                    | $      | (0.17            | ) |      | $      | 0.05 |  |   | $      | (0.30 | ) |   | $      | 0.04 | 
|                                                                                                                                                    | Diluted  as reported |                    | $      | (0.15            | ) |      | $      | 0.10 |  |   | $      | (0.27 | ) |   | $      | 0.12 | 
|                                                                                                                                                    | Diluted  pro forma   |                    | $      | (0.17            | ) |      | $      | 0.05 |  |   | $      | (0.30 | ) |   | $      | 0.04 | 

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

|                        |  |      |      |      |  |  |      |  
|----------------------- |  | ---- | ---- | ---- |  |  | ---- | -
|                        |  | 2003 |      | 2002
|                        |  |      |      |     
|Option life (in years)  |  |      | 7    |      |  |  | 7    |  
|Volatility              |  |      | 77.6 | %    |  |  | 77.8 | %
|Risk-free interest rate |  |      | 3.51 | %    |  |  | 4.77 | %

In January 2003, we granted options to three
former directors to purchase 15,320 shares of common stock
at an exercise price equal to the market price of the common
stock on the date of grant. These options vested immediately,
and $56,000 was recorded as compensation expense in the
statements of operations during the first quarter of 2003. Also,
we recorded an additional $156,000 as compensation expense in
the statements of operations during the second quarter of 2003
related to the remeasurement of options in connection with the
resignation of a key employee.



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

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

9



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|   |                       
|-- | ----------------------
|2. | Property and Equipment

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

|                                      |  |          |         |              |  |   |         |  
|------------------------------------- |  | -------- | ------- | ------------ |  | - | ------- | -
|                                      |  | June 30, |         | December 31,
|                                      |  | 2003     |         | 2002        
|                                      |  |          |         |             
|Barges, vessels and related equipment |  | $        | 280,349 |              |  | $ | 268,770 |  
|Land and buildings                    |  |          | 19,732  |              |  |   | 19,726  |  
|Machinery and equipment               |  |          | 245     |              |  |   | 245     |  
|Office furniture and equipment        |  |          | 5,837   |              |  |   | 5,554   |  
|Leasehold improvements                |  |          | 4,116   |              |  |   | 3,440   |  
|                                      |  |          |         |              |  |   |         |  
|                                      |  |          | 310,279 |              |  |   | 297,735 |  
|Less  accumulated depreciation       |  |          | (46,399 | )            |  |   | (39,888 | )
|                                      |  |          |         |              |  |   |         |  
|Property and equipment, net           |  | $        | 263,880 |              |  | $ | 257,847 |  
|                                      |  |          |         |              |  |   |         |  

During the six months ended June 30, 2003,
we incurred $12.5 million of capital expenditures,
including capitalized interest, primarily related to the
upgrades of the Sea Horizons lift capacity to 1,200
tons, the Pacific Horizons main hoist equalizer and
the design and fabrication of a 110-ton plow used for the
pipeline installation and burial project in the Northeastern U.S.

We use the units-of-production method to
calculate depreciation on our major barges, vessels and related
equipment to accurately reflect the wear and tear of normal use.
The useful lives of our major barges and vessels range from
15 years to 18 years. Depreciation expense calculated
under the units-of-production method may be different than
depreciation expense calculated under the straight-line method
in any period. The annual depreciation based on utilization of
each vessel will not be less than 25% of annual straight-line
depreciation, and the cumulative depreciation based on
utilization of each vessel will not be less than 50% of
cumulative straight-line depreciation.



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



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

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



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

Earnings per share data for all periods presented
has been computed pursuant to SFAS No. 128,
Earnings Per Share that requires a presentation of
basic earnings per share (basic EPS) and diluted earnings per
share (diluted EPS). Basic EPS excludes dilution and is
determined by dividing income available to common stockholders
by the weighted average number of common shares outstanding
during the period. Diluted EPS reflects the potential dilution
that could occur if securities and other contracts to issue
common stock were exercised or converted into common stock. As
of June 30, 2003, we had outstanding options covering an
aggregate of 3,495,718 shares of common stock, of which
2,271,392 shares were exercisable. Excluded from the
computation of diluted EPS are options to purchase
3,495,718 shares of common stock as of June 30, 2003
at a weighted average price of $7.35 per share and
760,145 shares of common stock as of June 30, 2002 at
a weighted average price of $14.11 per share, as they would
be anti-dilutive.

10



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



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

During the six months ended June 30, 2003,
we contributed 55,273 shares of treasury stock to our
401(k) Plan. As of June 30, 2003, our treasury stock
consisted of 856,934 shares at a cost of $5.6 million.



|   |                           
|-- | --------------------------
|4. | Related Party Transactions

In August 1998, we entered into a master services
agreement with Odyssea Marine, Inc. (Odyssea), an entity
wholly-owned by Elliott Associates, L.P. (Elliott Associates)
and Elliott International, L.P. (Elliott International),
collectively our largest stockholder owning 15.8% of our
outstanding common stock, to charter certain marine vessels from
Odyssea. As of June 30, 2003, we owed Odyssea
$0.8 million for charter services compared to
$2.6 million at June 30, 2002. Odyssea billed Horizon
and Horizon paid Odyssea for services rendered under the
agreement as follows (in millions):

|                         |  |                  |      |      |  |   |     | 
|------------------------ |  | ---------------- | ---- | ---- |  | - | --- | 
|                         |  |                 
|                         |  | Six Months Ended
|                         |  | June 30,        
|                         |  |                 
|                         |  | 2003             |      | 2002
|                         |  |                  |      |     
|Amount billed to Horizon |  | $                | 10.7 |      |  | $ | 9.6 | 
|Amount paid to Odyssea   |  | $                | 14.1 |      |  | $ | 7.6 | 

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

In October 2000, we loaned $142,000 to our Chief
Operating Officer. Forgiveness of that debt in connection with
his resignation resulted in a write-off of his loan to selling,
general and administrative expenses in the accompanying
consolidated statement of operations as of June 30, 2003.
See Note 7.



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

As of June 30, 2003, we had approximately
$153.1 million of total outstanding debt. This represents
an approximate net increase of $54.8 million from
December 31, 2002. Of the $153.1 million of
outstanding debt, $57.9 million represents borrowings on
our three revolving credit facilities and $95.2 million
represents borrowings on eight term-debt facilities.

During the second quarter of 2003, we secured a
$35.0 million loan from Boeing Capital Corporation, of
which $30.0 million was advanced in June 2003 and the
remaining $5.0 million was advanced in July 2003. The loan
has a seven year term, due June 30, 2010 and bears interest
at Libor plus 4.8%. A portion of the proceeds from the loan was
used to retire our GMAC Business Credit, LLC debt of
$14.1 million. In connection with the retirement of this
debt, we recognized additional interest expense of
$0.3 million during the second quarter of 2003 related to
the write-off of deferred loan fees and incurred a prepayment
penalty of $0.6 million which is reflected in other expense
in the accompanying consolidated statement of operations as of
June 30, 2003. Additionally, we amended our existing
revolving credit facility with CIT Group/ Equipment Financing,
Inc. increasing borrowing capacity by $5.0 million. The
additional $5.0 million advance was received in July 2003
and is due October 31, 2003. We also obtained a
$15.0 million loan with a one-year term from Elliott
Associates during the second quarter of 2003, bearing interest
at 12%. Pursuant to the loan agreement, the interest rate
increases to 18% on August 15, 2003. In addition, the loan
agreement provides that if the loan is not repaid at the
maturity date, Elliott Associates has the option to convert up
to $5.0 million of the loan into our common stock at a
conversion price which is the greater of the weighted average
price of our common stock for the preceding 30 trading days or
$3.50 per share. Any outstanding loan balance at the
maturity date will be due in September 2004.

At June 30, 2003, we classified
$31.6 million as current maturities for our revolving
credit facilities to Southwest Bank of Texas, N.A. based on
their maturity of April 2004. We had $10.2 million
available under our three revolving credit facilities at
June 30, 2003. Our weighted average interest rate on all
indebtedness

11



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

was 5.4% at June 30, 2003, and our term-debt
borrowings currently require $796,000 in monthly principal
payments.

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

For the quarter ended June 30, 2003, we were
not in compliance with two debt covenants related to a
$6.7 million term loan and two debt covenants related to
our three revolving credit facilities. Compliance with these
covenants is determined quarterly based on the trailing four
quarters ending on each determination date. We have obtained a
waiver of compliance on the term loan as of the June 30,
2003 determination date and for the determination dates on or
before March 31, 2004. We have also obtained waivers of
compliance from the lenders on our three revolving credit
facilities as of the June 30, 2003 determination date. In
August 2003, we amended the loan agreement for our revolving
credit facility with CIT Group/ Equipment Financing, Inc. to
provide for less restrictive financial covenant ratios, which
had an outstanding balance of $26.3 million at
June 30, 2003. We expect to meet these covenants, as
amended, at future determination dates. Based on current and
forecasted demand for our services, we do not expect to meet the
financial covenant ratios at future determination dates for our
two revolving credit facilities with Southwest Bank of Texas,
N.A., which had an outstanding balance of $31.6 million at
June 30, 2003. We anticipate that we will need to further
amend these debt covenants or receive waivers of compliance for
these facilities in subsequent quarters of 2003. In connection
with the waivers obtained from Southwest Bank of Texas, N.A.,
our two revolving credit facilities will be reduced from an
aggregate of $50 million to $20 million upon
collection of the Pemex receivable. The Southwest Bank of Texas,
N.A. facilities are classified as current in the accompanying
balance sheet at June 30, 2003 based on their maturity of
April 2004. Our other facilities have been classified as
long-term due to their stated maturity date, the future expected
status of compliance with covenants, as amended, and our
expectations regarding future payoffs, refinancing, or waivers
to be obtained from Southwest Bank of Texas, N.A. In the event
that the Southwest Bank of Texas, N.A. covenants are not met in
the future, and we are unsuccessful in obtaining waivers of
compliance, cross-default provisions could result in
acceleration of substantially all of our indebtedness.

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



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

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

12



---



##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

have collected reimbursement of $3.0 million
and included the $0.5 million remaining insurance claim in
current assets as of June 30, 2003.



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

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



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

We use the liability method of accounting for
income taxes. We recorded a federal income tax benefit of
$(6.2) million, at a net effective rate of 60.6% on pre-tax
net loss of $(10.3) million for the quarter ended
June 30, 2003 and a federal income tax benefit of
$(7.7) million, at a net effective rate of 52.5% on pre-tax
net loss of $(14.7) million for the six months ended
June 30, 2003. The difference in the effective tax rates
and the statutory tax rates for 2003 is primarily due to the tax
benefit recognized in the second quarter of 2003 attributable to
a research and development credit of $(3.0) million. We
recorded a federal income tax provision of $1.2 million, at
a net effective rate of 31.0% on pre-tax net income of
$3.8 million for the quarter ended June 30, 2002 and a
federal income tax provision of $1.3 million, at a net
effective rate of 31.0% on pre-tax net income of
$4.3 million for the six months ended June 30, 2002.
The difference from the statutory tax rate is due to the
application of the extraterritorial income exclusion for income
earned primarily in Mexico from January 1, 2002 to
June 30, 2002. The exclusion allows us to exclude a portion
of income earned outside the United States for tax purposes.



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

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

|          |                |                    |   |                  |      |      |   |      |      |  |   |      |       |  |   |      |       | 
|--------- | -------------- | ------------------ | - | ---------------- | ---- | ---- | - | ---- | ---- |  | - | ---- | ----- |  | - | ---- | ----- | 
|          |                |                    |   |                 
|          |                | Three Months Ended |   | Six Months Ended
|          |                | June 30,           |   | June 30,        
|          |                |                    |   |                 
|          |                | 2003               |   | 2002             |      | 2003 |   | 2002
|          |                |                    |   |                  |      |      |   |     
|Revenues: |                |                    |   |                  |      |      |   |      |      |  |   |      |       |  |   |     
|          | Domestic       |                    | $ | 44.0             |      |      | $ | 26.6 |      |  | $ | 96.1 |       |  | $ | 52.4 |      
|          | Latin America  |                    |   |                 |      |      |   | 34.1 |      |  |   | 3.6  |       |  |   | 71.4 |      
|          | West Africa    |                    |   | (1.3             | )    |      |   |     |      |  |   | 5.6  |       |  |   |     |      
|          | Southeast Asia |                    |   | 15.1             |      |      |   | 2.8  |      |  |   | 19.2 |       |  |   | 5.6  |      
|          | Other          |                    |   | 0.1              |      |      |   | 0.8  |      |  |   | 0.5  |       |  |   | 1.0  |      
|          |                |                    |   |                  |      |      |   |      |      |  |   |      |       |  |   |     
|          |                | Total              |   | $                | 57.9 |      |   | $    | 64.3 |  |   | $    | 125.0 |  |   | $    | 130.4 | 
|          |                |                    |   |                  |      |      |   |      |      |  |   |      |       |  |   |     

13



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

|              |                      |                    |   |                  |      |      |   |      |     |  |   |      |     |  |   |      |      | 
|------------- | -------------------- | ------------------ | - | ---------------- | ---- | ---- | - | ---- | --- |  | - | ---- | --- |  | - | ---- | ---- | 
|              |                      |                    |   |                 
|              |                      | Three Months Ended |   | Six Months Ended
|              |                      | June 30,           |   | June 30,        
|              |                      |                    |   |                 
|              |                      | 2003               |   | 2002             |      | 2003 |   | 2002
|              |                      |                    |   |                  |      |      |   |     
|Gross Profit: |                      |                    |   |                  |      |      |   |      |     |  |   |      |     |  |   |     
|              | Domestic             |                    | $ | 0.6              |      |      | $ | 4.5  |     |  | $ | 1.6  |     |  | $ | 8.5  |     
|              | Latin America        |                    |   | (0.6             | )    |      |   | 3.5  |     |  |   | (0.9 | )   |  |   | 6.9  |     
|              | West Africa          |                    |   | (2.7             | )    |      |   |     |     |  |   | (1.2 | )   |  |   |     |     
|              | Southeast Asia       |                    |   | 2.4              |      |      |   | 0.5  |     |  |   | 2.5  |     |  |   | 0.8  |     
|              | Other                |                    |   | (0.5             | )    |      |   | 0.4  |     |  |   | (0.2 | )   |  |   | 0.5  |     
|              | Unallocated costs(1) |                    |   |                 |      |      |   | 0.6  |     |  |   |     |     |  |   | (2.1 | )   
|              |                      |                    |   |                  |      |      |   |      |     |  |   |      |     |  |   |     
|              |                      | Total              |   | $                | (0.8 | )    |   | $    | 9.5 |  |   | $    | 1.8 |  |   | $    | 14.6 | 
|              |                      |                    |   |                  |      |      |   |      |     |  |   |      |     |  |   |     

|                      |                |          |   |              |       |  |   |       |       | 
|--------------------- | -------------- | -------- | - | ------------ | ----- |  | - | ----- | ----- | 
|                      |                |         
|                      |                | As of   
|                      |                |         
|                      |                | June 30, |   | December 31,
|                      |                | 2003     |   | 2002        
|                      |                |          |   |             
|Long-lived assets(2): |                |          |   |              |       |  |   |      
|                      | Domestic       |          | $ | 188.2        |       |  | $ | 168.4 |      
|                      | Latin America  |          |   | 0.2          |       |  |   | 21.5  |      
|                      | West Africa    |          |   | 19.8         |       |  |   | 19.6  |      
|                      | Southeast Asia |          |   | 41.8         |       |  |   | 34.3  |      
|                      | Other          |          |   | 13.9         |       |  |   | 14.0  |      
|                      |                |          |   |              |       |  |   |      
|                      |                | Total    |   | $            | 263.9 |  |   | $     | 257.8 | 
|                      |                |          |   |              |       |  |   |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Unallocated costs include support costs and
    operational overhead costs included in cost of contract revenues.                                                                                                                                                                                                                                                                                                                                                 
|   
|(2) | Long-lived assets include vessels, property and
    related marine equipment. Amounts reflect the location of the
    assets at June 30, 2003 and December 31, 2002.
    Equipment location changes as necessary to meet working
    requirements. Other identifiable assets include inventory and
    other long-term assets, and are primarily located in the
    Domestic geographic segment. Goodwill is included in the Latin
    America geographic segment.

14



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##### 








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

You should read the following discussion and
analysis together with our consolidated financial statements and
notes thereto and the discussion Managements
Discussion and Analysis of Financial Condition and Results of
Operations included in our 2002 Annual Report on
Form 10-K. The following information contains
forward-looking statements, which are subject to risks and
uncertainties. Should one or more of these risks or
uncertainties materialize, actual results may differ from those
expressed or implied by the forward-looking
statements.

General

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

The primary services we provide include:



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

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

Critical Accounting Policies

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting
period. Management must apply significant judgments in this
process. Among the factors, but not fully inclusive of all
factors, that may be considered by management in these processes
are: the range of accounting policies permitted by accounting
principles generally accepted in the United States;
managements understanding of our business; expected rates
of business and operational change; sensitivity and volatility
associated with the assumptions used in developing estimates;
and whether historical trends are expected to be representative
of future trends. Among the most subjective judgments employed
in the preparation of these financial statements are estimates
of expected costs to complete construction projects, the
collectibility of contract receivables and claims, the fair
value of salvage inventory, the depreciable lives of and future
cash flows to be provided by our equipment, the period and
extent of maintenance and repairs for dry-docking activity and
certain judgments regarding the nature of income and
expenditures for tax purposes. We review all significant
estimates on a recurring basis and record the effect of any
necessary adjustments prior to publication of our financial
statements. Adjustments made with respect to the use of
estimates often relate to improved information not previously
available. Because of the inherent uncertainties in this
process, actual future results could differ from those expected
at the reporting date.

15



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##### 



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



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

Contract revenues for construction contracts are
recognized on the percentage-of-completion method, measured by
the percentage of costs incurred to date to the total estimated
costs at completion for each contract. This percentage is
applied to the estimated revenue at completion to calculate
revenues earned to date. We consider the
percentage-of-completion method to be the best available measure
of progress on these contracts. Changes in job performance, job
conditions and estimated profitability, including those arising
from claims and final contract settlements, may result in
revisions to estimated costs and revenues and are recognized in
the period in which the revisions are determined. Provisions for
estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Revenue also includes
amounts earned upon the completion of salvage services. Revenues
from salvage projects sometimes include non-cash values assigned
to structures that are received from time to time as partial
consideration.

We follow the guidance of AICPA Statement of
Position (SOP) 81-1, Accounting for Performance of
Construction-Type and Certain Production-Type Contracts
relating to the use of the percentage-of-completion method,
estimating costs and claim recognition for construction
contracts. Contract revenue reflects the original contract price
adjusted for agreed upon change orders and unapproved claims. We
recognize unapproved claims only when the collection is deemed
probable and if the amount can be reasonably estimated for
purposes of calculating total profit or loss on long-term
contracts. We record revenue for claims to the extent of costs
incurred and include no profit on claims recorded.



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

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



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

We have significant investments in billed and
unbilled receivables as of June 30, 2003. At June 30,
2003, we had $2.3 million in contract receivables and
$61.6 million in costs in excess of billings from Pemex,
including $53.0 million in claims related to weather and
other delays, totaling $63.9 million. We believe our
receivables are realizable; however, any changes will be
recognized in the period in which they are determined. We have
historically not experienced any significant losses on
receivables, but significant losses would adversely affect our
financial position and results of operations and perhaps our
overall liquidity.



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

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



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

We use the units-of-production method to
calculate depreciation on our major barges and vessels to
accurately reflect the wear and tear of normal use. The annual
depreciation based on utilization of each vessel will not be
less than 25% of annual straight-line depreciation, and the
cumulative depreciation based on utilization of each vessel will
not be less than 50% of cumulative straight-line depreciation.
The useful lives of our major barges and vessels range from
15 years to 18 years. Major additions and improvements
to barges, boats and related equipment are capitalized and
depreciated over the useful life of the vessel. Maintenance

16



---



##### 



and repairs are expensed as incurred. When
equipment is sold or otherwise disposed of, the cost of the
equipment and accumulated depreciation are removed from the
accounts and any gain or loss is reflected in income.


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



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

Dry-dock costs are direct costs associated with
scheduled major maintenance on the marine construction vessels.
Costs incurred in connection with dry-dockings are deferred and
amortized over the five-year cycle to the next scheduled
dry-docking. On June 29, 2001, AICPA issued an exposure
draft of a proposed SOP, Accounting for Certain Costs and
Activities Related to Property, Plant, and Equipment. If
adopted, we would be required to expense regulatory maintenance
cost on our vessels as incurred. We incurred and capitalized
dry-dock costs of $1.4 million and $3.8 million for
the six months ended June 30, 2003 and 2002, respectively.
As of June 30, 2003, deferred dry-dock costs totaled
$12.4 million. Expensing dry-dock costs would likely result
in greater variability of our quarterly operating results as a
substantial portion of our dry-dock activities take place during
the first and fourth quarters.



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

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

In January 2003, we granted options to three
former directors to purchase 15,320 shares of common stock
at an exercise price equal to the market price of the common
stock on the date of grant. These options vested immediately,
and $56,000 was recorded as compensation expense in the
statements of operations during the first quarter of 2003. Also,
we recorded an additional $156,000 as compensation expense in
the statements of operations during the second quarter of 2003
related to the remeasurement of options in connection with the
resignation of a key employee.

It is expected in the future that the FASB will
require expensing of stock options issued based upon their fair
values. Should this rule be implemented, we may be subject to
significant stock compensation expense each quarter.

Recent Accounting Pronouncements

In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure 
an amendment of SFAS No. 123. SFAS No. 148
amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure
requirements of

17



---



##### 



SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee
compensation and the effect of the method used on reported
results. SFAS No. 148 does not permit the use of the
original SFAS No. 123 prospective method of transition
for changes to the fair value based method made in fiscal years
beginning after December 15, 2003. The adoption of this
standard will not have a significant impact on our consolidated
financial statements.


On June 29, 2001, the AICPA issued an
exposure draft of a proposed SOP, Accounting for Certain
Costs and Activities Related to Property, Plant, and
Equipment. This proposed SOP would change, among other
things, the method by which companies would account for normal,
recurring or periodic repairs and maintenance costs related to
in service fixed assets. It would require that these
types of expenses be recognized when incurred rather than
recognizing expense for these costs while the asset is
productive. We are assessing the impact of the change should
this SOP be adopted. If adopted, we would be required to expense
regulatory maintenance cost on our vessels as incurred. We
currently capitalize a significant portion of these costs and
amortize them over the future periods they are expected to
benefit. We incurred and capitalized dry-dock costs of
$1.4 million and $3.8 million for the six months ended
June 30, 2003 and 2002, respectively. As of June 30,
2003, deferred dry-dock costs totaled $12.4 million.
Expensing dry-dock costs would likely result in greater
variability of our quarterly operating results as a substantial
portion of our dry-dock activities take place during the first
and fourth quarters.

In January 2003, the FASB issued FASB
Interpretation No. 46 (FIN 46), Consolidation of
Variable Interest Entities, an Interpretation of ARB
No. 51. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have
the characteristics of a controlling financial interest or do
not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support
from other parties. FIN 46 is effective for all new
variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or
acquired prior to February 1, 2003, the provisions of
FIN 46 must be applied for the first interim or annual
period beginning after June 15, 2003. The adoption of
FIN 46 has not effected our results of operations or
financial position.

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

In May 2003, the FASB issued
SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes how an issuer
classifies and measures certain financial instruments that have
characteristics of both liabilities and equity. The statement
requires that an issuer classify financial instruments that are
within its scope as a liability and requires disclosure
regarding the terms of those instruments and settlement
alternatives. Previously, many of these instruments were
classified as equity or as mezzanine instruments (between the
liabilities and the equity section). SFAS No. 150 is
effective immediately for qualifying financial instruments
issued after May 31, 2003 and is effective for existing
issuances in the third quarter of 2003. We are adopting
SFAS No. 150 as it becomes effective but do not expect
it to have a material effect on our results of operations or
financial position.

Results of Operations

The discussion below describes our results of
operations. During the first six months of 2003, revenues
related to the pipeline installation and burial project in the
Northeastern U.S. accounted for 44.5% of our consolidated
revenues. We mobilized the Gulf Horizon to begin
construction of this pipeline in May 2002.

18



---



##### 



Construction activities commenced in November
2002, and we substantially completed the project during the
second quarter of 2003.


Lower profit margins on the pipeline project in
the Northeastern U.S., a significant decrease in vessel
utilization due to competitive market conditions in the
U.S. Gulf of Mexico and schedule slippage in several major
projects in West Africa and the U.S. Gulf of Mexico
contributed to a decrease in gross profit for the first six
months of 2003. We also experienced lower margins on vessels
operating in the northern U.S. Gulf of Mexico because of
downtime due to adverse weather conditions. We believe our
expansion into Southeast Asia and West Africa will provide some
measure of counter-seasonal balance to the effect of adverse
winter weather conditions in the U.S. Gulf of Mexico and
Latin America. We will continue to pursue international
construction projects in Mexico, Latin America, Southeast Asia
and West Africa.

The Brazos Horizon began work on a major
portion of a pipeline and structural installation project in
Nigeria in January 2003. In late March 2003, our customer
temporarily suspended operations in Nigeria, including
construction on this project, due to ethnic unrest in the Niger
Delta. We anticipate that our work will resume in the fourth
quarter of 2003. The suspension of operations in Nigeria
negatively impacted revenues and gross profit during the second
quarter of 2003.

Pemex accounted for 2.9% of consolidated revenues
for the first six months of 2003, compared with 39.1% for the
first six months of 2002. As of June 30, 2003, we had
$63.9 million of Pemex receivables, consisting of contract
receivables of $2.3 million and costs in excess of billings
of $61.6 million. Our receivables from Pemex continue to
impact our liquidity; however, the additional $55 million
of asset based financing secured during the second quarter of
2003 will provide additional working capital to support our
receivable position with Pemex.

Cumulative revenues recognized from 2000 through
June 2003 on all Pemex projects in Mexico total
$290.4 million, including $57.0 million of claims for
extra work related to interferences, interruptions and other
delays, primarily related to our second major project for Pemex,
EPC 64, which was completed during the fourth quarter of 2002.

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

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

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

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

During the second quarter of 2003, we secured
$55 million in secured asset based financing from three
lenders, of which $45 million was funded during the second
quarter of 2003 and $10 million was funded in July 2003.
The proceeds were used to repay our $14.1 million loan with
GMAC Business Credit, LLC and the remaining proceeds will be
used to provide working capital to support operations.

19



---



##### 



We obtained a $35.0 million loan with a
seven-year term from Boeing Capital Corporation, of which
$30.0 million was advanced in June 2003 and the remaining
$5.0 million was advanced in July 2003. We also obtained a
$15.0 million loan during the second quarter of 2003 with a
one-year term from Elliott Associates, L.P., which together with
Elliott International, L.P., owns 15.8% of our outstanding
common stock. Additionally, we increased our existing revolving
credit facility with CIT Group/ Equipment Financing, Inc. by
$5.0 million. The additional $5.0 million advance was
received in July 2003 and is due October 31, 2003.

Our credit facilities contain customary default
and cross-default provisions and some require us to maintain
certain financial ratios. For the quarter ended June 30,
2003, we were not in compliance with two debt covenants related
to a $6.7 million term loan and two debt covenants related
to our three revolving credit facilities. Compliance with these
covenants is determined quarterly based on the trailing four
quarters ending on each determination date. We have obtained a
waiver of compliance on the term loan as of the June 30,
2003 determination date and for the determination dates on or
before March 31, 2004. We have also obtained waivers of
compliance from the lenders on our three revolving credit
facilities as of the June 30, 2003 determination date. In
August 2003, we amended the loan agreement for our revolving
credit facility with CIT Group/ Equipment Financing, Inc. to
provide for less restrictive financial covenant ratios, which
had an outstanding balance of $26.3 million at
June 30, 2003. We expect to meet these covenants, as
amended, at future determination dates. Based on current and
forecasted demand for our services, we do not expect to meet the
financial covenant ratios at future determination dates for our
two revolving credit facilities with Southwest Bank of Texas,
N.A. which had an outstanding balance of $31.6 million at
June 30, 2003. We anticipate that we will need to further
amend these debt covenants or receive waivers of compliance for
these facilities in subsequent quarters of 2003. In connection
with the waivers obtained from Southwest Bank of Texas, N.A.,
our two revolving credit facilities will be reduced from an
aggregate of $50 million to $20 million upon
collection of the Pemex receivable. The Southwest Bank of Texas,
N.A. facilities are classified as current in the accompanying
balance sheet at June 30, 2003 based on their maturity of
April 2004. Our other facilities have been classified as
long-term due to their stated maturity date, the future expected
status of compliance with covenants, as amended, and our
expectations regarding future payoffs, refinancing, or waivers
to be obtained from Southwest Bank of Texas, N.A. In the event
that the Southwest Bank of Texas, N.A. covenants are not met in
the future, and we are unsuccessful in obtaining waivers of
compliance, cross-default provisions could result in
acceleration of substantially all of our indebtedness.

As of August 1, 2003, our backlog totaled
approximately $87.8 million compared to our backlog at
December 31, 2002 of approximately $123.6 million.
This change is attributable to our execution of contract
activity during that period.

Early in 2003 we began certain initiatives in
response to the challenging business environment and competitive
conditions in the marine construction industry. The objective of
these initiatives is to enhance profitability through
productivity, efficiency and a reduction in expense levels. In
January 2003, we formed a business improvement team composed of
managers from different areas within Horizon to identify and
implement significant cost-saving initiatives. As a result of
those efforts, we have implemented cost-saving plans in the
areas of travel, marketing, information systems, and other
employee related expenses, and we reduced our workforce in
January and February 2003. In addition, we reorganized our
current operations oriented management structure to place more
emphasis on project management and reduced our workforce in July
2003. We believe that these continuing cost-saving initiatives
and project focused management will result in improved
profitability.



| |                                                                            
| | ---------------------------------------------------------------------------
| | Quarter Ended June 30, 2003 Compared
    to the Quarter Ended June 30, 2002

Contract Revenues.Contract revenues were $57.9 million for the quarter ended
June 30, 2003, compared to $64.3 million for the
quarter ended June 30, 2002. The decline in revenues is
primarily due to reduced demand for offshore construction
services in the U.S. Gulf of Mexico and schedule slippage
in several major projects in West Africa and the U.S. Gulf
of Mexico. Additionally, the decline in revenues is due to
change in our customer mix in 2003 compared to 2002. The
decrease in revenue from projects in Mexico was partially offset
by revenues from the pipeline installation and burial project in
the Northeastern U.S.

20



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##### 



Gross Profit.Gross
profit was a $(0.8) million loss for the quarter ended
June 30, 2003, compared to gross profit of
$9.5 million (14.8% of contract revenues) for 2002. Gross
profit for the second quarter of 2003 decreased significantly as
vessel utilization declined due to competitive market conditions
in the U.S. Gulf of Mexico, which was compounded by
schedule slippage in several major projects in West Africa and
the U.S. Gulf of Mexico. Inclement weather in the
U.S. Gulf of Mexico during the second quarter further
eroded job margins. Profit margins on the pipeline installation
and burial project in the Northeastern U.S. and other contracts
in 2003 were lower than the profit margins on the Pemex
projects, which accounted for a greater percentage of revenues
in 2002.

Selling, General and Administrative
Expenses.Selling, general and
administrative expenses were $6.5 million (11.2% of
contract revenues) for the three months ended June 30,
2003, compared with $4.4 million (6.8% of contract
revenues) for the three months ended June 30, 2002. We
recognized $680,000 in the second quarter of 2003 for severance
and other charges due to the resignation of a key employee. The
remainder of the increase primarily relates to costs associated
with international operations of $1.5 million for 2003
compared to $0.6 million for 2002, and additional
depreciation expense for corporate fixed assets placed into
service during the second half of 2002 and first quarter of 2003.

Interest Expense.Interest expense was $2.4 million for the three months
ended June 30, 2003, net of $13,000 interest capitalized,
and $1.0 million for the same period last year, net of
$0.5 million interest capitalized. Our total outstanding
debt was $153.1 million at June 30, 2003, compared to
$92.4 million at June 30, 2002. Interest expense
increased due to higher average outstanding debt balances,
higher interest rates, the write-off of deferred loan fees
related to early retirement of debt and other fees associated
with the additional financing secured during the second quarter
of 2003.

Interest Income.Interest income on cash investments for the three months ended
June 30, 2003 was $10,000 compared to $28,000 for the three
months ended June 30, 2002.

Other Income (Expense),
Net.Other income (expense) for
the three months ended June 30, 2003, primarily consisted
of $569,000 in prepayment penalties for the early retirement of
debt and $89,000 of net foreign currency loss due to activity in
Mexico denominated in Mexican pesos and a decline of the
U.S. dollar compared to the Mexican peso. Other income
(expense) for the quarter ended June 30, 2002
primarily consisted of approximately $414,000 of foreign
currency loss due to activity in Mexico denominated in Mexican
pesos and a decline of the U.S. dollar compared to the
Mexican peso. Also, included in other expense for the quarter
ended June 30, 2002 is approximately $14,000 related to our
Cal Dive joint venture.

Income Taxes.We use
the liability method of accounting for income taxes. For the
quarter ended June 30, 2003, we recorded a federal income
tax benefit of $(6.2) million, at a net effective rate of
60.6% on pre-tax net loss of $(10.3) million. The
difference in the effective tax rate and the statutory tax rate
is primarily due to the tax benefit recognized for the quarter
ended June 30, 2003 attributable to a research and
development credit of $(3.0) million. For the quarter ended
June 30, 2002, we recorded a federal income tax provision
of $1.2 million, at a net effective rate of 31.0% on
pre-tax net income of $3.8 million. The difference from the
statutory rate is due to the application of the extraterritorial
income exclusion for income earned primarily in Mexico during
the second quarter of 2002. The exclusion allows us to exclude a
qualifying portion of income earned outside the United States
for tax purposes.

Net Income (Loss).Net loss for the quarter ended June 30, 2003 was
$(4.1) million, or $(0.15) per share-diluted. This compares
with net income of $2.6 million, or $0.10 per
share-diluted for the quarter ended June 30, 2002.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Six Months Ended June 30, 2003
    Compared to the Six Months Ended June 30,
    2002

Contract Revenues.Contract revenues were
$125.0 million for the six months ended June 30, 2003,
compared to $130.4 million for the six months ended
June 30, 2002. Revenues decreased due to reduced demand for
offshore construction services in the U.S. Gulf of Mexico
and schedule slippage in several major projects in West Africa
and the U.S. Gulf of Mexico. The decline in revenues from
projects in Mexico in 2002

21



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##### 



was partially offset by revenues from the project
in the Northeastern U.S. and projects in Southeast Asia in 2003.


Gross Profit.Gross
profit was $1.8 million (1.4% of contract revenues) for the
six months ended June 30, 2003, compared to gross profit of
$14.6 million (11.2% of contract revenues) for the same
period of 2002. Lower profit margins on the pipeline
installation and burial project in the Northeastern U.S.,
reduced vessel utilization and unusually adverse weather
conditions during 2003, and resulting downtime and revenues
recorded for such events, lowered the overall profit margins.
The profit margins on the Pemex projects, which accounted for a
greater percentage of revenues in 2002, were higher than profit
margins on other contracts in 2003.

Selling, General and Administrative Expenses.Selling, general and administrative
expenses were $11.9 million (9.5% of contract revenues) for
the six months ended June 30, 2003, compared to
$7.9 million (6.1% of contract revenues) for the same
period of 2002. The increase primarily relates to costs
associated with international operations, additional
depreciation expense for corporate fixed assets placed into
service during the second half of 2002 and first quarter of
2003, and severance and other charges due to the resignation of
a key employee in 2003.

Interest Expense.Interest expense for the six months
ended June 30, 2003 was $3.9 million, net of $123,000
of interest capitalized. Interest expense was $2.0 million
for the six months ended June 30, 2002, net of
$1.0 million of interest capitalized. Our total outstanding
debt was $153.1 million at June 30, 2003, compared to
$92.4 million at June 30, 2002. Interest expense
increased due to higher average outstanding debt balances,
higher interest rates, the write-off of deferred loan fees
related to early retirement of debt and other fees associated
with the additional financing secured during the second quarter.

Interest Income.Interest income on cash investments
for the six months ended June 30, 2003 and 2002 was $21,000
and $53,000, respectively. The decrease was primarily due to
lower interest rates and lower average cash balances for 2003.

Other Income (Expense),
Net.Other income (expense) for
the six months ended June 30, 2003, primarily consisted of
$569,000 in prepayment penalties for the early retirement of
debt and $136,000 of net foreign currency loss due to activity
in Mexico denominated in Mexican pesos and a decline of the
U.S. dollar compared to the Mexican peso, and approximately
$5,000 of miscellaneous income. Included in other income
(expense) for the six months ended June 30, 2002 is
$411,000 of foreign currency loss due to activity in Mexico
denominated in Mexican pesos and a decline of the
U.S. dollar compared to the Mexican peso. Also included in
other expense is approximately $46,000 related to our Cal Dive
joint venture and $27,000 other income related to administrative
fees related to our Cal Dive joint venture.

Income Taxes.We use
the liability method of accounting for income taxes. For the six
months ended June 30, 2003, we recorded a federal income
tax benefit of $(7.7) million, at a net effective rate of
52.5% on pre-tax net loss of $(14.7) million. The
difference in the effective tax rate and the statutory tax rate
is primarily due to the tax benefit recognized for the six
months ended June 30, 2003 attributable to a research and
development credit of $(3.0) million. For the six months
ended June 30, 2002, we recorded a federal income tax
provision of $1.3 million, at a net effective rate of 31.0%
on pre-tax net income of $4.3 million. The difference from
the statutory tax rate is due to the application of the
extraterritorial income exclusion for income earned primarily in
Mexico from January 1, 2002 to June 30, 2002. The
exclusion allows us to exclude a portion of income earned
outside the United States for tax purposes.

Net Income (Loss).Net loss was $(7.0) million, or $(0.27) per share-diluted,
for the six months ended June 30, 2003, compared to net
income for the six months ended June 30, 2002 of
$3.0 million, or $0.12 per share-diluted.

Liquidity and Capital Resources

Our primary liquidity needs are to provide
working capital to support our projects and other operations and
to fund acquisitions and improvements to the fleet necessary to
expand operations. We had $16.0 million of working capital
at June 30, 2003 compared to $30.4 million of working
capital at December 31, 2002. The

22



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decrease in working capital was primarily
attributable to our pretax losses for the six months ended
June 30, 2003 and to the reclassification of an aggregate
of $31.6 million to current maturities for our revolving
credit facilities with Southwest Bank of Texas, N.A. based on
their maturity of April 2004 offset by long-term financing
used to reduce current liabilities and increasing cash and cash
equivalents. We intend to either repay our revolving credit
facilities with Southwest Bank of Texas, N.A. upon the
collection of the Pemex receivables or replace these facilities
with long-term debt.


Our receivables from Pemex continue to impact our
liquidity. As of June 30, 2003, we had contract receivables
of $2.3 million and costs in excess of billings of
$61.6 million from Pemex totaling $63.9 million. The
significant delays between the completion of the work and when
it is billed and collected are caused by Pemexs rigid
requirements on the submission, review and approval of invoices
and documentation prior to their payment of contract claims and
change orders. As of June 30, 2003, there were
$57.0 million of claims for extra work related to
interferences, interruptions and other delays, primarily related
the EPC 64 contract in the Cantarell field. Pemex extended the
EPC 64 contract, which had an original value of
$41.0 million, and substantially increased the scope of our
operations in the Cantarell field. As a result, this project was
subject to greater interruptions due to weather conditions and
standby time as other contractors completed their work. From
2000 through June 30, 2003, cumulative revenues recognized
related to the EPC 64 contract totaled $194.4 million. The
EPC 64 claim was formally submitted in July 2003.

Cash used in operations was $33.0 million
for the first six months of 2003 compared to cash provided by
operations of $13.8 million for the first six months of
2002. The increase in funds used in operating activities is
primarily attributable to the decrease in accrued job costs and
accrued liabilities as projects were completed, delays in
collections of revenues and the net loss before income tax
benefit of $(14.7) million for the six months ended
June 30, 2003.

Cash used in investing activities was
$8.4 million for the first six months of 2003 compared to
cash used in investing activities of $22.7 million for the
first six months of 2002. The decrease in funds used in
investing activities is primarily attributable to the
significant upgrades to the Sea Horizon, our largest
vessel, and other vessels in our fleet during the first six
months of 2002 compared to the first six months of 2003.

Cash provided by financing activities was
$53.6 million for the first six months of 2003 compared to
cash provided by financing activities of $4.3 million for
the first six months of 2002. The increase in funds provided by
financing activities is primarily attributable to the additional
$55 million in secured asset based financing, of which
$45 million was funded during the second quarter of 2003.
For the first six months ended June 30, 2002, the
$30.8 million we received in our public stock offering was
offset by the funds used to reduce indebtedness under our
revolving credit facilities.

At June 30, 2003, we had approximately
$153.1 million of total outstanding debt. This represents
an approximate net increase of $54.8 million from
December 31, 2002 primarily due to additional borrowings to
meet working capital needs during the first six months of 2003.
Of the $153.1 million of outstanding debt,
$57.9 million represents borrowings on our three revolving
credit facilities and $95.2 million represents borrowings
on our eight term-debt facilities. At June 30, 2003, we had
$10.2 million available under our three revolving credit
facilities and $18.3 million of cash and cash equivalents.
Our weighted average interest rate on all indebtedness was 5.4%
at June 30, 2003, and our term-debt borrowings currently
require $796,000 in monthly principal payments. Current
maturities of long-term debt were $56.2 million as of
June 30, 2003.

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

For the quarter ended June 30, 2003, we were
not in compliance with two debt covenants related to a
$6.7 million term loan and two debt covenants related to
our three revolving credit facilities. Compliance with

23



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these covenants is determined quarterly based on
the trailing four quarters ending on each determination date. We
have obtained a waiver of compliance on the term loan as of the
June 30, 2003 determination date and for the determination
dates on or before March 31, 2004. We have also obtained
waivers of compliance from the lenders on our three revolving
credit facilities as of the June 30, 2003 determination
date. In August 2003, we amended the loan agreement for our
revolving credit facility with CIT Group/ Equipment Financing,
Inc. to provide for less restrictive financial covenant ratios,
which had an outstanding balance of $26.3 million at
June 30, 2003. We expect to meet these covenants, as
amended, at future determination dates. Based on current and
forecasted demand for our services, we do not expect to meet the
financial covenant ratios at future determination dates for our
two revolving credit facilities with Southwest Bank of Texas,
N.A. which had an outstanding balance of $31.6 million at
June 30, 2003. We anticipate that we will need to further
amend these debt covenants or receive waivers of compliance for
these facilities in subsequent quarters of 2003. In connection
with the waivers obtained from Southwest Bank of Texas, N.A.,
our two revolving credit facilities will be reduced from an
aggregate of $50 million to $20 million upon
collection of the Pemex receivable. The Southwest Bank of Texas,
N.A. facilities are classified as current in the accompanying
balance sheet at June 30, 2003 based on their maturity of
April 2004. Our other facilities have been classified as
long-term due to their stated maturity date, the future expected
status of compliance with covenants, as amended, and our
expectations regarding future payoffs, refinancing, or waivers
to be obtained from Southwest Bank of Texas, N.A. In the event
the Southwest Bank of Texas, N.A. covenants are not met in the
future, and we are unsuccessful in obtaining waivers of
compliance, cross-default provisions could result in
acceleration of substantially all of our indebtedness.


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

We have fixed debt service and lease payment
obligations under notes payable and operating leases for which
we have material contractual cash obligations. Interest rates on
our debt vary from commercial paper plus 2.45% to 12.0%. The
following table summarizes our long-term material contractual
cash obligations (in millions):

|                                        |  |           |       |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |       |  |  |   |        | 
|--------------------------------------- |  | --------- | ----- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | - | ------ |  |  | - | ----- |  |  | - | ------ | 
|                                        |  | Remainder |       |      |  |      |        |      |  |      |        |           
|                                        |  | of 2003   |       | 2004 |  | 2005 |        | 2006 |  | 2007 |        | Thereafter
|                                        |  |           |       |      |  |      |        |      |  |      |        |           
|Principal and interest payments on debt |  | $         | 8,006 |      |  | $    | 62,931 |      |  | $    | 54,064 |            |  | $ | 17,146 |  |  | $ | 5,355 |  |  | $ | 29,389 | 
|Operating leases                        |  |           | 1,323 |      |  |      | 2,510  |      |  |      | 2,504  |            |  |   | 2,341  |  |  |   | 2,347 |  |  |   | 2,489  | 
|                                        |  |           |       |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |       |  |  |   |        | 
|                                        |  | $         | 9,329 |      |  | $    | 65,441 |      |  | $    | 56,568 |            |  | $ | 19,487 |  |  | $ | 7,702 |  |  | $ | 31,878 | 
|                                        |  |           |       |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |       |  |  |   |        | 

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

Planned capital expenditures for the remainder of
2003 are estimated to range from approximately $7 million
to $9 million largely related to vessel improvements. These
expenditures will depend upon available

24



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funds, work awarded and future operating
activity. Our strategy, however, is to make other acquisitions,
to expand our operating capabilities and to expand into
additional selected international areas. To the extent we are
successful in identifying acquisition and expansion
opportunities and have expanded our market share in those areas,
we may require additional equity or debt financing depending on
the size of any transaction.


Forward-Looking Statements

In addition to historical information,
Managements Discussion and Analysis of Financial Condition
and Results of Operations includes certain forward-looking
statements regarding events and financial trends that may affect
our future operating results and financial position. Some
important factors that could cause actual results to differ
materially from the anticipated results or other expectations
expressed in our forward-looking statements include the
following:



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

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

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

25



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##### 








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

Our market risk exposures primarily include
interest rate and exchange rate fluctuation on financial
instruments as detailed below. Our market risk sensitive
instruments are classified as other than trading.
The following sections address the significant market risks
associated with our financial activities during the six months
ended June 30, 2003. Our exposure to market risk as
discussed below includes forward-looking statements
and represents estimates of possible changes in fair values,
future earnings or cash flows that would occur assuming
hypothetical future movements in foreign currency exchange rates
or interest rates.

As of June 30, 2003, the carrying value of
our debt, including $0.3 million of accrued interest, was
approximately $153.4 million. The fair value of this debt
approximates the carrying value because the interest rates are
based on floating rates identified by reference to market rates.
A hypothetical 1% increase in the applicable interest rates as
of June 30, 2003 would increase annual interest expense by
approximately $1.5 million.

We collect a portion of international contract
revenues and pay local expenses in foreign currency. We manage
foreign currency risk by attempting to contract as much foreign
revenue as possible in U.S. dollars. We monitor the
exchange rate of our foreign currencies in order to mitigate the
risk from foreign currency fluctuations. Additional exposure
could occur as we expand internationally. Approximately 80% of
our current contracts with Pemex is denominated in
U.S. dollars. We receive payment in Mexican pesos
equivalent to the U.S. dollars billed, which is converted
to U.S. dollars that day or the following day. Our
contracts in Mexico also typically provide some protection from
declining exchange rates on the portion of the contract revenues
denominated in foreign currency. We recognized a $136,000
foreign currency loss due to activity in Mexico denominated in
Mexican pesos and a decline of the U.S. dollar compared to
the Mexican peso for the six months ended June 30, 2003.

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






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

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

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




PART II  OTHER
INFORMATION






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

(a) Our annual meeting of stockholders was
held on May 6, 2003. At such meeting, each of the following
persons listed below was re-elected as a director of the company.

|                  |  |     |            |                    |  |  |         | 
|----------------- |  | --- | ---------- | ------------------ |  |  | ------- | 
|                  |  | For |            | Withhold Authority
|                  |  |     |            |                   
|Edward L. Moses   |  |     | 22,731,013 |                    |  |  | 705,699 | 
|Phil D. Wedemeyer |  |     | 23,214,633 |                    |  |  | 222,079 | 

26



---



##### 



In addition to the directors re-elected at the
annual meeting, the terms of Bill J. Lam, J. Louis Frank, John
T. Mills, Michael R. Latina and Ken R. LeSuer continued after
the annual meeting.

(b) The stockholders also approved the
Amended and Restated Horizon Offshore, Inc. 2002 Stock Incentive
Plan.

|          |            |               |  |                 |           |                  |  |  |        |  |  |  |       | 
|--------- | ---------- | ------------- |  | --------------- | --------- | ---------------- |  |  | ------ |  |  |  | ----- | 
|Votes For |            | Votes Against |  | Votes Abstained |           | Broker Non Votes
|          |            |               |  |                 |           |                 
|          | 16,783,178 |               |  |                 | 6,628,031 |                  |  |  | 20,503 |  |  |  | 5,000 | 






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

(a) Exhibits

| |    |    |  |                                                                                                                                                                                                                                                                                    
| | -- | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1 |  | Amended and Restated Certificate of Incorporation
    of the Company(1)                                                                                                                                                                                                            
| | 3  | .2 |  | Bylaws of the Company(1)                                                                                                                                                                                                                                                           
| | 10 | .1 |  | Loan Agreement dated June 4, 2003, between
    Horizon Vessels, Inc., as borrower and Elliott Associates, L.P.,
    as lender(2)                                                                                                                                                   
| | 10 | .2 |  | Amendment No. 1 dated as of June 30,
    2003 to Loan Agreement dated June 4, 2003, between Horizon
    Vessels, Inc, as borrower and Elliott Associates, L.P., as
    lender(2)                                                                                                   
| | 10 | .3 |  | Loan Agreement dated June 30, 2003, between
    Horizon Vessels International, Inc., as borrower and Boeing
    Capital Corporation, as lender(2)                                                                                                                                  
| | 10 | .4 |  | Amendment No. 2 dated as of June 30,
    2003 to Credit Agreement dated May 10, 2001, among Horizon
    Vessels, Inc., as borrower, Horizon Offshore Contractors, Inc.
    and Horizon Offshore, Inc., as guarantors and The CIT Group/
    Equipment Financing, Inc., as lender(2)
| | 10 | .5 |  | Employment and Non-Competition Agreement dated
    July 1, 2003 between the Company and David W. Sharp(2)                                                                                                                                                                          
| | 10 | .6 |  | Employment and Non-Competition Agreement dated
    July 1, 2003 between the Company and William B. Gibbens(2)                                                                                                                                                                      
| | 31 | .1 |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002(2)                                                                                                                                                                                                     
| | 31 | .2 |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002(2)                                                                                                                                                                                                     
| | 32 | .1 |  | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002(2)                                                                                                                                                                                                     
| | 32 | .2 |  | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002(2)                                                                                                                                                                                                     



---



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

(b) Reports on Form 8-K:

On May 14, 2003, we filed a report on
Form 8-K, reporting under item 5, announcing first
quarter 2003 results.

On June 8, 2003, we filed a report on
Form 8-K, reporting under item 5, announcing that
Horizon Offshore Contractors, Inc. secured an additional
contract in the northeast United States.

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

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

27



---



##### 






SIGNATURE

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



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

Date: August 13, 2003

28



---



##### 






INDEX TO EXHIBITS

|         |    |             |  |                                                                                                                                                                                                                                                                                    
|-------- | -- | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibits |    | Description
|         |    |            
|         | 3  | .1          |  | Amended and Restated Certificate of Incorporation
    of the Company(1)                                                                                                                                                                                                            
|         | 3  | .2          |  | Bylaws of the Company(1)                                                                                                                                                                                                                                                           
|         | 10 | .1          |  | Loan Agreement dated June 4, 2003, between
    Horizon Vessels, Inc., as borrower and Elliott Associates, L.P.,
    as lender(2)                                                                                                                                                   
|         | 10 | .2          |  | Amendment No. 1 dated as of June 30,
    2003 to Loan Agreement dated June 4, 2003, between Horizon
    Vessels, Inc, as borrower and Elliott Associates, L.P., as
    lender(2)                                                                                                   
|         | 10 | .3          |  | Loan Agreement dated June 30, 2003, between
    Horizon Vessels International, Inc., as borrower and Boeing
    Capital Corporation, as lender(2)                                                                                                                                  
|         | 10 | .4          |  | Amendment No. 2 dated as of June 30,
    2003 to Credit Agreement dated May 10, 2001, among Horizon
    Vessels, Inc., as borrower, Horizon Offshore Contractors, Inc.
    and Horizon Offshore, Inc., as guarantors and The CIT Group/
    Equipment Financing, Inc., as lender(2)
|         | 10 | .5          |  | Employment and Non-Competition Agreement dated
    July 1, 2003 between the Company and David W. Sharp(2)                                                                                                                                                                          
|         | 10 | .6          |  | Employment and Non-Competition Agreement dated
    July 1, 2003 between the Company and William B. Gibbens(2)                                                                                                                                                                      
|         | 31 | .1          |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002(2)                                                                                                                                                                                                     
|         | 31 | .2          |  | Certification Pursuant to Section 302 of the
    Sarbanes-Oxley Act of 2002(2)                                                                                                                                                                                                     
|         | 32 | .1          |  | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002(2)                                                                                                                                                                                                     
|         | 32 | .2          |  | Certification Pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002(2)                                                                                                                                                                                                     



---



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

29