##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K

|           |  |                                                                                                                                         
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                                                                         
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 or
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    for the fiscal year ended December 31, 2002
|          
|o          |  | TRANSITION REPORT PURSUANT TO SECTION 13
    or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934                                            

Commission File Number 0-23653



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Horizon Offshore, Inc.

(Exact name of registrant as specified in its
charter)


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

Registrants telephone number, including
area code:

(713) 361-2600


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $1.00 par value per
share


Preferred Stock Purchase Rights


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 if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     þ

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 aggregate market value of the voting common
equity held by non-affiliates computed by reference to the price
at which the common equity was last sold as of the last business
day of the registrants most recently completed second
fiscal quarter (June 28, 2002), was approximately
$186 million.

The number of shares of the registrants
common stock, $1.00 par value per share, outstanding as of
March 3, 2003 was 26,397,068.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrants definitive
Proxy Statement prepared in connection with the
registrants 2003 annual meeting of stockholders have been
incorporated by reference into Part III of this
Form 10-K.



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TABLE OF CONTENTS



|                                                                         |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                                  
|                                                                         | Items 1. and 2. Business And Properties                                                                
|                                                                         | Item 3. Legal Proceedings                                                                              
|                                                                         | Item 4. Submission of Matters to a Vote of Security Holders                                            
|                                                                         | Item 4A. Executive Officers of the Registrant                                                          
|PART II                                                                 
|                                                                         | Item 5. Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                                         | Item 6. Selected Financial Data                                                                        
|                                                                         | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                                         | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|                                                                         | Item 8. Financial Statements and Supplementary Data                                                    
|                                                                         | Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure           
|PART III                                                                
|                                                                         | Item 10. Directors and Executive Officers of the Registrant                                            
|                                                                         | Item 11. Executive Compensation                                                                        
|                                                                         | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|                                                                         | Item 13. Certain Relationships and Related Transactions                                                
|                                                                         | Item 14. Controls and Procedures                                                                       
|PART IV                                                                 
|                                                                         | Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|REPORT OF INDEPENDENT ACCOUNTANTS                                       
|REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS                                
|SIGNATURES                                                              
|CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
|EXHIBIT INDEX                                                           
|Fifth Amendment to Loan Agreement                                       
|Fourth Amendment to EXIM Guaranteed Loan Agreement                      
|Employment & Non-Competition Agmt - J Louis Frank                       
|Amended Employment Agreemet - James Devine                              
|Loan Agreement                                                          
|Subsidiaries of the Company                                             
|Consent of PricewaterhouseCoopers LLP                                   
|Certification of Bill J. Lam Pursuant to Sec.906                        
|Certification of David W. Sharp - Section 906                           

HORIZON OFFSHORE, INC.

ANNUAL REPORT ON FORM 10-K

For the Year Ended December 31,
2002


TABLE OF CONTENTS

|                                                              |  |                                                                                                    |  |  |  | 
|------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------- |  |  |  | 
|PART I                                                       
|Item 1. and 2.                                                |  | Business and Properties                                                                            |  |  |  | 
|Item 3.                                                       |  | Legal Proceedings                                                                                  |  |  |  | 
|Item 4.                                                       |  | Submission of Matters to a Vote of Security
    Holders                                            |  |  |  | 
|Item 4A.                                                      |  | Executive Officers of the Registrant                                                               |  |  |  | 
|PART II                                                      
|Item 5.                                                       |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |  |  | 
|Item 6.                                                       |  | Selected Financial Data                                                                            |  |  |  | 
|Item 7.                                                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |  |  | 
|Item 7A.                                                      |  | Quantitative and Qualitative Disclosure About
    Market Risk                                      |  |  |  | 
|Item 8.                                                       |  | Financial Statements and Supplementary Data                                                        |  |  |  | 
|Item 9.                                                       |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |  |  | 
|PART III                                                     
|Item 10.                                                      |  | Directors and Executive Officers of the Registrant                                                 |  |  |  | 
|Item 11.                                                      |  | Executive Compensation                                                                             |  |  |  | 
|Item 12.                                                      |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |  |  | 
|Item 13.                                                      |  | Certain Relationships and Related Transactions                                                     |  |  |  | 
|Item 14.                                                      |  | Controls and Procedures                                                                            |  |  |  | 
|PART IV                                                      
|Item 15.                                                      |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |  |  |  | 
|Financial Statements                                          |  |                                                                                                    |  | 
|Signatures                                                    |  |                                                                                                    |  | 
|Certifications Pursuant to the Sarbanes-Oxley Act
    of 2002 |  |                                                                                                    |  | 
|Exhibit Index                                                 |  |                                                                                                    |  | 

1



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PART I




Items 1. and
2.     Business And
Properties

General

We provide marine construction services to the
offshore oil and gas industry in the U.S. Gulf of Mexico,
Latin America, Southeast Asia and West Africa. Our fleet
consists of thirteen vessels, twelve of which are currently
operational. Our primary services 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.                                            

We have our principal executive offices at 2500
CityWest Boulevard, Suite 2200, Houston, Texas 77042. Our
telephone number is (713) 361-2600. Our Internet address is
www.horizonoffshore.com. Copies of the annual, quarterly and
current reports we file with the SEC, and any amendments to
those reports, are available on our web site free of charge. The
information posted on our web site is not incorporated into this
Annual Report.

Industry Conditions

Our operating results are directly tied to
industry demand for our services, and, to a lesser degree,
seasonal impact. The demand for our services depends on the
level of capital expenditures by oil and gas companies for
developmental construction. Due to the time required to drill a
well and fabricate a production platform, demand for our
services usually lags exploratory drilling by nine to eighteen
months and sometimes longer.

The marine construction industry in the
U.S. Gulf of Mexico historically has been highly seasonal
with contracts typically awarded in the spring and early summer
and performed before the onset of adverse weather conditions in
the winter. The scheduling of much of our work is affected by
weather conditions and many projects are performed within a
relatively short period of time. We believe that the seasonality
of our core operations in the U.S. Gulf of Mexico and Latin
America should be offset by our continuing efforts to expand our
operations in international areas, such as offshore Southeast
Asia and West Africa, where marine construction services
historically have been less seasonal. The locations of these
regions and the timing of customers awards should provide
a counter-seasonal balance to our operations in the
U.S. Gulf of Mexico. International construction projects
also typically have longer lead times with extended job
durations of up to one to two years.

Scope of Operations

We are a leading provider of marine construction
services in the U.S. Gulf of Mexico and offshore Mexico.
Profit margins in the U.S. Gulf of Mexico have been reduced
by continued highly competitive conditions during 2002 due to
reductions in capital expenditures by oil and gas companies for
developmental construction caused by the general slow down of
the U.S. economy, and concerns over U.S. natural gas
pricing trends.

During 2002, we laid 278 miles of pipe of
various diameters in various depths. We can install and bury
pipelines with an outside diameter (including concrete coating)
of up to 48 inches. Also in 2002, we performed a total of
70 pipeline construction contracts, and installed or removed 31
offshore platforms. We can install platforms of up to 1,200 tons
using our derrick barges.

2



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We completed two projects for Petroleos Mexicanos
(Pemex) utilizing the Atlantic Horizon, Lone Star Horizon
and Pearl Horizon during 2002. We began another project
for Pemex in May 2002 that was completed during the first
quarter of 2003. The Brazos Horizon arrived in Nigerian
waters in the fourth quarter of 2002, and began work on a major
portion of Chevron Nigeria Ltd.s Escravos Offshore
Pipeline and Structural Installation two year program in
February 2003. During 2002, we also successfully completed
several pipeline and installation projects in Southeast Asia. We
completed a subcontract in 2002 for the installation and burial
of a 20-inch pipeline for TotalFinaElf in Indonesia utilizing
the Sea Horizon for all aspects of the installation. In
the domestic sector, we mobilized the Gulf Horizon to
begin construction of a pipeline installation and burial project
in Long Island Sound, New York in May 2002. We were awarded the
contract to install 35 miles of 24-inch diameter pipe to
transport natural gas from Northport, Long Island to Hunts
Point, New York via the Long Island Sound and East River.
Preparations for the project included extensive environmental
training of personnel. The Gulf Horizon was upgraded for
inclement weather conditions and for the addition of automatic
welding equipment. This pipeline installation also included the
design, fabrication and use of a 110-ton plow to bury the
24-inch pipeline below the seabed and riverbed. Construction
activities commenced in November 2002, and we expect to
substantially complete the project during the second quarter of
2003.

We completed the construction of a spooling
facility at our marine base in Port Arthur, Texas in the first
quarter of 2002. We successfully completed two spooling projects
and commenced a third spool job in December 2002 that was
successfully completed in the first quarter of 2003.

Our fleet of seven pipelay and pipebury vessels
install and bury pipelines of various diameters. Our pipelay
vessels employ conventional S-lay technology which is
appropriate for operating on the U.S. continental shelf and
the international areas where we currently operate. Conventional
pipeline installation involves the sequential assembly of pieces
of pipe through an assembly line of welding stations that run
the length of the pipelay vessel. Welds are then inspected and
coated on the deck of the pipelay barge. The pipe is then
supported off the stern and into the water via a ramp that is
referred to as a pontoon or stinger. The
ramp supports the pipe to some distance under the water and
prevents over-stressing as it curves into a horizontal position
toward the sea floor. The barge is then moved forward by its
anchor winches and the pipeline is laid on the sea floor. The
suspended pipe forms an elongated S shape as it
undergoes a second bend above the contact point. During the
pipelay process, divers regularly inspect the pipeline to ensure
that the ramp is providing proper support and that the pipeline
is settling correctly.

Pipelines installed on the U.S. continental
shelf or located in water depths of 200 feet or less are
required by the regulations of the United States Department of
Interiors Minerals Management Service to be buried at
least three feet below the sea floor. Jet sleds towed behind
pipelay/pipebury barges are used to bury pipelines on smaller
pipe installation projects. Towed jet sleds are less likely to
damage the pipeline being laid or any existing pipelines that
the pipeline may cross. Towed jet sleds use a high-pressure
stream of air and water which is pumped from the barge to create
a trench into which the pipe settles. For larger pipe burying
projects, or where deeper trenching is required, we use the
Canyon Horizon, our dedicated bury barge. It is one of
only two dedicated pipebury barges operating in the
U.S. Gulf of Mexico and can bury pipelines more efficiently
and to greater depths than any other vessel in the Gulf. We
match our burying approach to the requirements of each specific
contract by using the Canyon Horizon for larger projects
and our towed jet sleds behind pipelay barges for smaller
projects. We also use the Pecos Horizon for larger
pipebury projects.

Our fleet also includes the Pearl Horizon,
a multi-purpose vessel. This vessel performs diving support
services such as connecting pipelines to platforms and other
pipelines (tie-ins) and filling pipelines with water under
pressure to test the integrity of the system. The Pearl
Horizons capabilities have also been expanded to
permit it to tow other vessels. Our dynamically positioned
diving support vessel, the Stephaniturm, was under
charter in the North Sea throughout 2002. The
Stephaniturm is currently undergoing scheduled
maintenance and is available for charter hire.

We install and remove or salvage offshore fixed
platforms. We have substantially expanded our operating
capabilities in this market area in the last three years. We
have three derrick barges equipped with cranes designed to lift
and place platforms, structures or equipment into position for
installation. In addition, they are

3



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##### 



used to disassemble and remove platforms and
prepare them for salvage or refurbishment. We acquired and
upgraded a derrick barge, the Pacific Horizon, with a
lift capacity of 1000 tons to complement the Atlantic
Horizon that has a 550 ton lift capacity. The Sea
Horizon is also utilized to install and remove offshore
fixed platforms and its lift capacity was recently upgraded from
800 tons to 1200 tons. The Sea Horizon is
360 feet long and 100 feet wide and has both pipelay
and derrick capabilities. It was deployed early in 2002 and has
successfully completed several projects in Southeast Asia.


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.

Our alliance with Cal Dive International, Inc.
(Cal Dive) in the U.S. Gulf of Mexico includes surface
diving, which is done to inspect the pipeline as it is being
laid, monitor the pipebury activities, connect pipelines to
production platforms and assist derrick barges in the
installation and removal of structures. We believe that having
Cal Dive perform our surface diving allows us to concentrate on
our core activities and improve efficiencies.

Our customers award contracts by means of a
highly competitive bidding process. In preparing a bid, we must
consider a variety of factors, including estimated time
necessary to complete the project, the recovery equipment and
the location and duration of current and future projects. We
have placed a strong emphasis on attempting to sequentially
structure scheduled work in adjacent areas. Sequential
scheduling reduces mobilization and demobilization time and
costs associated with each project and increases profitability.
We employ core groups of experienced offshore personnel that
work together on particular types of projects to increase our
bidding accuracy. We often obtain the services of workers
outside our core employee groups by subcontracting with other
parties. Our management examines the results of each bid
submitted, reevaluates bids, and implements a system of controls
to maintain and improve the accuracy of the bidding process. The
accuracy of the various estimates in preparing a bid is critical
to our profitability.

Our contracts are typically of short duration in
the U.S. Gulf of Mexico, being completed in periods as
short as several days to periods of up to several months for
projects involving our larger pipelay vessels. International
construction projects, such as our projects offshore Mexico with
Pemex, have longer lead times and extended job duration. We
perform most of our projects on a fixed-price or lump
sum basis, although a few projects are performed on a
cost-plus basis. Under a fixed-price contract, the price stated
in the contract is subject to adjustment only for change orders
placed by the customer. As a result, we are responsible for all
cost overruns. Furthermore, our profitability under a
fixed-price contract is reduced when the contract takes longer
to complete than estimated. Similarly, our profitability will be
increased if we can perform the contract ahead of schedule.
Under cost-plus arrangements, we receive a specified fee in
excess of direct labor and material cost and are protected
against cost overruns, but do not benefit directly from improved
performance.

4



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| |                 
| | ----------------
| | Marine Equipment

The following table describes our marine vessels.

|                   |  |                       |  |        |     |              |  |          |       |  |  |  |    | 
|------------------ |  | --------------------- |  | ------ | --- | ------------ |  | -------- | ----- |  |  |  | -- | 
|                   |  |                       |  |        |     |              |  | Maximum 
|                   |  |                       |  |        |     | Maximum      |  | Pipelay 
|                   |  |                       |  | Length |     | Derrick Lift |  | Diameter
|Vessel             |  | Vessel Type           |  | (feet) |     | (tons)       |  | (inches)
|                   |  |                       |  |        |     |              |  |         
|American Horizon   |  | Pipelay/Pipebury      |  |        | 180 |              |  |          |      |  |  |  | 20 | 
|Cajun Horizon      |  | Pipelay/Pipebury      |  |        | 140 |              |  |          |      |  |  |  | 12 | 
|Lone Star Horizon  |  | Pipelay/Pipebury      |  |        | 320 |              |  |          |      |  |  |  | 48 | 
|Gulf Horizon       |  | Pipelay/Pipebury      |  |        | 350 |              |  |          |      |  |  |  | 42 | 
|Brazos Horizon     |  | Pipelay/Pipebury      |  |        | 210 |              |  |          |      |  |  |  | 36 | 
|Pecos Horizon      |  | Pipelay/Pipebury      |  |        | 250 |              |  |          |      |  |  |  | 36 | 
|Sea Horizon        |  | Derrick/Pipelay       |  |        | 360 |              |  |          | 1,200 |  |  |  | 36 | 
|Pearl Horizon      |  | Diving Support Vessel |  |        | 184 |              |  |          |      |  |  |  |   | 
|Stephaniturm       |  | Diving Support Vessel |  |        | 230 |              |  |          |      |  |  |  |   | 
|Canyon Horizon     |  | Pipebury              |  |        | 330 |              |  |          |      |  |  |  |   | 
|Atlantic Horizon   |  | Derrick Barge         |  |        | 420 |              |  |          | 550   |  |  |  |   | 
|Pacific Horizon    |  | Derrick Barge         |  |        | 350 |              |  |          | 1,000 |  |  |  |   | 
|Phoenix Horizon(1) |  | Derrick/Pipelay       |  |        | 300 |              |  |          | 250   |  |  |  | 24 | 



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|    |                                                  
|--- | -------------------------------------------------
|(1) | Currently, the Phoenix Horizon is not
    active.

We own all of our marine vessels and have placed
mortgages on them to collateralize our debt. See Note 5 of
our notes to our consolidated financial statements and
Managements Discussion and Analysis of Financial
Condition and Results of Operations  Liquidity and
Capital Resources. Under governmental regulations and our
insurance policies, we are required to maintain the vessels in
accordance with standards of seaworthiness, safety and health
prescribed by governmental regulations and applicable vessel
classification societies. We believe we are in compliance with
all governmental regulations and insurance policies regarding
the operation and maintenance of our vessels.

In the normal course of our operations, we also
lease or charter other vessels, such as diving support vessels,
tugboats, cargo barges, utility boats and support vessels.

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. Repairs to
the Lone Star Horizon were completed during the fourth
quarter of 2002 at a cost of $5.0 million. 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 2002, we recorded this $2.0 million loss
as other expense, and we believe the insurance will cover the
cost to repair the damage. As of December 31, 2002, we
included the $3.0 million insurance claim in current
assets. We collected an initial reimbursement of
$1.2 million in February 2003.

Cal Dive Joint Venture

In March 2001, we formed a joint venture, 50%
owned by us, with Cal Dive to perform small diameter, deepwater
reel pipelaying projects in the U.S. Gulf of Mexico with
the Intrepid, a vessel owned by Cal Dive. Operations of
the joint venture would be jointly managed and staffed. If both
Cal Dive and Horizon decide to commence joint venture
operations, 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.

5



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Safety and Quality Assurance

We are concerned with the safety and health of
our employees and maintain a stringent safety assurance program
to reduce the possibility of costly accidents. Our health,
safety and environmental department establishes guidelines to
ensure compliance with all applicable state, federal and foreign
safety regulations. We also provide training and safety
education through new employee orientations, which include first
aid and CPR training. In addition, prospective and current
employees must submit to alcohol and drug testing. After each
accident or other health or safety occurrence, we promptly
collect data concerning the incident, perform further
investigations, and evaluate our safety procedures to help
prevent similar incidents.

In the third quarter of 2002, our health, safety
and environmental management system received OHSAS-18001
certification from the Norwegian classification society Det
Norske Veritas (DNV). This internationally recognized
certification is applicable to our health, safety and
environmental management system for our worldwide operations.
Additionally, we were awarded ISO 9001:2000 accreditation by DNV
for our Houston-based international operational support
activities and marine operations in Southeast Asia. ISO
9001:2000 is an internationally recognized accreditation for
demonstrating that a companys Quality Management System
has the ability to consistently provide products and services
meeting customer and applicable regulatory requirements, and
with the additional goal of enhancing customer satisfaction. We
believe that our safety program and commitment to quality are
vital to attracting and retaining customers and employees, and
controlling costs.

Customers

We have domestic and international operations in
one industry, the marine construction service industry to
offshore oil and gas companies. Our customers in the
U.S. have primarily been the oil and gas companies
operating on the U.S. outer continental shelf. In 2002, we
provided offshore marine construction services to approximately
41 customers. Our single largest customer during the last three
years was Pemex. We completed one major project for a subsidiary
of Pemex in 2001 and completed two major projects for Pemex in
2002, and we completed another project during the first quarter
of 2003. Pemex accounted for 30.6% of our revenues for the year
2002, compared to 52.2% of revenues for 2001 and 36.1% of
revenues for 2000. In addition, Iroquois Gas Transmission System
LP accounted for 19.7% of consolidated revenues for the year
2002. There were no other customers accounting for more than 10%
of consolidated revenues for 2002, 2001 or 2000.

Cumulative revenues recognized from 2000 through
2002 on all Pemex projects in Mexico total $286.8 million,
including $57.0 million of claims made under three Pemex
contracts for extra work related to interferences, interruptions
and other delays. Of the $57.0 million of claims,
$54.2 million relates to our second major project for
Pemex, which was completed during the fourth quarter of 2002.
The remaining $2.8 million of claims relates to two more
recent projects for Pemex. Unapproved claims related to the
Pemex projects developed primarily from client delays and
changes in the initial scope of work.

The level of construction services required by a
customer depends on the size of its capital expenditure budget
for construction for the year and our ability to bid for and be
awarded its projects. 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. Most of our U.S. contracts are typically
of short duration, being completed in periods as short as
several days to periods of up to several months. Many of our
international construction projects have longer lead times and
extended job durations.

Backlog

As of December 31, 2002, our backlog
supported by written agreements totaled approximately
$123.6 million, compared to our backlog at
December 31, 2001 of approximately $63.0 million. Our
backlog has typically been lower in the first and fourth
quarters of the year due to the seasonality and weather
conditions in the U.S. Gulf of Mexico during the winter
months. As we increase the scope of our international
operations, where projects tend to have longer lead times and
result in earlier awards, our backlog may increase. We do not
consider backlog amounts to be a reliable indicator of annual
revenues.

6



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##### 



Seasonality, Cyclicality and Factors Affecting
Demand

The marine construction industry in the
U.S. Gulf of Mexico historically has been highly seasonal
with contracts being awarded in the spring and early summer and
performed before the onset of adverse weather conditions in the
winter. The scheduling of much of our work is affected by
weather conditions and other factors, and many projects are
performed within a relatively short period of time. We have
attempted to offset the seasonality of our core operations in
the U.S. Gulf of Mexico and Latin America by expanding our
operations to international areas, such as offshore Southeast
Asia and West Africa, where marine construction services
historically have been less seasonal. We believe the locations
of these regions and the timing of customers awards
provide a counter-seasonal balance to our domestic operations,
which we believe offset adverse weather conditions in the
U.S. Gulf of Mexico in the first and fourth quarters.

The level and volatility of oil and gas prices
have a strong effect on exploration and production activities
offshore which ultimately affect the demand for our services.
Capital expenditures of oil and gas companies are influenced by:



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

Insurance

Our operations are subject to the inherent risks
of offshore marine activity, including accidents resulting in
the loss of life or property, environmental mishaps, mechanical
failures and collisions. We insure against these risks at levels
we believe are consistent with industry standards. Our insurance
premiums required to cover these risks significantly increased
during 2001 and 2002 due to losses in the insurance industry. In
addition, the terrorist attacks that took place on
September 11, 2001 further contributed to losses in the
insurance industry and may impact our ability to renew our
existing coverage in the future.

We believe that our insurance is adequate to
cover the cost of replacing any of our vessels that are lost and
most other offshore risks. However, certain risks are either not
insurable or insurance is available only at rates that are not
economical. We cannot assure that any such insurance will be
sufficient or effective under all circumstances or against all
hazards to which we may be subject.

Competition

The marine construction industry is highly
competitive. Competition is influenced by such factors as price,
availability and capability of equipment and personnel, and
reputation and experience of management. Contracts for work in
the U.S. Gulf of Mexico are typically awarded on a
competitive bid basis one to three months prior to commencement
of operations. Customers usually request bids from companies
they believe are technically qualified to perform the project.
Our marketing staff contacts offshore operators known to have
projects scheduled to ensure an opportunity to bid for these
projects. Although we believe customers consider, among other
things, the availability and technical capabilities of equipment
and personnel, the condition of equipment and the efficiency and
safety record of the contractor, price is the primary factor in
determining which qualified contractor is awarded the contract.
Because of the lower degree of complexity and capital costs
involved in shallow water marine construction activities, there
are a number of companies with one or more pipelay barges
capable of installing pipelines in shallow water. We currently
compete in the Gulf in water depths of 200 feet or less
primarily with Global Industries, Ltd., Torch Offshore, Inc. and
a few other smaller contractors. In projects in water depths of
200 feet or more or where a higher degree of complexity is
involved, competition generally is limited to Global Industries
and from time to time other international companies that

7



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##### 



may have vessels operating in the U.S. Gulf
of Mexico. We compete primarily with Global Industries and
Offshore Specialty Fabricators, Inc. for the installation and
removal of production platforms. We believe that our reputation,
experienced management and competitive pricing are key
advantages.


Internationally, the marine construction industry
is dominated by a small number of major international
construction companies and government owned or controlled
companies that operate in specific areas or on a joint venture
basis with one or more of the major international construction
companies.

Regulation

Many aspects of the offshore marine construction
industry are subject to extensive governmental regulation. Our
United States operations are subject to the jurisdiction of the
United States Coast Guard, the National Transportation Safety
Board and the Customs Service, as well as private industry
organizations such as the American Bureau of Shipping. The Coast
Guard and the National Transportation Safety Board set safety
standards and are authorized to investigate vessel accidents and
recommend improved safety standards, and the Customs Service is
authorized to inspect vessels at will.

We are required by various governmental and
quasi-governmental agencies to obtain permits, licenses and
certificates in connection with our operations. We believe that
we have obtained or will be able to obtain, when required, all
permits, licenses and certificates necessary to conduct our
business.

In addition, we depend on the demand for our
services from the oil and gas industry and, therefore, our
business is affected by laws and regulations, as well as
changing taxes and policies relating to the oil and gas
industry. In particular, the exploration and development of oil
and gas properties located on the continental shelf of the
United States is regulated primarily by the Minerals Management
Service. The Minerals Management Service must approve and grant
permits in connection with drilling and development plans
submitted by oil and gas companies. Delays in the approval of
plans and issuance of permits by the Minerals Management Service
because of staffing, economic, environmental or other reasons
could adversely affect our operations by limiting demand for
services.

Certain of our employees are covered by
provisions of the Jones Act, the Death on the High Seas Act and
general maritime law. These laws make liability limits under
state workers compensation laws inapplicable and permit
these employees to bring suit for job related injuries with
generally no limits on our potential liability.



| |                         
| | ------------------------
| | Environmental Regulation

Our operations are affected by numerous federal,
state and local laws and regulations relating to protection of
the environment, including the Outer Continental Shelf Lands
Act, the Federal Water Pollution Control Act of 1972 and the Oil
Pollution Act of 1990. The technical requirements of these laws
and regulations are becoming increasingly complex and stringent,
and compliance is becoming increasingly difficult and expensive.
Certain environmental laws provide for strict
liability for remediation of spills and releases of
hazardous substances and some provide liability for damages to
natural resources or threats to public health and safety.
Sanctions for noncompliance may include revocation of permits,
corrective action orders, administrative or civil penalties, and
criminal prosecution. It is possible that changes in the
environmental laws and enforcement policies, or claims for
damages to persons, property, natural resources or the
environment could result in substantial costs and liabilities.
Our insurance policies provide liability coverage for sudden and
accidental occurrences of pollution and/or clean-up and
containment of the foregoing in amounts that we believe are
comparable to policy limits carried by others in the offshore
construction industry.

Employees

As of January 31, 2003, we had approximately
717 employees, including 501 operating personnel and
216 corporate, administrative and management personnel. We are
employing approximately 32 union laborers for our project
in Long Island Sound, New York, pursuant to a project specific
labor agreement. Our remaining

8



---



##### 



685 employees are not unionized or employed
pursuant to any collective bargaining agreement or any similar
agreement. We believe our relationship with our employees is
good.


Our ability to expand operations and meet any
increased demand for our services depends on our ability to
increase our workforce. A significant increase in the wages paid
by competing employers could result in a reduction in the
skilled labor force, and/or increases in the wage rates paid. If
either of these circumstances takes place to the extent that
such wage increases could not be passed on to our customers, our
growth and profitability could be impaired.

Properties

Our corporate headquarters is located in Houston,
Texas, in approximately 94,000 square feet of leased space
under leases expiring from 2006 to 2008. In addition, we lease
approximately 37,000 square feet of office space in various
international locations under leases expiring from 2003 to 2006.

We own and operate a marine support base and
storage facility (for marine structures that may be salvaged by
our marine fleet) from approximately 23 acres with
approximately 6,000 feet of waterfront on a peninsula in
Sabine Lake near Port Arthur, Texas with direct access to the
Gulf. The facility has more than 3,000 feet of deepwater
access for docking barges and vessels. We also own and operate a
marine support and spool base located on 26 acres of
waterfront property in Sabine, Texas. This marine base includes
1,700 feet of bulkhead, 59,000 square feet of office
and warehouse space, and two heliports. We also lease
approximately 19,000 square feet of land in Morgan City,
Louisiana for inventory storage on a month-to-month basis.

Cautionary Statements

Certain statements made in this Annual Report
that are not historical facts are intended to be
forward-looking statements. Such forward-looking
statements may include statements that relate to:



| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | our business plans or strategies, and projected
    or anticipated benefits or other consequences of such plans or
    strategies;             
|
| |  | our objectives;                                                                                                                                
|
| |  | projected or anticipated benefits from future or
    past acquisitions; and                                                                    
|
| |  | projections involving anticipated capital
    expenditures or revenues, earnings or other aspects of capital
    projects or operating results.

Also, you can generally identify forward-looking
statements by such terminology as may,
will, expect, believe,
anticipate, project,
estimate or similar expressions. We caution you that
such statements are only predictions and not guarantees of
future performance or events. In evaluating these statements,
you should consider various risk factors, including but not
limited to the risks listed below. These risk factors may affect
the accuracy of the forward-looking statements and the
projections on which the statements are based.

All phases of our operations are subject to a
number of uncertainties, risks and other influences, many of
which are beyond our control. Any one of such influences, or a
combination, could materially affect the results of our
operations and the accuracy of forward-looking statements made
by us. 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;
|
| |  | 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;                                                                                                                              

9



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##### 





| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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;                                                                                                                                       
|
| |  | the need for additional financing;                                                                                                                                                                   
|
| |  | 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 a prolonged war with Iraq.                                                                                                                                                    

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.

A more detailed discussion of the foregoing
factors follows:



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | The approval and timing of collection of
    receivables and claims from Pemex may adversely affect our
    liquidity and financing requirements

Our receivables from Pemex continue to impact our
liquidity and operating cash flows. As of December 31,
2002, we have recognized contract receivables of
$14.2 million and costs in excess of billings of
$62.7 million from Pemex totaling $76.9 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 December 31, 2002, there were
$57.0 million of claims, which we have recognized as
revenue, made under three Pemex contracts for extra work related
to interferences, interruptions and other delays, with the
majority of this amount related to our second major contract
that was completed in the fourth quarter of 2002.

During November 2002, we engaged a consulting
firm in Mexico to assist us in the administration of the claims
to be made against Pemex. After considering the time necessary
for the consultants to comply with Pemexs requirements and
communication with new Pemex management, we believe that it will
take longer to process and collect these claims than previously
expected. We now expect to formally submit these claims in
accordance with Pemexs requirements through the second
quarter of 2003, with collections expected by the end of the
third quarter of 2003. The unapproved claims we have included as
revenue through December 31, 2002 are expected to be
substantially less than the actual claims to be presented to
Pemex, and we believe we will 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

10



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##### 



impact the ultimate collectibility of these
amounts. We have considered 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.


Our ability to service our existing debt, provide
working capital and fund our capital expenditure requirements
will be affected by our ability to collect our Pemex receivables
and claims. We believe that our cash on hand, together with cash
provided by operations and available borrowings under our
revolving credit facilities, will be sufficient to fund our debt
service requirements, working capital and capital expenditures
for at least the next year barring any unforeseen circumstances.
If current activity levels continue in the U.S. Gulf of
Mexico or if we are unsuccessful in collecting our Pemex
receivables and claims as expected, it would require us to
depend more heavily on our existing revolving credit facilities
and possibly refinance some or all of our indebtedness in order
to increase our total borrowing capability if we cannot obtain
additional financing from our existing lenders. We cannot assure
you that we will be able to refinance any of our indebtedness,
including our existing revolving credit facilities, on
commercially reasonable terms or at all.



| |                                                                   
| | ------------------------------------------------------------------
| | Industry volatility may adversely affect
    results of operations

The demand for our services depends on the level
of capital expenditures by oil and gas companies for
developmental construction. As a result, the cyclical nature of
the oil and gas industry has a significant effect on our
revenues and profitability. Historically, prices of oil and gas,
as well as the level of exploration and developmental activity,
have fluctuated substantially. Any significant decline in the
worldwide demand for oil and gas, or prolonged low oil or gas
prices in the future, will likely depress development activity.
We are unable to predict future oil and gas prices or the level
of oil and gas industry activity. A prolonged low level of
activity in offshore drilling and exploration will adversely
affect our revenues and profitability.



| |                                                       
| | ------------------------------------------------------
| | Our rapid growth and growth strategy
    involve risks

We have undergone rapid growth both internally
and through acquisitions of additional barges and vessels.
Future acquisitions of other complementary businesses and marine
equipment are key elements of our growth strategy. If we are
unable to purchase additional equipment or other vessels on
favorable financial or other terms or to manage acquired
businesses or vessels, this could adversely affect our revenues
and profitability. We cannot assure that we will be able to
identify or acquire equipment or businesses. In addition, any
such future acquisitions may involve potential delays and
increased costs. If we acquire new vessels, we may need to
upgrade or refurbish the vessels. If we experience delays or
cost increases in upgrading or refurbishing the vessels, our
operating results will be negatively affected.



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

Offshore construction involves a high degree of
operational risk. Risks of vessels capsizing, sinking,
grounding, colliding and sustaining damage from severe weather
conditions are inherent in offshore operations. These hazards
may cause significant personal injury or property damage,
environmental damage, and suspension of operations. In addition,
we may be named as a defendant in lawsuits involving potentially
large claims as a result of such occurrences. Our insurance
premiums required to cover these risks significantly increased
during 2001 and 2002 due to losses in the insurance industry. In
addition, the terrorist attacks that took place on
September 11, 2001 further contributed to losses in the
insurance industry and may impact our ability to renew our
existing coverage in the future. We maintain what we believe is
prudent insurance protection. However, we cannot assure that our
insurance will be sufficient or effective under all
circumstances. A successful claim for which we are not fully
insured may have a material adverse effect on our revenues and
profitability.



| |                                                
| | -----------------------------------------------
| | We operate in a highly competitive
    industry

Our business is highly competitive because
construction companies operating offshore compete vigorously for
available projects, which are typically awarded on a competitive
bid basis. This competitive bid process

11



---



##### 



could adversely affect our growth because our
expansion strategy depends on being awarded projects in areas
where we have not performed operations.


Several of our competitors and potential
competitors are larger and have greater financial and other
resources. Competitors with greater financial resources may be
willing to sustain losses on certain projects to prevent further
market entry by other competitors. In addition, marine
construction vessels have few alternative uses and high
maintenance costs, whether they are operating or not. As a
result, some companies may bid contracts at rates below our
rates. These factors may adversely affect the number of
contracts that are awarded to us and the profit margins on those
contracts which are awarded to us. Additionally, as a result of
the competitive bidding process, our significant customers vary
over time.



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

Historically, the greatest demand for marine
construction services in the U.S. Gulf of Mexico has been
during the period from May to September. This seasonality of the
construction industry in the U.S. Gulf of Mexico is caused
both by weather conditions and by the historical timing of
capital expenditures by oil and gas companies which accompanies
this. As a result, revenues are typically higher in the summer
months and lower in the winter months. Although we are in the
process of offsetting U.S. Gulf of Mexico seasonality by
pursuing business opportunities in international areas, we
cannot assure that such expansion will offset the seasonality of
our operations in the U.S. Gulf of Mexico.



| |                                                                     
| | --------------------------------------------------------------------
| | Our acquisition growth strategy may require
    additional financing

Our acquisition strategy may require significant
amounts of additional capital. We may have to issue additional
equity securities or incur additional debt in connection with
such acquisitions.



| |                                                    
| | ---------------------------------------------------
| | We incur risks associated with contract
    bidding

Substantially all of our projects are performed
on a fixed-price basis. Changes in offshore job conditions and
variations in labor and equipment productivity may affect the
revenue and costs on a contract. These variations may affect our
gross profits. In addition, typically during the summer
construction season, and occasionally during the winter season,
we bear the risk of delays caused by adverse weather conditions.



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

Since our contract revenues are recognized on a
percentage-of-completion basis, we periodically review contract
revenue and cost estimates as the work progresses. Accordingly,
adjustments are reflected in income in the period when such
revisions are determined. These adjustments could result in a
reduction of previously reported profits, which may be
significant.



| |                                      
| | -------------------------------------
| | We are dependent on key
    personnel

Our success depends on, among other things, the
continued active participation of our executive officers and
certain of our other key operating personnel. Our officers and
personnel have extensive experience in the marine construction
industry, both domestic and international. The loss of the
services of any one of these persons could adversely impact our
ability to implement our expansion strategy.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | We may incur additional expenditures to
    comply with governmental regulations

Our operations are subject to various
governmental regulations, violations of which may result in
civil and criminal penalties, injunctions, and cease and desist
orders. In addition, some environmental statutes may impose
liability without regard to negligence or fault. Although our
cost of compliance with such laws has to date been immaterial,
such laws are changed frequently. Accordingly, it is impossible
to predict the cost or impact of such laws on our future
operations.

We depend on demand for our services from the oil
and gas industry, and this demand may be affected by changing
tax laws and oil and gas regulations. As a result, the adoption
of laws which curtail oil and gas

12



---



##### 



production in our areas of operation may
adversely affect us. We cannot determine to what extent our
operations may be affected by any new regulations or changes in
existing regulations.




| |                                                                  
| | -----------------------------------------------------------------
| | Our international operations are subject to
    significant risks

A key element of our expansion strategy has been
to expand our operations into selected international oil and gas
producing areas, which we will continue to do. These
international operations are subject to a number of risks
inherent in any business operating in foreign countries
including, but not limited to:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | political, social, and economic instability;                          
|
| |  | potential seizure or nationalization of assets;                       
|
| |  | increased operating costs;                                            
|
| |  | modification or renegotiating of contracts;                           
|
| |  | import-export quotas; and                                             
|
| |  | other forms of government regulation which are
    beyond our control.

Our international operations have not yet been
affected materially by such conditions or events, but if our
international operations expand, the exposure to these risks
will increase. As a result, we could, at any one time, have a
significant amount of our revenues generated by operating
activity in a particular country. Therefore, our results of
operations could be susceptible to adverse events beyond our
control that could occur in the particular country in which we
are conducting such operations.

Additionally, our competitiveness in
international areas may be adversely affected by regulations,
including but not limited to regulations requiring:



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

We cannot predict what types of the above events
may occur.



| |                                                                 
| | ----------------------------------------------------------------
| | There are risks associated with our joint
    venture operations

We anticipate entering into joint ventures with
entities as we expand into other international areas. We cannot
assure that we will undertake such joint ventures or, if
undertaken, that such joint ventures will be successful.



| |                                                      
| | -----------------------------------------------------
| | A terrorist attack and a prolonged war with
    Iraq.

The terrorist attacks that took place on
September 11, 2001 in the U.S. were unprecedented
events that have created many economic and political
uncertainties, and highlight the impact that future similar
terrorist attacks could have on broader economic and political
factors that indirectly affect our business and demand for
marine construction services. The potential for future terrorist
attacks, the national and international response to terrorist
attacks, including a prolonged war with Iraq, and other acts of
war or hostility have created many economic and political
uncertainties, which could adversely affect our business for the
short or long-term in ways that cannot presently be predicted.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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

13



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##### 








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

None.




Item 4A.     Executive
Officers of the Registrant

Listed below are the names, ages and offices held
by our executive officers as of March 1, 2003.

|                  |  |     |    |              |  |                                                         
|----------------- |  | --- | -- | ------------ |  | --------------------------------------------------------
|Name              |  | Age |    | Offices Held
|                  |  |     |    |             
|Bill J. Lam       |  |     | 36 |              |  | President, Chief Executive Officer and Director         
|David W. Sharp    |  |     | 49 |              |  | Executive Vice President and Chief Financial
    Officer
|R. Clay Etheridge |  |     | 48 |              |  | Executive Vice President and Chief Operating
    Officer

Our executive officers are appointed by our board
of directors, subject to their rights under employment
agreements.

Bill J. Lamis our
President, Chief Executive Officer and a Director. Mr. Lam
has served as our President and Chief Executive Officer since
December 1997. From July 1997 to November 1997, Mr. Lam was
our Vice President  Operations. Prior to being
employed by us, Mr. Lam held various supervisory positions
for the following providers of marine construction services to
the offshore oil and gas industry: Lowe Offshore, Inc. (from
January 1997 to July 1997), J. Ray McDermott, S.A. (from January
1995 to January 1997), and OPI International, Inc. (from August
1990 to January 1995).

David W. Sharpis an
Executive Vice President and our Chief Financial Officer.
Mr. Sharp has served as our Executive Vice President and
Chief Financial Officer since December 1997. From October 1996
to November 1997, Mr. Sharp was Vice President 
Finance. He held various positions from January 1995 to October
1996 with McDermott, including world-wide project leader for the
implementation of accounting and financial systems. He was
controller-Atlantic Division and Director of Management
Information of OPI International from November 1990 to January
1995.

R. Clay
Etheridgeis an Executive Vice
President and our Chief Operating Officer. Mr. Etheridge
has served as our Executive Vice President and Chief Operating
Officer since September 1999. Prior to joining us,
Mr. Etheridge served as Vice President of International
Operations for Global Industries from March 1997 to September
1999. Mr. Etheridge has held executive management positions
with McDermott in Southeast Asia, and OPI International, with
responsibility for U.S. Gulf of Mexico and West African
operations, and served as operations manager for Heerema Marine
Contractors.




PART II






|        |                                                                          
|------- | -------------------------------------------------------------------------
|Item 5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our common stock is traded on the NASDAQ National
Market under the symbol HOFF. At March 3, 2003,
we had approximately 30 holders of record of our common
stock.

The following table sets forth the high and low
closing bid prices per share of our common stock, as reported by
the NASDAQ National Market, for the periods indicated.

|               |  |      |       |      |  |      |      |     |  |   |       |  |  |   |       | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ----- | 
|               |  |      |       |     
|               |  | 2002 |       | 2001
|               |  |      |       |     
|Fiscal Quarter |  | High |       | Low  |  | High |      | Low
|               |  |      |       |      |  |      |      |    
|First          |  | $    | 11.82 |      |  | $    | 6.05 |     |  | $ | 25.00 |  |  | $ | 16.50 | 
|Second         |  | $    | 13.12 |      |  | $    | 7.77 |     |  | $ | 25.05 |  |  | $ | 12.54 | 
|Third          |  | $    | 8.15  |      |  | $    | 4.21 |     |  | $ | 14.02 |  |  | $ | 5.30  | 
|Fourth         |  | $    | 6.14  |      |  | $    | 4.62 |     |  | $ | 8.59  |  |  | $ | 5.43  | 

14



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##### 



We intend to retain all of the cash our business
generates to fund future growth and meet our working capital
requirements. We do not plan to pay cash dividends on our common
stock in the foreseeable future. In addition, our debt
agreements currently prevent us from paying dividends or making
other distributions to our stockholders.

Equity Compensation Plan Information

The following table provides information
regarding common stock authorized for issuance under our equity
compensation plans as of December 31, 2002:

|                                                                  |  |                      |           |                   |  |                      |      |  |  |  |           | 
|----------------------------------------------------------------- |  | -------------------- | --------- | ----------------- |  | -------------------- | ---- |  |  |  | --------- | 
|                                                                  |  |                      |           |                   |  | Number of Securities
|                                                                  |  |                      |           |                   |  | Remaining Available 
|                                                                  |  |                      |           | Weighted-Average  |  | For Future Issuance 
|                                                                  |  | Number of Securities |           | Exercise Price of |  | Under Equity        
|                                                                  |  | to be Issued Upon    |           | Outstanding       |  | Compensation Plans  
|                                                                  |  | Exercise of          |           | Options,          |  | (Excluding          
|                                                                  |  | Outstanding Options, |           | Warrants and      |  | Securities Reflected
|Plan Category                                                     |  | Warrants and Rights  |           | Rights            |  | in Column (a))      
|                                                                  |  |                      |           |                   |  |                     
|                                                                  |  | (a)                  |           | (b)               |  | (c)(2)              
|Equity compensation plans approved by security
    holders        |  |                      | 2,718,220 |                   |  | $                    | 8.59 |  |  |  | 2,319,000 | 
|Equity compensation plans not approved by
    security holders(1) |  |                      |          |                   |  |                      |     |  |  |  |          | 
|                                                                  |  |                      |           |                   |  |                      |      |  |  |  |           | 
|Total                                                             |  |                      | 2,718,220 |                   |  | $                    | 8.59 |  |  |  | 2,319,000 | 
|                                                                  |  |                      |           |                   |  |                      |      |  |  |  |           | 



---



|    |                                                                                                                                                                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Our equity compensation program does not include
    any equity compensation plans (including individual compensation
    arrangements) under which common stock is authorized for
    issuance that were adopted without the approval of shareholders.                                      
|   
|(2) | Of the shares remaining for issuance under our
    equity compensation plans, no more than 200,000 shares may
    be issued as restricted stock or other stock based awards (which
    awards are valued in whole or in part on the value of the shares
    of common stock under each plan).






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The selected financial data for the five-year
period ended December 31, are derived from our audited
financial statements. You should read the information below
together with Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
consolidated financial statements and notes thereto included in
this Annual Report.

The Consolidated Financial Statements for 1998
through 2001 were audited by Arthur Andersen LLP
(Andersen), which has ceased operations. A copy of the
auditors report previously issued by Andersen on our
financial statements as of December 31, 2001 and 2000 and
for each of the three years in the period ended
December 31, 2001 is included elsewhere in this report.
Andersen did not reissue its report.

|                                             |                         |                                       |         |        |   |      |         |        |  |      |         |        |  |   |        |        |  |   |         |        | 
|-------------------------------------------- | ----------------------- | ------------------------------------- | ------- | ------ | - | ---- | ------- | ------ |  | ---- | ------- | ------ |  | - | ------ | ------ |  | - | ------- | ------ | 
|                                             |                         |                                      
|                                             |                         | Year Ended December 31,              
|                                             |                         |                                      
|                                             |                         | 2002                                  |         | 2001   |   | 2000 |         | 1999   |  | 1998
|                                             |                         |                                       |         |        |   |      |         |        |  |     
|                                             |                         |                                      
|                                             |                         | (In thousands, except per share data)
|INCOME STATEMENT DATA:                       |                         |                                       |         |        |   |      |         |        |  |      |         |        |  |   |        |        |  |   |         |       
|Contract revenues                            |                         | $                                     | 283,410 |        |   | $    | 272,208 |        |  | $    | 160,532 |        |  | $ | 89,015 |        |  | $ | 119,802 |       
|Cost of contract revenues                    |                         |                                       | 253,016 |        |   |      | 237,175 |        |  |      | 136,146 |        |  |   | 72,181 |        |  |   | 91,961  |       
|                                             |                         |                                       |         |        |   |      |         |        |  |      |         |        |  |   |        |        |  |   |         |       
|                                             | Gross profit            |                                       |         | 30,394 |   |      |         | 35,033 |  |      |         | 24,386 |  |   |        | 16,834 |  |   |         | 27,841 | 
|Selling, general and administrative expenses |                         |                                       | 21,845  |        |   |      | 13,771  |        |  |      | 9,401   |        |  |   | 9,043  |        |  |   | 8,120   |       
|Impairment of property and equipment         |                         |                                       | 9,852   |        |   |      |        |        |  |      |        |        |  |   |       |        |  |   |        |       
|                                             |                         |                                       |         |        |   |      |         |        |  |      |         |        |  |   |        |        |  |   |         |       
|                                             | Operating income (loss) |                                       |         | (1,303 | ) |      |         | 21,262 |  |      |         | 14,985 |  |   |        | 7,791  |  |   |         | 19,721 | 

15



---



##### 



|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |        |  
|-------------------------------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | ------- | ------ | - | ---- | ------- | ------ | - | ---- | ------- | ------ | - | - | ------- | ------ | - | - | ------- | ------ | -
|                                                                                                         |                                             |                                      
|                                                                                                         |                                             | Year Ended December 31,              
|                                                                                                         |                                             |                                      
|                                                                                                         |                                             | 2002                                  |         | 2001   |   | 2000 |         | 1999   |   | 1998
|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |     
|                                                                                                         |                                             |                                      
|                                                                                                         |                                             | (In thousands, except per share data)
|Other:                                                                                                   |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|                                                                                                         | Interest expense, net of amount capitalized |                                       |         | (4,585 | ) |      |         | (5,381 | ) |      |         | (7,730 | ) |   |         | (5,759 | ) |   |         | (3,000 | )
|                                                                                                         | Interest income                             |                                       |         | 91     |   |      |         | 403    |   |      |         | 718    |   |   |         | 480    |   |   |         | 187    |  
|                                                                                                         | Gain (loss) on sale of assets               |                                       |         |       |   |      |         | (22    | ) |      |         | 6      |   |   |         | 10     |   |   |         | 20     |  
|                                                                                                         | Other income (expense), net                 |                                       |         | (2,831 | ) |      |         | (184   | ) |      |         | (84    | ) |   |         | 158    |   |   |         | 17     |  
|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net income (loss) before income taxes,
    extraordinary loss and cumulative effect of accounting change |                                             |                                       | (8,628  | )      |   |      | 16,078  |        |   |      | 7,895   |        |   |   | 2,680   |        |   |   | 16,945  |       
|Income tax provision (benefit)                                                                           |                                             |                                       | (3,079  | )      |   |      | 4,817   |        |   |      | 2,902   |        |   |   | 1,001   |        |   |   | 4,485   |       
|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net income (loss) before extraordinary loss and
    cumulative effect of accounting change               |                                             |                                       | (5,549  | )      |   |      | 11,261  |        |   |      | 4,993   |        |   |   | 1,679   |        |   |   | 12,460  |       
|Extraordinary loss, net of taxes of $(306)                                                               |                                             |                                       |        |        |   |      | (568    | )      |   |      |        |        |   |   |        |        |   |   |        |       
|Cumulative effect of accounting change, net of
    taxes of $743                                         |                                             |                                       |        |        |   |      |        |        |   |      | 1,381   |        |   |   |        |        |   |   |        |       
|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net income (loss)                                                                                        |                                             | $                                     | (5,549  | )      |   | $    | 10,693  |        |   | $    | 6,374   |        |   | $ | 1,679   |        |   | $ | 12,460  |       
|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Earnings per share  basic:                                                                              |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net income (loss) before extraordinary loss and
    cumulative effect of accounting change               |                                             | $                                     | (0.22   | )      |   | $    | 0.50    |        |   | $    | 0.27    |        |   | $ | 0.09    |        |   | $ | 0.69    |       
|Extraordinary loss                                                                                       |                                             |                                       |        |        |   |      | (0.02   | )      |   |      |        |        |   |   |        |        |   |   |        |       
|Cumulative effect of accounting change                                                                   |                                             |                                       |        |        |   |      |        |        |   |      | 0.07    |        |   |   |        |        |   |   |        |       
|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net income (loss)  basic                                                                                |                                             | $                                     | (0.22   | )      |   | $    | 0.48    |        |   | $    | 0.34    |        |   | $ | 0.09    |        |   | $ | 0.69    |       
|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Earnings per share  diluted:                                                                            |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net income (loss) before extraordinary loss and
    cumulative effect of accounting change               |                                             | $                                     | (0.22   | )      |   | $    | 0.49    |        |   | $    | 0.26    |        |   | $ | 0.09    |        |   | $ | 0.69    |       
|Extraordinary loss                                                                                       |                                             |                                       |        |        |   |      | (0.03   | )      |   |      |        |        |   |   |        |        |   |   |        |       
|Cumulative effect of accounting change                                                                   |                                             |                                       |        |        |   |      |        |        |   |      | 0.07    |        |   |   |        |        |   |   |        |       
|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net income (loss)  diluted                                                                              |                                             | $                                     | (0.22   | )      |   | $    | 0.46    |        |   | $    | 0.33    |        |   | $ | 0.09    |        |   | $ | 0.69    |       
|                                                                                                         |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|STATEMENT OF CASH FLOWS DATA:                                                                            |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Net cash provided by (used in) operating
    activities                                                  |                                             | $                                     | 47,458  |        |   | $    | (43,994 | )      |   | $    | 8,723   |        |   | $ | 12,627  |        |   | $ | 9,704   |       
|Net cash used in investing activities                                                                    |                                             |                                       | (58,723 | )      |   |      | (53,223 | )      |   |      | (18,178 | )      |   |   | (23,397 | )      |   |   | (78,490 | )     
|Net cash provided by financing activities                                                                |                                             |                                       | 9,474   |        |   |      | 95,838  |        |   |      | 10,581  |        |   |   | 9,238   |        |   |   | 75,589  |       
|OTHER FINANCIAL DATA:                                                                                    |                                             |                                       |         |        |   |      |         |        |   |      |         |        |   |   |         |        |   |   |         |       
|Depreciation and amortization                                                                            |                                             | $                                     | 15,959  |        |   | $    | 12,935  |        |   | $    | 9,591   |        |   | $ | 7,574   |        |   | $ | 4,448   |       
|Capital expenditures                                                                                     |                                             |                                       | 57,723  |        |   |      | 54,828  |        |   |      | 19,268  |        |   |   | 24,396  |        |   |   | 95,725  |       

16



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##### 



|                                          |                   |                                                                   |         |        |        |   |         |        |        |   |        |       |        |   |        |       |        |   |        |        |        | 
|----------------------------------------- | ----------------- | ----------------------------------------------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ------ | ------ | 
|                                          |                   |                                                                   |         |        |        |   |         |       
|                                          |                   | December 31,                                                      |         |        |        |   |         |       
|                                          |                   |                                                                   |         |        |        |   |         |       
|                                          |                   | 2002                                                              |         | 2001   |        |   |         |        |        |  
|                                          |                   |                                                                   |         |        |        |   |         |        |        |  
|BALANCE SHEET DATA:                       |                   |                                                                   |         |        |        |   |         |        |        |   |        |       |        |   |        |       |        |   |        |       
|Working capital                           |                   | $                                                                 | 30,385  |        |        | $ | 78,055  |        |        |   |        |       |        |   |        |       |        |   |        |       
|Property and equipment, net               |                   |                                                                   | 257,847 |        |        |   | 221,446 |        |        |   |        |       |        |   |        |       |        |   |        |       
|Total assets                              |                   |                                                                   | 420,533 |        |        |   | 393,584 |        |        |   |        |       |        |   |        |       |        |   |        |       
|Long-term debt, net of current maturities |                   |                                                                   | 90,062  |        |        |   | 111,414 |        |        |   |        |       |        |   |        |       |        |   |        |       
|Stockholders equity                      |                   |                                                                   | 211,675 |        |        |   | 185,690 |        |        |   |        |       |        |   |        |       |        |   |        |       
|                                         
|OTHER NON-GAAP FINANCIAL DATA:            |                   |                                                                   |         |        |        |   |         |        |        |   |        |       |        |   |        |       |        |   |        |       
|EBITDA(1)                                 |                   | $                                                                 | 21,677  |        |        | $ | 33,991  |        |        | $ | 24,498 |       |        | $ | 15,533 |       |        | $ | 24,206 |       
|                                          |                   |                                                                   |         |        |        |   |         |        |        |   |        |       |        |   |        |       |        |   |        |       
|EBITDA calculation is as follows:         |                   |                                                                   |         |        |        |   |         |        |        |   |        |       |        |   |        |       |        |   |        |       
|                                          | Net income (loss) |                                                                   | $       | (5,549 | )      |   | $       | 10,693 |        |   | $      | 6,374 |        |   | $      | 1,679 |        |   | $      | 12,460 |       
|                                          |                   | Extraordinary loss and cumulative effect of
    accounting change |         |        |       |   |         |        | 568    |   |        |       | (1,381 | ) |        |       |       |   |        |        |       | 
|                                          |                   | Income tax provision (benefit)                                    |         |        | (3,079 | ) |         |        | 4,817  |   |        |       | 2,902  |   |        |       | 1,001  |   |        |        | 4,485  | 
|                                          |                   | Net interest expense                                              |         |        | 4,494  |   |         |        | 4,978  |   |        |       | 7,012  |   |        |       | 5,279  |   |        |        | 2,813  | 
|                                          |                   | Depreciation and amortization                                     |         |        | 15,959 |   |         |        | 12,935 |   |        |       | 9,591  |   |        |       | 7,574  |   |        |        | 4,448  | 
|                                          |                   | Non-cash impairment of property and equipment                     |         |        | 9,852  |   |         |        |       |   |        |       |       |   |        |       |       |   |        |        |       | 
|                                          |                   |                                                                   |         |        |        |   |         |        |        |   |        |       |        |   |        |       |        |   |        |       
|                                          |                   | EBITDA                                                            |         | $      | 21,677 |   |         | $      | 33,991 |   |        | $     | 24,498 |   |        | $     | 15,533 |   |        | $      | 24,206 | 
|                                          |                   |                                                                   |         |        |        |   |         |        |        |   |        |       |        |   |        |       |        |   |        |       



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Horizon calculates EBITDA (earnings before
    interest, income taxes, depreciation and amortization) as net
    income or loss excluding extraordinary loss and cumulative
    effect of accounting change, income taxes, net interest expense,
    depreciation and amortization, and non-cash impairment. Earnings
    includes revenues for services for which non-cash consideration
    is received (approximately $6.8 million in 2002). EBITDA is
    a supplemental financial measurement we use to evaluate our
    business. We believe that EBITDA provides supplemental
    information about our ability to meet future requirements for
    debt service, capital expenditures and working capital. It is
    not intended to depict funds available for reinvestment or other
    discretionary uses. We believe factors that should be considered
    by investors in evaluating EBITDA include, but are not limited
    to, trends in EBITDA as compared to cash flow from operations,
    debt service requirements and capital expenditures. Our
    measurement of EBITDA may not be comparable to EBITDA as
    calculated by other companies. Further, you should not consider
    EBITDA in isolation as an alternative to, or more meaningful
    than, net income, cash flow provided by (used in) operations or
    any other measure of performance determined in accordance with
    generally accepted accounting principles as an indicator of our
    profitability or liquidity.






|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | 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 included in this Annual Report. 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. See Cautionary Statements.

General

We provide marine construction services to the
offshore oil and gas industry in the U.S. Gulf of Mexico,
Latin America, Southeast Asia and West Africa. Our marine fleet
consists of thirteen vessels, twelve of which are currently
operational.

17



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##### 



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. These expenditures
are influenced by:



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

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 drydocking 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

18



---



##### 



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.


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 include non-cash values assigned to
structures that are received from time to time as partial
consideration.



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

Costs of contract revenues include 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 December 31, 2002. We have
historically not experienced any significant losses on
receivables, but significant losses could be material to our
financial position and results of operations. At
December 31, 2002, we had $14.2 million in contract
receivables and $62.7 million in costs in excess of
billings from Pemex, including $57.0 million in claims
related to weather and other delays, totaling
$76.9 million. We believe our receivables are realizable;
however, any changes will be recognized in the period in which
they are determined.



| |                       
| | ----------------------
| | 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 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 we expect to continue for at least
the first half of 2003. During the fourth quarter, 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 years ended
December 31, 2001 and 2000.

19



---



##### 





| |             
| | ------------
| | 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, the American Institute of
Certified Public Accountants (AICPA) issued an exposure
draft of a proposed Statement of Position (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
$5.8 million in 2002, $7.1 million in 2001 and
$2.0 million in 2000. As of December 31, 2002,
deferred dry-dock costs totaled $12.9 million. Expensing
dry-dock costs would likely result in greater variability of our
quarterly earnings as a substantial portion of our dry-dock
activities take place during the first and fourth quarters.



| |          
| | ---------
| | 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.
In 2002 and 2001, we sold inventory structures for
$0.7 million and $0.9 million with related cost of
sales of $0.7 million and $0.6 million, respectively.
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.

Results of Operations

The discussion below describes our results of
operations. Our 2002 results reflect the ongoing competitive
nature of marine construction services in the U.S. Gulf of
Mexico. Our profit margins in the U.S. Gulf of Mexico
remained under competitive pressure during 2002 due to reduced
industry demand for our services. Our work in international
areas continued to grow in 2002 with the expansion of our
operations into Southeast Asia and West Africa. We believe these
international areas will provide opportunities for improved
profit margins compared to current market conditions in the
U.S. Gulf of Mexico.

Our profit margins were adversely impacted by
weather conditions during the fourth quarter of 2002. We
experienced lower margins on vessels operating in the northern
U.S. Gulf of Mexico because of downtime due to unusually
adverse weather conditions during the fourth quarter of 2002.
The inclement winter weather conditions in the Northeastern
United States affected our profitability related to the pipeline
installation and burial project in Long Island Sound even though
that project remains on schedule. We believe our expansion into
Southeast Asia and West Africa will provide a counter-seasonal
balance to the effect of adverse winter weather conditions in
the U.S. Gulf of Mexico and Latin America.

During 2002, we completed two projects for Pemex
utilizing the Atlantic Horizon, Lone Star Horizon and
Pearl Horizon. We began another project for Pemex in May
2002 which we completed during the first quarter of 2003. Pemex
accounted for 30.6% of consolidated revenues for 2002 compared
with 52.2% for 2001 and 36.1% for 2000. Our receivables from
Pemex continue to impact our liquidity and operating cash flows.
As of December 31, 2002, we had $76.9 million of Pemex
receivables, consisting of contract receivables of
$14.2 million and costs in excess of billings of
$62.7 million.

We follow the guidance of AICPA SOP 81-1,
Accounting for Performance of Construction-Type and
Certain Production-Type Contracts relating to 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.

Cumulative revenues recognized from 2000 through
2002 on all Pemex projects in Mexico total $286.8 million,
including $57.0 million of claims made under three Pemex
contracts for extra work related to

20



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##### 



interferences, interruptions and other delays. Of
the $57.0 million of claims, $54.2 million relates to
our second major project for Pemex, EPC 64, which was
completed during the fourth quarter of 2002. The remaining
$2.8 million of claims relates to two more recent projects
for Pemex. Unapproved claims related to the Pemex projects arise
primarily from client delays and changes in the initial scope of
work.


A summary of the balance of claims remaining in
costs in excess of billings related to the Pemex projects are as
follows (in millions):

|                                |                                                                            |   |      |      | 
|------------------------------- | -------------------------------------------------------------------------- | - | ---- | ---- | 
|Claims included in 2001 revenue |                                                                            | $ | 42.8 |     
|Claims included in 2002 revenue |                                                                            |   | 14.2 |     
|                                |                                                                            |   |      |     
|                                | Total claims                                                               |   |      | 57.0 | 
|Claims billed to Pemex          |                                                                            |   | (4.0 | )   
|                                |                                                                            |   |      |     
|                                | Claims included in costs in excess of billings as
    of December 31, 2002 |   | $    | 53.0 | 
|                                |                                                                            |   |      |     

Subsequent to December 31, 2002, we have
collected $8.4 million of contract receivables related to
the Pemex projects.

During November 2002, we engaged a consulting
firm in Mexico to assist us in the administration of the claims
to be made against Pemex. After considering the time necessary
for the consultants to comply with Pemexs requirements and
communication with new Pemex management, we believe that it will
take longer to process and collect these claims than previously
expected. We now expect to formally submit these claims in
accordance with Pemexs requirements through the second
quarter of 2003, with collections expected by the end of the
third quarter of 2003. The unapproved claims we have included as
revenue through December 31, 2002 are expected to be
substantially less than the actual claims to be presented to
Pemex, and we believe we will 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 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.

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. Repairs to
the Lone Star Horizon were completed during the fourth
quarter of 2002 at a cost of $5.0 million. 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 2002, we recorded this $2.0 million loss
as other expense, and we believe the insurance will cover the
cost to repair the damage. As of December 31, 2002, we
included the $3.0 million insurance claim in current
assets. We collected an initial reimbursement of
$1.2 million in February 2003.

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. We successfully completed two spooling
projects in 2002 and commenced a third spool job in December
2002 that was successfully completed in the first quarter of
2003. 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. Operations of the joint venture would be
jointly managed and staffed. If both Cal Dive and Horizon
decide to commence joint venture operations, 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.

The Brazos Horizon arrived in Nigerian
waters in October 2002, and began work on a major portion of
Chevron Nigeria Ltd.s Escravos Offshore Pipeline and
Structural Installation two year program in February 2003.
During 2002, we successfully completed several structural
projects in Indonesian waters. We completed

21



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##### 



a subcontract in 2002 for the installation and
burial of a 20-inch pipeline for TotalFinaElf in Indonesia
utilizing the Sea Horizon for all aspects of the
installation. We will continue to pursue international
construction projects in Mexico, Latin America, Southeast Asia
and West Africa.


We mobilized the Gulf Horizon to begin
construction of a pipeline installation and burial project in
Long Island Sound, New York in May 2002. We were awarded
the contract to install 35 miles of 24-inch diameter pipe
to transport natural gas from Northport, Long Island to Hunts
Point, New York via the Long Island Sound and East River.
Preparations for the project included extensive environmental
training of personnel. The Gulf Horizon was upgraded for
inclement weather conditions and for the addition of automatic
welding equipment. This pipeline installation also included the
design, fabrication and use of a 110-ton plow to bury the
24-inch pipeline below the seabed and riverbed. Construction
activities commenced in November 2002, and we expect to
substantially complete the project during the second quarter of
2003.

As of March 7, 2003, our backlog totaled
approximately $100.0 million compared to our backlog at
December 31, 2002 and 2001 of approximately
$123.6 million and $63.0 million, respectively. This
change is attributable to work performed during that period.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Year Ended December 31, 2002 Compared
    to the Year Ended December 31, 2001

Results of Operations



| |                  
| | -----------------
| | Contract Revenues

Contract revenues were $283.4 million for
2002, compared to $272.2 million for 2001. Revenues
increased 4.1% compared with last year. Our projects in Mexico
contributed approximately $86.7 million in revenues during
2002, compared with $142.2 million during 2001. The decline
in revenues from the projects in Mexico was offset by revenues
of $55.9 million from the pipeline installation and burial
project in Long Island Sound and by revenues from other
international projects. Revenues recognized in 2002 and 2001
included $43.4 million and $23.3 million,
respectively, from salvage and installation projects in the
U.S. Gulf of Mexico. Of the $43.4 million in revenues
recognized in 2002, approximately $6.8 million represents
values assigned to structures received as partial consideration
for salvage projects performed. No significant non-cash
consideration was received in 2001.



| |             
| | ------------
| | Gross Profit

Gross profit was $30.4 million (10.7% of
contract revenues) for 2002 compared with gross profit of
$35.0 million (12.9% of contract revenues) for 2001.
Excluding the effect of the claims on the Pemex projects for
which revenues were recognized to the extent of actual costs
incurred, gross profit as a percentage of revenues was 11.3% for
2002 compared with 15.3% for 2001. The decline was due to lower
margins bid on jobs as a result of competitive market
conditions. In addition, unusually adverse weather conditions
during the fourth quarter of 2002, and resulting downtime and
revenues recorded for such events, lowered the overall profit
margin.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses were
$21.8 million (7.7% of contract revenues) for 2002,
compared with $13.8 million (5.1% of contract revenues) for
2001. The increase was primarily due to our international
expansion and costs associated with our Pemex claims.



| |                                         
| | ----------------------------------------
| | Impairment of Property and
    Equipment

We recognized a $9.9 million impairment loss
related to the Phoenix Horizon under
SFAS No. 144 for the year ended December 31,
2002. During the fourth quarter of 2002, we determined that we
would not invest in the improvements required to place the barge
into service under the current market conditions. The impairment
loss was based upon the cost of the Phoenix Horizon in
excess of its estimated fair value based upon estimated
discounted future cash flows. No impairments were recognized for
the year ended December 31, 2001.

22



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##### 





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

Interest expense for 2002 was $4.6 million,
net of $1.6 million of capitalized interest. Interest
expense for 2001 was $5.4 million, net of $1.3 million
of capitalized interest. Total outstanding debt was
$98.3 million at December 31, 2002 compared with
$119.1 million at December 31, 2001. The decrease in
interest expense was due to lower average interest rates, lower
average outstanding debt balances as a result of the April 2002
equity offering and an increase in interest capitalization in
2002 related to our increased capital spending.



| |                
| | ---------------
| | Interest Income

Interest income includes interest from cash
investments for the years ended December 31, 2002 and 2001
of $0.1 million and $0.4 million, respectively. The
decrease was primarily due to lower interest rates and lower
average cash balances for 2002.



| |                            
| | ---------------------------
| | Other Income (Expense), Net

Included in other income (expense) for 2002 is a
$2.0 million loss related to a fire on the Lone Star
Horizon, $0.8 million of foreign currency loss due to
activity denominated in Mexican pesos and a decline of the
Mexican peso compared to the U.S. dollar, and approximately
$31,000 of miscellaneous expense.

Included in other income (expense) for the year
ended December 31, 2001 is $(164,000) of other net expenses
associated with foreign currency transaction losses and
$(10,000) of net expenses related to our Cal Dive joint venture.
We recognized $(39,000) of equity losses related to the DSND
joint venture and $29,000 of revenue earned from billings to the
DSND joint venture for administrative services in 2001. The DSND
joint venture was dissolved in February 2001.



| |                       
| | ----------------------
| | Income Taxes (Benefit)

We use the liability method of accounting for
income taxes. We recorded a federal income tax benefit of
$(3.1) million, at a net effective rate of 35.7% on a
pre-tax loss of $(8.6) million for 2002. We recorded a
federal income tax provision of $4.8 million, at a net
effective rate of 30.0% on a pre-tax income before extraordinary
loss of $16.1 million for 2001. The difference from the
statutory rate is due to the application of the extraterritorial
income exclusion for income earned primarily in Mexico and parts
of Southeast Asia. The exclusion allows us to exclude a
qualifying portion of income earned outside the United States
for tax purposes. The impact of this exclusion on future periods
will vary depending upon the amount of qualifying income earned
outside the United States and changes in tax rules.



| |                   
| | ------------------
| | Extraordinary Loss

In March of 2001, we recorded an extraordinary
loss of $(0.6) million, or $(0.03) per share-diluted,
net of taxes of $(0.3) million related to a penalty on the
early extinguishment of debt. See Note 2 of our notes to
consolidated financial statements. We had no such event in 2002.



| |                  
| | -----------------
| | Net Income (Loss)

Net loss was $(5.5) million, or $(0.22) per
share-diluted, for 2002, compared to net income for 2001 of
$10.7 million, or $0.46 per share-diluted, which
includes the effect of an extraordinary loss of
$(0.6) million, or $(0.03) per share-diluted, related
to the early extinguishment of debt.



| |                                                                              
| | -----------------------------------------------------------------------------
| | Year Ended December 31, 2001 Compared
    to the Year Ended December 31, 2000

Results Of Operations



| |                  
| | -----------------
| | Contract Revenues

Contract revenues were $272.2 million for
2001 compared with $160.5 million for 2000. Our revenues
for 2001 increased 69.6% compared with the same period last
year, primarily due to our ongoing projects offshore Mexico. Our
two projects in Mexico contributed approximately
$142.2 million in revenues during 2001, as

23



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##### 



compared to $57.9 million in 2000. Revenues
recognized in 2001 and 2000, included $23.3 million and
$55.4 million, respectively, from salvage and installation
projects in the U.S. Gulf of Mexico. No significant
non-cash consideration was received in 2001 and 2000.




| |             
| | ------------
| | Gross Profit

Gross profit was $35.0 million (12.9% of
contract revenues) for 2001 compared with gross profit of
$24.4 million (15.2% of contract revenues) for 2000. Gross
profit as a percentage of revenues decreased due to lower
margins previously bid on jobs as a result of the competitive
market conditions in the U.S. Gulf of Mexico. In addition,
weather and other delay related claims on the Pemex projects,
for which revenues recognized of $42.8 million in 2001
approximate the actual costs incurred, lowered the overall
profit margin.



| |                                                 
| | ------------------------------------------------
| | Selling, General and Administrative
    Expenses

Selling, general and administrative expenses were
$13.8 million (5.1% of contract revenues) for 2001 compared
with $9.4 million (5.9% of contract revenues) for 2000. The
increase is due to additional expenses associated with our
international expansion. The percentage decrease was primarily
due to the increase in revenues with a lower corresponding
increase in selling, general and administrative expenses in 2001.



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

Interest expense for 2001 was $5.4 million,
net of $1.3 million of capitalized interest. Interest
expense for 2000 was $7.7 million, net of $0.3 million
of capitalized interest. The decrease in interest expense was
due to both lower average interest rates and lower average
outstanding balances on our debt.



| |                
| | ---------------
| | Interest Income

Interest income includes interest from cash
investments for the years ended December 31, 2001 and 2000
of $0.4 million and $0.7 million, respectively. The
decrease was primarily due to lower interest rates and lower
average cash balances for 2001.



| |                            
| | ---------------------------
| | Other Income (Expense), Net

Included in other income (expense) for the year
ended December 31, 2001 is $(164,000) of other net expenses
associated with foreign currency transaction losses and
$(10,000) of net expenses related to our Cal Dive joint venture.
We recognized $(39,000) of equity losses related to the DSND
joint venture and $29,000 of revenue earned from billings to the
DSND joint venture for administrative services in 2001. The DSND
joint venture was dissolved in February 2001. Other income
(expense) for the year ended December 31, 2000 consisted of
equity losses of $(221,000) related to the DSND joint venture,
$122,000 of revenue earned from billings to the DSND joint
venture for administrative services and $15,000 of miscellaneous
income.



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

We use the liability method of accounting for
income taxes. We recorded a federal income tax provision of
$4.8 million, at a net effective rate of 30.0% on a pre-tax
income of $16.1 million for 2001, excluding
$(0.3) million of deferred tax benefit attributable to the
extraordinary loss. We recorded a federal income tax provision
of $2.9 million, at a net effective rate of 36.8% on a
pre-tax income of $7.9 million for 2000, excluding
$0.7 million of deferred tax provisions attributable to the
accounting change in 2000. The decrease in our effective tax
rate is due to the effect of the application of the
extraterritorial income exclusion in 2001 for income earned
primarily in Mexico from October 1, 2000 to
December 31, 2001. The exclusion allows us to exclude a
qualifying portion of income earned outside the United States
for tax purposes. The impact of this exclusion on future periods
will vary depending upon the amount of qualifying income earned
outside the United States and changes in tax rules.

24



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##### 





| |                   
| | ------------------
| | Extraordinary Loss

In March of 2001, we recorded an extraordinary
loss of $(0.6) million, or $(0.03) per share-diluted,
net of taxes of $(0.3) million related to a penalty on the
early extinguishment of debt. See Note 2 of our notes to
consolidated financial statements.



| |           
| | ----------
| | Net Income

Net income was $10.7 million, or
$0.46 per share-diluted, for 2001, which includes the
effect of an extraordinary loss of $(0.6) million, or
$(0.03) per share-diluted, related to the early
extinguishment of debt. Net income for 2000 was
$6.4 million, or $0.33 per share-diluted, which
includes the effect of a cumulative adjustment of
$1.4 million, or $0.07 per share, related to a change
in accounting principle.

Liquidity and Capital Resources

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.

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 $30.4 million of working capital
at December 31, 2002, compared to $78.1 million of
working capital at December 31, 2001. The decrease in
working capital was attributable to an increase in accounts
payable and the use of funds for capital expenditures and to
reduce of our long-term debt.

Our receivables from Pemex continue to impact our
liquidity and operating cash flows. As of December 31,
2002, we had contract receivables of $14.2 million and
costs in excess of billings of $62.7 million from Pemex
totaling $76.9 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
December 31, 2002, there were $57.0 million of claims
made under three Pemex contracts for extra work related to
interferences, interruptions and other delays.

Of the $57.0 million of claims,
$54.2 million of claims relate to our most significant
contract with Pemex, the EPC 64 contract in the Cantarell
field. Pemex extended the EPC 64 contract, which had an
original value of $41.0 million, in scope to
$194.4 million of total revenue recognized. This extension
substantially increased the period of our operations in the
Cantarell field, and as a result, this project was subject to
greater interruptions due to weather conditions and standby time
as other contractors completed their work. The claims on the
EPC 64 contract could not be submitted in accordance with
Pemex requirements until all work was completed in the fourth
quarter of 2002.

Cash provided by operations was
$47.5 million for 2002 compared to $44.0 million of
cash used in operations for 2001. During 2002, costs in excess
of billings decreased $17.9 million compared to an increase
of $78.8 million in 2001 that related principally to
contracts with Pemex. The decrease in 2002 was based upon
billing and subsequent collection of accounts receivable related
to Pemex, the project in Long Island Sound and the Amistad
Development project in Golfo de Guayaquil, Ecuador.
Additionally, cash flows from operating activities included
increases in accounts payable and accrued liabilities of
approximately $26.3 million in 2002 and $38.5 million
in 2001 related to extensions in the timing of payments by us.

At December 31, 2002, we had approximately
$98.3 million of total outstanding debt. This represents an
approximate net decrease of $20.8 million from
December 31, 2001 primarily due to the use of
$20.0 million in equity offering proceeds to pay down our
loans. Of the $98.3 million of outstanding debt,
$30.9 million represents borrowings on our three revolving
credit facilities and $67.4 million represents borrowings
on seven term-debt facilities. At December 31, 2002, we had
$31.4 million available under our three revolving credit
facilities. At March 15, 2003, we had $15.1 million
available under our three revolving credit facilities. Interest
rates vary from Libor plus 2.5% to Prime plus 0.5%. Our weighted
average interest rate was 4.21% at December 31, 2002, and
our term-debt borrowings currently require $680,000 in monthly
principal payments.

25



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##### 



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 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 defaults 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.

In September and December 2002, we amended one of
our revolving credit facilities to increase the financial ratio
related to our financial leverage of debt to EBITDA (earnings
before interest, taxes, depreciation, amortization) for periods
ending on or before June 30, 2003. We have experienced a
reduction in our EBITDA primarily due to reduced demand, lower
margins on projects and the $2.0 million loss related to
the Lone Star Horizon in the third quarter of 2002. We
were in compliance with all of our amended debt covenants at
December 31, 2002.

We also incurred debt to fund our working capital
requirements in Mexico due to the timing of collections related
to our Pemex claims. We may need to borrow additional funds to
meet working capital requirements for 2003 contingent upon the
timing and magnitude of collection of our Pemex receivables and
claims. If we are required to make additional borrowings in
excess of our current debt facilities, we will be required to
amend financial covenants under our revolving credit facilities.
Although we can provide no assurance, we believe that we will be
able to borrow additional funds secured by mortgages on our
vessels and amend financial covenants as required.

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 Libor plus 2.5% to prime plus 0.5%. The
following table summarizes our long-term material contractual
cash obligations (in millions):

|                                        |  |      |        |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |       |  |  |   |        | 
|--------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | - | ------ |  |  | - | ----- |  |  | - | ------ | 
|                                        |  | 2003 |        | 2004 |  | 2005 |        | 2006 |  | 2007 |        | Thereafter
|                                        |  |      |        |      |  |      |        |      |  |      |        |           
|Principal and interest payments on debt |  | $    | 12,467 |      |  | $    | 42,170 |      |  | $    | 25,300 |            |  | $ | 15,063 |  |  | $ | 3,363 |  |  | $ | 11,509 | 
|Operating leases                        |  |      | 2,684  |      |  |      | 2,510  |      |  |      | 2,504  |            |  |   | 2,341  |  |  |   | 2,347 |  |  |   | 2,489  | 
|                                        |  |      |        |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |       |  |  |   |        | 
|                                        |  | $    | 15,151 |      |  | $    | 44,680 |      |  | $    | 27,804 |            |  | $ | 17,404 |  |  | $ | 5,710 |  |  | $ | 13,998 | 
|                                        |  |      |        |      |  |      |        |      |  |      |        |            |  |   |        |  |  |   |       |  |  |   |        | 

Current maturities of long-term debt were
$8.3 million as of December 31, 2002. Planned capital
expenditures for 2003 are estimated to range from approximately
$20.0 million to $24.0 million largely related to
vessel improvements. Our strategy, however, is to make other
acquisitions, to expand our operating capabilities and 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.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | 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 2002. Our
exposure to market risk as discussed below includes
forward-looking statements and represents estimates
of possible changes in fair values and future earnings or cash
flows that would occur assuming hypothetical future movements in
foreign currency exchange rates or interest rates.

As of December 31, 2002 the carrying value
of our debt, including $0.1 million of accrued interest,
was approximately $98.4 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 December 31, 2002 would increase annual
interest expense by approximately $1.0 million.

26



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##### 



In Mexico, we collect a portion of our 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. 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
$0.8 million foreign currency loss due to activity
denominated in Mexican pesos and a decline of the Mexican peso
compared to the U.S. dollar for 2002. 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.

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.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Our consolidated financial statements and
supplementary data appear on pages 30 through 53 in this
report and are incorporated herein by reference. See Index to
consolidated financial statements on page 28.






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

On June 14, 2002, upon the recommendation of
the audit committee of our board of directors, the board of
directors dismissed Arthur Andersen LLP (Andersen) as our
independent public accountants. We selected
PricewaterhouseCoopers LLP (PwC) as our new independent
accountants. The decision to select PwC was recommended by the
audit committee and approved by the board of directors. During
the two fiscal years ended December 31, 2001 and the
subsequent interim period preceding such selection, neither we
nor anyone on our behalf consulted PwC regarding either
(1) the application of accounting principles to a specified
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on our financial statements, nor
did PwC provide to us a written report or oral advice regarding
such principles or audit opinion; or (2) any matter that
was either the subject of a disagreement or a reportable event.

None of Andersens reports on our
consolidated financial statements for the past two fiscal years
contained an adverse opinion or disclaimer of opinion, nor was
any such report qualified or modified as to uncertainty, audit
scope or accounting principles.

During each of our two most recent fiscal years
and through the date of this report there were: (i) no
disagreements with Andersen on any matter of accounting
principle practice, financial statement disclosure, or auditing
scope or procedures, which disagreements, if not resolved to
Andersens satisfaction, would have caused them to make
reference to the subject matter in connection with their report
on our consolidated financial statements for such years; and
(ii) no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K.




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information concerning our directors and
executive officers called for by this item will be included in
our definitive Proxy Statement prepared in connection with the
2003 annual meeting of stockholders and is incorporated herein
by reference. For additional information regarding executive
officers, see Executive Officers of the Registrant
of this Annual Report.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information concerning the compensation of the
executive officers called for by this item will be included in
our definitive Proxy Statement prepared in connection with the
2003 annual meeting of stockholders and is incorporated herein
by reference.

27



---



##### 








|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Information concerning security ownership of
certain beneficial owners and management called for by this item
will be included in our definitive Proxy Statement prepared in
connection with the 2003 annual meeting of stockholders and is
incorporated herein by reference.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information concerning certain relationships and
related transactions called for by this item will be included in
our definitive Proxy Statement prepared in connection with the
2003 annual meeting of stockholders and is incorporated herein
by reference.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Within the 90-day period prior to the filing of
this Annual Report, an evaluation was performed under the
supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures as defined in
Rule 13a-14(c) of the rules promulgated under the
Securities Exchange Act of 1934, as amended. Based on that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the design and operation of these
disclosure controls and procedures were effective. There have
been no significant changes in our internal controls or in other
factors that could significantly affect these controls
subsequent to the date of their evaluation.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following financial statements are
filed as a part of this report:



| | 
| | 
| | 



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

|                                                                                                         |  |  |    | 
|-------------------------------------------------------------------------------------------------------- |  |  | -- | 
|Reports of Independent Accountants                                                                       |  |  | 30 | 
|Consolidated Balance Sheets as of
    December 31, 2002 and 2001                                         |  |  | 32 | 
|Consolidated Statements of Operations for the
    Years Ended December 31, 2002, 2001 and 2000           |  |  | 33 | 
|Consolidated Statements of Stockholders
    Equity for the Years Ended December 31, 2002, 2001 and 2000 |  |  | 34 | 
|Consolidated Statements of Cash Flows for the
    Years Ended December 31, 2002, 2001 and 2000           |  |  | 35 | 
|Notes to Consolidated Financial Statements                                                               |  |  | 36 | 



| |                                            
| | -------------------------------------------
| | 2. Financial Statement
    Schedules  None



| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Schedules have not been included because they are
    not applicable, immaterial or the information required has been
    included in the financial statements or notes thereto.



| |            
| | -----------
| | 3. Exhibits



| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Exhibits                                                                                                                                                                                                                    
|
| | See Index to Exhibits on page 57. We will furnish
    to any eligible stockholder, upon written request, a copy of any
    exhibit listed upon payment of a reasonable fee equal to our
    expenses in furnishing such exhibit.
|
| | (b) Reports on Form 8-K                                                                                                                                                                                                         

28



---



##### 



On October 9, 2002, we filed a report on
Form 8-K, reporting under Item 7, announcing the award
of a major portion of Chevron Nigeria Ltd.s Escravos
Offshore Pipeline and Structural Installation two year program.

On October 16, 2002, we filed a report on
Form 8-K, reporting under Item 7, announcing the award
of a contract to our subsidiary, Horizon Offshore Contractors,
Inc., by Williams Oil Gathering, LLC to install pipeline in the
U.S. Gulf of Mexico.

On October 28, 2002, we filed a report on
Form 8-K, reporting under Item 7, announcing the award
of a contract to our subsidiary, Horizon Marine Construction,
Ltd., by Brunei Shell Petroleum Company Sdn. Bhd.

On October 30, 2002, we filed a report on
Form 8-K, reporting under Item 7, reporting earnings
for the quarter ended September 30, 2002.

29



---



##### 






REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders of Horizon Offshore, Inc.:

In our opinion, the accompanying consolidated
balance sheet as of December 31, 2002 and the related
consolidated statements of operations, stockholders
equity, and cash flows present fairly, in all material respects,
the financial position of Horizon Offshore, Inc. (a Delaware
Corporation), and subsidiaries at December 31, 2002 and the
results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally
accepted in the United States of America. These financial
statements are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit
of these statements in accordance with auditing standards
generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The financial
statements of Horizon Offshore, Inc. as of December 31,
2001, and for each of the two years in the period ended
December 31, 2001, were audited by other independent
accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial
statements in their report dated February 28, 2002.



| |                               
| | ------------------------------
| | /S/ PRICEWATERHOUSECOOPERS LLP

Houston, Texas

March 25, 2003


30



---



##### 



The following audit opinion is a copy of the
opinion issued by Arthur Andersen LLP on February 28, 2002.
This opinion has not been reissued by Arthur Andersen LLP. Note
that only the Consolidated Balance Sheet as of December 31,
2001 and the Consolidated Statements of Operations,
Stockholders Equity and Cash Flows for the years ended
December 31, 2001 and 2000 covered by this report below are
included in this set of consolidated financial statements.




REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors of

Horizon Offshore, Inc.,


We have audited the accompanying consolidated
balance sheets of Horizon Offshore, Inc. (a Delaware
corporation), and subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of operations,
stockholders equity and cash flows for the years ended
December 31, 2001, 2000 and 1999. These financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Horizon Offshore, Inc., and
subsidiaries as of December 31, 2001 and 2000, and
consolidated results of their operations and their cash flows
for the years ended December 31, 2001, 2000 and 1999, in
conformity with accounting principles generally accepted in the
United States.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Houston, Texas

February 28, 2002


31



---



##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)


|                                          |                                                                                                                         |                             |                            |              |        |         |         |         |        |         | 
|----------------------------------------- | ----------------------------------------------------------------------------------------------------------------------- | --------------------------- | -------------------------- | ------------ | ------ | ------- | ------- | ------- | ------ | ------- | 
|                                          |                                                                                                                         | December 31,                |                            | December 31,
|                                          |                                                                                                                         | 2002                        |                            | 2001        
|                                          |                                                                                                                         |                             |                            |             
|ASSETS                                   
|CURRENT ASSETS:                           |                                                                                                                         |                             |                            |              |        |         |         |        
|                                          | Cash and cash equivalents                                                                                               |                             | $                          | 6,073        |        |         | $       | 7,864   |       
|                                          | Accounts receivable                                                                                                    |                             |                            |              |        |         |         |         |       
|                                          |                                                                                                                         | Contract receivables        |                            |              | 52,362 |         |         |         | 52,431 |        
|                                          |                                                                                                                         | Costs in excess of billings |                            |              | 78,494 |         |         |         | 96,433 |        
|                                          |                                                                                                                         | Affiliated parties          |                            |              | 170    |         |         |         | 94     |        
|                                          | Other current assets                                                                                                    |                             |                            | 3,010        |        |         |         | 4,923   |       
|                                          |                                                                                                                         |                             |                            |              |        |         |         |        
|                                          |                                                                                                                         |                             | Total current assets       |              |        | 140,109 |         |         |        | 161,745 | 
|PROPERTY AND EQUIPMENT, net               |                                                                                                                         |                             | 257,847                    |              |        |         | 221,446 |        
|INVENTORY                                 |                                                                                                                         |                             | 7,816                      |              |        |         | 1,705   |        
|OTHER ASSETS                              |                                                                                                                         |                             | 14,761                     |              |        |         | 8,688   |        
|                                          |                                                                                                                         |                             |                            |              |        |         |         |        
|                                          |                                                                                                                         | $                           | 420,533                    |              |        | $       | 393,584 |        
|                                          |                                                                                                                         |                             |                            |              |        |         |         |        
|                                         
|LIABILITIES AND STOCKHOLDERS
    EQUITY 
|                                         
|CURRENT LIABILITIES:                      |                                                                                                                         |                             |                            |              |        |         |         |        
|                                          | Accounts payable                                                                                                        |                             | $                          | 34,930       |        |         | $       | 11,498  |       
|                                          | Accrued liabilities                                                                                                     |                             |                            | 10,641       |        |         |         | 12,852  |       
|                                          | Accrued job costs                                                                                                       |                             |                            | 54,866       |        |         |         | 49,799  |       
|                                          | Billings in excess of costs                                                                                             |                             |                            | 602          |        |         |         | 1,860   |       
|                                          | Current maturities of long-term debt                                                                                    |                             |                            | 8,262        |        |         |         | 7,681   |       
|                                          | Current taxes payable                                                                                                   |                             |                            | 423          |        |         |         |        |       
|                                          |                                                                                                                         |                             |                            |              |        |         |         |        
|                                          |                                                                                                                         |                             | Total current liabilities  |              |        | 109,724 |         |         |        | 83,690  | 
|LONG-TERM DEBT, net of current maturities |                                                                                                                         |                             | 90,062                     |              |        |         | 111,414 |        
|DEFERRED INCOME TAXES                     |                                                                                                                         |                             | 9,072                      |              |        |         | 12,790  |        
|                                          |                                                                                                                         |                             |                            |              |        |         |         |        
|                                          |                                                                                                                         |                             | Total liabilities          |              |        | 208,858 |         |         |        | 207,894 | 
|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 and
    24,244,598 shares issued, respectively |                             |                            | 16,583       |        |         |         | 13,537  |       
|                                          | Additional paid-in capital                                                                                              |                             |                            | 182,722      |        |         |         | 154,636 |       
|                                          | Retained earnings                                                                                                       |                             |                            | 18,353       |        |         |         | 23,902  |       
|                                          | Treasury stock, 912,207 and 973,505 shares,
    respectively                                                            |                             |                            | (5,983       | )      |         |         | (6,385  | )     
|                                          |                                                                                                                         |                             |                            |              |        |         |         |        
|                                          |                                                                                                                         |                             | Total stockholders equity |              |        | 211,675 |         |         |        | 185,690 | 
|                                          |                                                                                                                         |                             |                            |              |        |         |         |        
|                                          |                                                                                                                         | $                           | 420,533                    |              |        | $       | 393,584 |        
|                                          |                                                                                                                         |                             |                            |              |        |         |         |        

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

32



---



##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except share data)


|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |            |      |        |  
|------------------------------------------------------------------------------------------ | ----------------- | ------------------------------------------------------------------------------------------ | ------------------------------------------- | ---------- | ----- | ------ | ------- | ---------- | ----- | ------ | ------- | ---------- | ---- | ------ | -
|                                                                                           |                   |                                                                                           
|                                                                                           |                   | Year Ended December 31,                                                                   
|                                                                                           |                   |                                                                                           
|                                                                                           |                   | 2002                                                                                       |                                             | 2001       |       | 2000  
|                                                                                           |                   |                                                                                            |                                             |            |       |       
|CONTRACT REVENUES                                                                          |                   | $                                                                                          | 283,410                                     |            |       | $      | 272,208 |            |       | $      | 160,532 |           
|COST OF CONTRACT REVENUES                                                                  |                   |                                                                                            | 253,016                                     |            |       |        | 237,175 |            |       |        | 136,146 |           
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|                                                                                           |                   |                                                                                            | Gross profit                                |            |       | 30,394 |         |            |       | 35,033 |         |            |      | 24,386 |  
|SELLING, GENERAL AND ADMINISTRATIVE EXPENSES                                               |                   |                                                                                            | 21,845                                      |            |       |        | 13,771  |            |       |        | 9,401   |           
|IMPAIRMENT OF PROPERTY AND EQUIPMENT                                                       |                   |                                                                                            | 9,852                                       |            |       |        |        |            |       |        |        |           
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|                                                                                           |                   |                                                                                            | Operating income (loss)                     |            |       | (1,303 | )       |            |       | 21,262 |         |            |      | 14,985 |  
|OTHER:                                                                                     |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|                                                                                           |                   |                                                                                            | Interest expense, net of amount capitalized |            |       | (4,585 | )       |            |       | (5,381 | )       |            |      | (7,730 | )
|                                                                                           |                   |                                                                                            | Interest income                             |            |       | 91     |         |            |       | 403    |         |            |      | 718    |  
|                                                                                           |                   |                                                                                            | Gain (loss) on sale of assets               |            |       |       |         |            |       | (22    | )       |            |      | 6      |  
|                                                                                           |                   |                                                                                            | Other income (expense), net                 |            |       | (2,831 | )       |            |       | (184   | )       |            |      | (84    | )
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|NET INCOME (LOSS) BEFORE INCOME TAXES,
    EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF     |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|                                                                                           | ACCOUNTING CHANGE |                                                                                            |                                             | (8,628     | )     |        |         | 16,078     |       |        |         | 7,895      |     
|INCOME TAX PROVISION (BENEFIT)                                                             |                   |                                                                                            | (3,079                                      | )          |       |        | 4,817   |            |       |        | 2,902   |           
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND
    CUMULATIVE EFFECT OF ACCOUNTING CHANGE |                   |                                                                                            | (5,549                                      | )          |       |        | 11,261  |            |       |        | 4,993   |           
|EXTRAORDINARY LOSS, NET OF TAXES OF $(306)                                                 |                   |                                                                                            |                                            |            |       |        | (568    | )          |       |        |        |           
|CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF
    TAXES OF $743                           |                   |                                                                                            |                                            |            |       |        |        |            |       |        | 1,381   |           
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|NET INCOME (LOSS)                                                                          |                   | $                                                                                          | (5,549                                      | )          |       | $      | 10,693  |            |       | $      | 6,374   |           
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|EARNINGS PER SHARE  BASIC:                                                                |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|                                                                                           |                   | Net income (loss) before extraordinary loss and
    cumulative effect of accounting change |                                             | $          | (0.22 | )      |         | $          | 0.50  |        |         | $          | 0.27 |       
|                                                                                           |                   | Extraordinary loss                                                                         |                                             |            |      |        |         |            | (0.02 | )      |         |            |     |       
|                                                                                           |                   | Cumulative effect of accounting change                                                     |                                             |            |      |        |         |            |      |        |         |            | 0.07 |       
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|                                                                                           |                   | Net income (loss)  BASIC                                                                  |                                             | $          | (0.22 | )      |         | $          | 0.48  |        |         | $          | 0.34 |       
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|EARNINGS PER SHARE  DILUTED:                                                              |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|                                                                                           |                   | Net income (loss) before extraordinary loss and
    cumulative effect of accounting change |                                             | $          | (0.22 | )      |         | $          | 0.49  |        |         | $          | 0.26 |       
|                                                                                           |                   | Extraordinary loss                                                                         |                                             |            |      |        |         |            | (0.03 | )      |         |            |     |       
|                                                                                           |                   | Cumulative effect of accounting change                                                     |                                             |            |      |        |         |            |      |        |         |            | 0.07 |       
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|                                                                                           |                   | Net income (loss)  DILUTED                                                                |                                             | $          | (0.22 | )      |         | $          | 0.46  |        |         | $          | 0.33 |       
|                                                                                           |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|WEIGHTED AVERAGE SHARES USED IN COMPUTING
    EARNINGS PER SHARE:                          |                   |                                                                                            |                                             |            |       |        |         |            |       |        |         |           
|                                                                                           | BASIC             |                                                                                            |                                             | 25,573,326 |       |        |         | 22,430,894 |       |        |         | 18,823,610 |     
|                                                                                           | DILUTED           |                                                                                            |                                             | 25,573,326 |       |        |         | 23,085,975 |       |        |         | 19,455,470 |     

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

33



---



##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

(In thousands)


|                           |                                                                  |              |        |            |  |          |        |                |  |               |         |        |  |        |        |        |   |  |       |     |   |   |        |     |  |   |         |        |  
|-------------------------- | ---------------------------------------------------------------- | ------------ | ------ | ---------- |  | -------- | ------ | -------------- |  | ------------- | ------- | ------ |  | ------ | ------ | ------ | - |  | ----- | --- | - | - | ------ | --- |  | - | ------- | ------ | -
|                           |                                                                  |              |        |            |  |          |        |                |  |              
|                           |                                                                  | Common Stock |        | Additional |  |          |        | Treasury Stock |  | Total        
|                           |                                                                  |              |        | Paid-in    |  | Retained |        |                |  | Stockholders
|                           |                                                                  | Shares       |        | Amount     |  | Capital  |        | Earnings       |  | Shares        |         | Amount |  | Equity
|                           |                                                                  |              |        |            |  |          |        |                |  |               |         |        |  |       
|BALANCE, December 31, 1999 |                                                                  |              | 19,826 |            |  | $        | 9,119  |                |  | $             | 87,872  |        |  | $      | 6,835  |        |   |  | 1,025 |     |   | $ | (6,726 | )   |  | $ | 97,100  |       
|                           | Stock options exercised                                          |              |        | 43         |  |          |        | 43             |  |               |         | 271    |  |        |        |       |   |  |       |    |   |   |        |    |  |   |         | 314    |  
|                           | 401(k) contributions in company stock                            |              |        |           |  |          |        |               |  |               |         | 102    |  |        |        |       |   |  |       | (22 | ) |   |        | 145 |  |   |         | 247    |  
|                           | Net income before cumulative effect of accounting
    change     |              |        |           |  |          |        |               |  |               |         |       |  |        |        | 4,993  |   |  |       |    |   |   |        |    |  |   |         | 4,993  |  
|                           | Cumulative effect of accounting change, net of
    taxes of $743 |              |        |           |  |          |        |               |  |               |         |       |  |        |        | 1,381  |   |  |       |    |   |   |        |    |  |   |         | 1,381  |  
|                           |                                                                  |              |        |            |  |          |        |                |  |               |         |        |  |        |        |        |   |  |       |     |   |   |        |     |  |   |         |       
|BALANCE, December 31, 2000 |                                                                  |              | 19,869 |            |  |          | 9,162  |                |  |               | 88,245  |        |  |        | 13,209 |        |   |  | 1,003 |     |   |   | (6,581 | )   |  |   | 104,035 |       
|                           | Issuance of common stock, net of offering costs                  |              |        | 3,800      |  |          |        | 3,800          |  |               |         | 62,219 |  |        |        |       |   |  |       |    |   |   |        |    |  |   |         | 66,019 |  
|                           | Issuance of common stock to purchase assets                      |              |        | 250        |  |          |        | 250            |  |               |         | 1,355  |  |        |        |       |   |  |       |    |   |   |        |    |  |   |         | 1,605  |  
|                           | Stock options exercised                                          |              |        | 325        |  |          |        | 325            |  |               |         | 2,682  |  |        |        |       |   |  |       |    |   |   |        |    |  |   |         | 3,007  |  
|                           | 401(k) contributions in company stock                            |              |        |           |  |          |        |               |  |               |         | 135    |  |        |        |       |   |  |       | (29 | ) |   |        | 196 |  |   |         | 331    |  
|                           | Net income                                                       |              |        |           |  |          |        |               |  |               |         |       |  |        |        | 10,693 |   |  |       |    |   |   |        |    |  |   |         | 10,693 |  
|                           |                                                                  |              |        |            |  |          |        |                |  |               |         |        |  |        |        |        |   |  |       |     |   |   |        |     |  |   |         |       
|BALANCE, December 31, 2001 |                                                                  |              | 24,244 |            |  |          | 13,537 |                |  |               | 154,636 |        |  |        | 23,902 |        |   |  | 974   |     |   |   | (6,385 | )   |  |   | 185,690 |       
|                           | Issuance of common stock, net of offering costs                  |              |        | 3,000      |  |          |        | 3,000          |  |               |         | 27,844 |  |        |        |       |   |  |       |    |   |   |        |    |  |   |         | 30,844 |  
|                           | Stock options exercised                                          |              |        | 46         |  |          |        | 46             |  |               |         | 238    |  |        |        |       |   |  |       |    |   |   |        |    |  |   |         | 284    |  
|                           | 401(k) contributions in company stock                            |              |        |           |  |          |        |               |  |               |         | 4      |  |        |        |       |   |  |       | (62 | ) |   |        | 402 |  |   |         | 406    |  
|                           | Net (loss)                                                       |              |        |           |  |          |        |               |  |               |         |       |  |        |        | (5,549 | ) |  |       |    |   |   |        |    |  |   |         | (5,549 | )
|                           |                                                                  |              |        |            |  |          |        |                |  |               |         |        |  |        |        |        |   |  |       |     |   |   |        |     |  |   |         |       
|BALANCE, December 31, 2002 |                                                                  |              | 27,290 |            |  | $        | 16,583 |                |  | $             | 182,722 |        |  | $      | 18,353 |        |   |  | 912   |     |   | $ | (5,983 | )   |  | $ | 211,675 |       
|                           |                                                                  |              |        |            |  |          |        |                |  |               |         |        |  |        |        |        |   |  |       |     |   |   |        |     |  |   |         |       

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

34



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(In thousands)


|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |         |        |         |         |  
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------------------- | ------ | ------ | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | -
|                                                         |                                                                                                         |                                                                                    
|                                                         |                                                                                                         | Year Ended December 31,                                                            
|                                                         |                                                                                                         |                                                                                    
|                                                         |                                                                                                         | 2002                                                                                |                             | 2001                                                    |        | 2000  
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |       
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|                                                         | Net income (loss)                                                                                       |                                                                                     | $                           | (5,549                                                  | )      |        | $       | 10,693  |        |         | $       | 6,374   |       
|                                                         | Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities  |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |         |       
|                                                         |                                                                                                         | Depreciation and amortization                                                       |                             |                                                         | 15,959 |        |         |         | 12,935 |         |         |         | 9,591  |        
|                                                         |                                                                                                         | Cumulative effect of accounting change                                              |                             |                                                         |       |        |         |         |       |         |         |         | (2,124 | )      
|                                                         |                                                                                                         | Impairment of property and equipment                                                |                             |                                                         | 9,852  |        |         |         |       |         |         |         |       |        
|                                                         |                                                                                                         | Deferred income tax expense (benefit)                                               |                             |                                                         | (3,718 | )      |         |         | 4,511  |         |         |         | 3,645  |        
|                                                         |                                                                                                         | Gain (loss) on sale of assets                                                       |                             |                                                         |       |        |         |         | 22     |         |         |         | (6     | )      
|                                                         |                                                                                                         | Expense recognized for issuance of treasury stock
    for 401(k) plan contributions |                             |                                                         | 406    |        |         |         | 331    |         |         |         | 247    |        
|                                                         |                                                                                                         | Changes in operating assets and
    liabilities                                    |                             |                                                         |        |        |         |         |        |         |         |         |        |        
|                                                         |                                                                                                         |                                                                                     | Accounts receivable         |                                                         |        | (7     | )       |         |        | (25,215 | )       |         |        | (7,549  | )      
|                                                         |                                                                                                         |                                                                                     | Costs in excess of billings |                                                         |        | 17,939 |         |         |        | (78,822 | )       |         |        | (13,439 | )      
|                                                         |                                                                                                         |                                                                                     | Billings in excess of costs |                                                         |        | (1,258 | )       |         |        | 1,310   |         |         |        | (321    | )      
|                                                         |                                                                                                         |                                                                                     | Inventory                   |                                                         |        | (6,111 | )       |         |        | 242     |         |         |        | (247    | )      
|                                                         |                                                                                                         |                                                                                     | Other assets                |                                                         |        | (6,766 | )       |         |        | (8,521  | )       |         |        | (2,572  | )      
|                                                         |                                                                                                         |                                                                                     | Accounts payable            |                                                         |        | 23,432 |         |         |        | 3,306   |         |         |        | 3,945   |        
|                                                         |                                                                                                         |                                                                                     | Accrued liabilities         |                                                         |        | (2,211 | )       |         |        | 7,899   |         |         |        | 2,027   |        
|                                                         |                                                                                                         |                                                                                     | Accrued job costs           |                                                         |        | 5,067  |         |         |        | 27,315  |         |         |        | 9,152   |        
|                                                         |                                                                                                         |                                                                                     | Current taxes payable       |                                                         |        | 423    |         |         |        |        |         |         |        |        |        
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|                                                         |                                                                                                         |                                                                                     |                             | Net cash provided by (used in) operating
    activities |        |        | 47,458  |         |        |         | (43,994 | )       |        |         | 8,723   |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|                                                         | Purchases and additions to property, equipment
    and intangibles                                      |                                                                                     |                             | (58,723                                                 | )      |        |         | (53,223 | )      |         |         | (18,178 | )     
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|                                                         |                                                                                                         |                                                                                     |                             | Net cash used in investing activities                   |        |        | (58,723 | )       |        |         | (53,223 | )       |        |         | (18,178 | )
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|                                                         | Borrowings under term debt                                                                              |                                                                                     |                             | 4,045                                                   |        |        |         | 32,596  |        |         |         | 8,088   |       
|                                                         | Principal payments on term debt                                                                         |                                                                                     |                             | (8,040                                                  | )      |        |         | (38,733 | )      |         |         | (10,937 | )     
|                                                         | Borrowings on revolving credit facilities                                                               |                                                                                     |                             | 131,424                                                 |        |        |         | 86,800  |        |         |         | 60,800  |       
|                                                         | Payments on revolving credit facilities                                                                 |                                                                                     |                             | (148,200                                                | )      |        |         | (52,500 | )      |         |         | (47,400 | )     
|                                                         | Loan fees                                                                                               |                                                                                     |                             | (883                                                    | )      |        |         | (1,351  | )      |         |         | (284    | )     
|                                                         | Proceeds from issuance of common stock, net                                                             |                                                                                     |                             | 30,844                                                  |        |        |         | 66,019  |        |         |         |        |       
|                                                         | Stock option transactions and other                                                                     |                                                                                     |                             | 284                                                     |        |        |         | 3,007   |        |         |         | 314     |       
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|                                                         |                                                                                                         |                                                                                     |                             | Net cash provided by financing activities               |        |        | 9,474   |         |        |         | 95,838  |         |        |         | 10,581  |  
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|NET INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS |                                                                                                         |                                                                                     | (1,791                      | )                                                       |        |        | (1,379  | )       |        |         | 1,126   |        
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR           |                                                                                                         |                                                                                     | 7,864                       |                                                         |        |        | 9,243   |         |        |         | 8,117   |        
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|CASH AND CASH EQUIVALENTS AT END OF YEAR                 |                                                                                                         | $                                                                                   | 6,073                       |                                                         |        | $      | 7,864   |         |        | $       | 9,243   |        
|                                                         |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|SUPPLEMENTAL DISCLOSURES:                                |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|                                                         | Cash paid for interest                                                                                  |                                                                                     | $                           | 5,449                                                   |        |        | $       | 6,788   |        |         | $       | 6,753   |       
|                                                         | Cash paid for income taxes                                                                              |                                                                                     | $                           | 216                                                     |        |        | $       |        |        |         | $       |        |       
|NON-CASH INVESTING AND FINANCING ACTIVITIES:             |                                                                                                         |                                                                                     |                             |                                                         |        |        |         |         |        |         |         |        
|                                                         | Purchases and additions to equipment with the
    issuance of common stock                              |                                                                                     | $                           |                                                        |        |        | $       | 1,605   |        |         | $       |        |       
|                                                         | Purchases and additions to equipment with the
    issuance of notes payable                             |                                                                                     | $                           |                                                        |        |        | $       |        |        |         | $       | 1,090   |       

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

35



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##### 



HORIZON OFFSHORE, INC. AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2002




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



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

Horizon Offshore, Inc. (a Delaware corporation)
and its subsidiaries (Horizon), provides marine construction
services for the offshore oil and gas industry. These services
generally consist of laying and burying marine pipelines for the
transportation of oil and gas, and installing and salvaging
production platforms and other marine structures. Work is
performed primarily on a fixed-price or day-rate basis or a
combination thereof.



| |               
| | --------------
| | Business Risks

Our level of activity depends largely on the
condition of the oil and gas industry and, in particular, the
level of capital expenditures by oil and gas companies for
developmental construction. These expenditures are influenced by
prevailing oil and gas prices, expectations about future demand
and prices, the cost of exploring for, producing and developing
oil and gas reserves, the discovery rates of new oil and gas
reserves, sale and expiration dates of offshore leases in the
United States and abroad, political and economic conditions,
governmental regulations and the availability and cost of
capital. 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.

A prolonged weakness in energy prices or a
prolonged period of lower levels of offshore drilling and
exploration could adversely affect our future revenues,
profitability and liquidity. Our 2002 results reflect the
competitive nature and low demand for marine construction
services in the U.S. Gulf of Mexico. Profit margins in the
U.S. Gulf of Mexico have decreased during 2002 due to the
reduced level of capital expenditures by oil and gas companies
for developmental construction and the general slow down of the
U.S. and other economies in the region.

Factors affecting our profitability include
competition, equipment and labor productivity, contract
estimating, weather conditions and the 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 quarters of the year. Full
year results are not a direct multiple of any quarter or
combination of quarters because of this seasonality.

We have domestic and international operations in
one industry segment, the marine construction service industry
to offshore oil and gas companies. Our customers in the
U.S. have primarily been the oil and gas companies
operating on the U.S. outer continental shelf. In 2002, we
provided offshore marine construction services to approximately
41 customers. Our single largest customer during the last three
years was Pemex. We completed one major project for a subsidiary
of Pemex in 2001 and completed two major projects for Pemex in
2002, and we completed another project during the first quarter
of 2003. Pemex accounted for 30.6% of our revenues for the year
2002 compared to 52.2% of revenues for 2001 and 36.1% of
revenues for 2000. Our receivables from Pemex continue to impact
our liquidity and operating cash flows. As of December 31,
2002, we have recognized contract receivables of
$14.2 million and costs in excess of billings of
$62.7 million from Pemex totaling $76.9 million.



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

The consolidated financial statements include the
accounts of Horizon and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.

36



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##### 





| |                 
| | ----------------
| | 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 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.



| |                    
| | -------------------
| | 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 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
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 as
determined on an individual contract basis.

For service contracts, revenues are recognized
under 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.

37



---



##### 





| |                        
| | -----------------------
| | 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 2002 was net of $1.6 million of
capitalized interest compared with $1.3 million in 2001 and
$0.3 million in 2000. Net interest expense was
$4.6 million, $5.4 million and $7.7 million for
2002, 2001 and 2000, respectively.



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

We consider all cash in banks and highly liquid
investments with original maturity dates of three months or less
to be cash equivalents.



| |          
| | ---------
| | 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. During 2002, revenue of
$6.8 million was recognized representing the non-cash
values assigned to the structures received as partial
consideration for performing salvage projects. No significant
non-cash consideration was received during 2001 and 2000. These
structures are held for resale. The inventory is valued at
amounts not in excess of the fair value of services provided.
Horizon assesses the net realizable value of its inventory items
at each balance sheet date. Inventory is classified as long-term
due to the uncertain timing of the sale of inventory.



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

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

Depreciation on our other fixed assets is
provided using the straight-line method based on the following
estimated useful lives:

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

On January 1, 2000, we changed depreciation
methods from the straight-line method to the units-of-production
method on our major barges and vessels to more accurately
reflect the wear and tear of normal use. We believe that the
units-of-production method is best suited to reflect the actual
deterioration of our marine equipment. 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. For the year ended
December 31, 2000, we recorded the cumulative effect of a
$1.4 million adjustment, or $0.07 per share, which is
net of taxes of $0.7 million, related to changing
depreciation methods from the straight-line method to the
units-of-production method.

As of December 31, 2002, fixed assets
totaling $17.5 million, excluding land, are not being
depreciated as some of these assets are under construction and
others have not been placed into service.

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 discounted future

38



---



##### 



cash flows for our long-term assets, we
recognized a $9.9 million impairment loss related to the
Phoenix Horizon under Statement of Financial Accounting
Standards (SFAS) No. 144 for the year ended
December 31, 2002. We believe that the Phoenix
Horizon would require improvements and upgrades in order to
place it into service. 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 in the current market conditions, which we
expect to continue for at least the first half of 2003. We
determined that we would not invest in the improvements required
to place the barge into service under current conditions. The
impairment loss was based upon the cost of the Phoenix
Horizon in excess of its estimated fair value based upon
estimated discounted future cash flows. No impairments were
recognized for the years ended December 31, 2001 and 2000.




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

Other assets consist principally of deferred
dry-dock costs, goodwill, prepaid loan fees and deposits.
Deposits consist of security deposits on office leases as of
December 31, 2002 and 2001. Loan fees paid in connection
with the loan facilities are amortized over the term of the
loans. See Note 5.

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.

In August 2002, Horizon acquired the remaining
51% equity interest in an entity in Mexico for $1.0 million
cash. Horizon previously had a 49% equity interest in this
entity and included its accounts in Horizons consolidated
financial statements as Horizon exercised effective control over
the entitys operations. As a result of this acquisition,
Horizon will be qualified to bid on and perform projects
reserved for national companies in Mexico without a locally
domiciled partner. We recorded $1.0 million of goodwill in
connection with acquiring the equity interest, which is
nondeductible for tax purposes. The related goodwill is included
in other long-term assets at December 31, 2002.

Other long-term assets consist of the following
(in thousands):

|                        |  |              |        |      |  |   |       | 
|----------------------- |  | ------------ | ------ | ---- |  | - | ----- | 
|                        |  |             
|                        |  | December 31,
|                        |  |             
|                        |  | 2002         |        | 2001
|                        |  |              |        |     
|Deferred dry-dock costs |  | $            | 12,861 |      |  | $ | 7,711 | 
|Goodwill                |  |              | 1,000  |      |  |   |      | 
|Prepaid loan fees       |  |              | 562    |      |  |   | 681   | 
|Deposits                |  |              | 293    |      |  |   | 211   | 
|Other                   |  |              | 45     |      |  |   | 85    | 
|                        |  |              |        |      |  |   |       | 
|                        |  | $            | 14,761 |      |  | $ | 8,688 | 
|                        |  |              |        |      |  |   |       | 



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

We use the liability method of accounting for
income taxes. Under the liability method, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial
statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to reverse. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period enacted.



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

At December 31, 2002, we had two stock-based
employee compensation plans, which are described more fully in
Note 9. We account for those plans 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

39



---



##### 



granted under those plans had an exercise price
equal to the market value of the underlying common stock on the
date of grant. 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,
Accounting for Stock-Based Compensation, to
stock-based employee compensation.


|                                                                                                                                                    |                       |                         |        |       |   |      |        |      |  |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | ----------------------- | ------ | ----- | - | ---- | ------ | ---- |  | - | ------ | ---- | 
|                                                                                                                                                    |                       |                        
|                                                                                                                                                    |                       | Year Ended December 31,
|                                                                                                                                                    |                       |                        
|                                                                                                                                                    |                       | 2002                    |        | 2001  |   | 2000
|                                                                                                                                                    |                       |                         |        |       |   |     
|Net income (loss), as reported                                                                                                                      |                       | $                       | (5,549 | )     |   | $    | 10,693 |      |  | $ | 6,374  |     
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                       |                         | (3,128 | )     |   |      | (3,594 | )    |  |   | (3,379 | )   
|                                                                                                                                                    |                       |                         |        |       |   |      |        |      |  |   |        |     
|Pro forma net income (loss)                                                                                                                         |                       | $                       | (8,677 | )     |   | $    | 7,099  |      |  | $ | 2,995  |     
|                                                                                                                                                    |                       |                         |        |       |   |      |        |      |  |   |        |     
|Earnings per share:                                                                                                                                 |                       |                         |        |       |   |      |        |      |  |   |        |     
|                                                                                                                                                    | Basic  as reported   |                         | $      | (0.22 | ) |      | $      | 0.48 |  |   | $      | 0.34 | 
|                                                                                                                                                    |                       |                         |        |       |   |      |        |      |  |   |        |     
|                                                                                                                                                    | Basic  pro forma     |                         | $      | (0.34 | ) |      | $      | 0.32 |  |   | $      | 0.16 | 
|                                                                                                                                                    |                       |                         |        |       |   |      |        |      |  |   |        |     
|                                                                                                                                                    | Diluted  as reported |                         | $      | (0.22 | ) |      | $      | 0.46 |  |   | $      | 0.33 | 
|                                                                                                                                                    |                       |                         |        |       |   |      |        |      |  |   |        |     
|                                                                                                                                                    | Diluted  pro forma   |                         | $      | (0.34 | ) |      | $      | 0.31 |  |   | $      | 0.15 | 
|                                                                                                                                                    |                       |                         |        |       |   |      |        |      |  |   |        |     

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.

|                        |  |      |      |      |  |      |       |   |  |  |       |  
|----------------------- |  | ---- | ---- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                        |  | 2002 |      | 2001 |  | 2000
|                        |  |      |      |      |  |     
|Option life (in years)  |  |      | 7    |      |  |      | 10    |   |  |  | 10    |  
|Volatility              |  |      | 77.8 | %    |  |      | 79.07 | % |  |  | 56.85 | %
|Risk-free interest rate |  |      | 4.77 | %    |  |      | 5.11  | % |  |  | 6.77  | %



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The carrying values of cash, receivables,
accounts payable and accrued liabilities approximate fair value
due to the short term maturity of those instruments.

As of December 31, 2002 the carrying value
of our debt, including $0.1 million of accrued interest,
was approximately $98.4 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 December 31, 2002 would have increased annual
interest expense by approximately $1.0 million.



| |                                                  
| | -------------------------------------------------
| | Segment Information and Significant
    Customers

We have domestic and international operations in
one industry segment, the marine construction service industry
for offshore oil and gas companies. We completed one major
project for a subsidiary of Pemex in 2001 and completed two
major projects for Pemex in 2002, and we completed another
project during the first quarter of 2003. Pemex accounted for
30.6% of our revenues for the year 2002, as compared to 52.2% of
revenues for 2001 and 36.1% of revenues for 2000.

In addition to Pemex, we had one other customer
accounting for more than 10% of consolidated revenues for the
year ended December 31, 2002. This domestic customer
accounted for 19.7% of consolidated revenues for the year ended
December 31, 2002. There were no other customers accounting
for more than 10% of consolidated revenues for the year ended
December 31, 2002, 2001 or 2000.

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

40



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##### 



revenues in one year may represent an immaterial
portion of contract revenues in subsequent years. Based upon our
interpretation of the requirements of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related
Information, Horizon has domestic and international
operations in one industry segment, the marine construction
service industry for offshore oil and gas companies. Geographic
information has been provided in Note 12 of these
consolidated financial statements.




| |                   
| | ------------------
| | 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.



| |                         
| | ------------------------
| | Other Comprehensive Loss

We have no items representing other comprehensive
losses under SFAS No. 130, Reporting
Comprehensive Income.



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

Certain prior period amounts have been
reclassified to conform to the presentation shown in the
consolidated financial statements as of December 31, 2002.
Reclassifications in 2001 and 2000 had no effect on net income
or total stockholders equity and relate to the
classification of dry-docking expenditures and borrowings and
payments on our revolving credit facilities in the consolidated
statements of cash flows. For the year ended December 31,
2001, cash used in operating activities was increased by
$7.1 million and cash used in investing activities was
reduced by $7.1 million. For the year ended
December 31, 2000, cash provided by operating activities
was reduced by $2.0 million and cash used in investing
activities was reduced by $2.0 million.



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

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill
and Other Intangible Assets. The new rules apply to
goodwill and intangible assets acquired after June 30, 2001
and to existing goodwill and intangible assets upon adoption of
SFAS No. 141 and SFAS No. 142. The new rules
establish one method of accounting for all business combinations
and the resulting goodwill and other intangible assets. Under
SFAS No. 142, intangible assets with a finite life
will generally continue to be amortized over their lives while
intangibles without a finite life, including goodwill, will no
longer be amortized. However, tests for impairment will be
performed annually or upon the occurrence of a triggering event.
We adopted SFAS No. 142 on January 1, 2002, and
there was no significant impact to our financial statements upon
adoption.

In June 2001, the FASB issued
SFAS No. 143, Accounting for Asset Retirement
Obligations. The provisions of SFAS No. 143
apply to all entities that incur obligations associated with the
retirement of tangible long-lived assets and establishes an
accounting standard requiring the recording of the fair value of
liabilities associated with the retirement of long-term assets
in the period in which the liability is incurred.
SFAS No. 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The
adoption of this standard will not have a significant impact on
our consolidated financial statements.

In August 2001, the FASB issued
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The FASBs new rules
on asset impairment supersede SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and was effective for
our fiscal year beginning January 1, 2002. 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. We record impairment losses on
long-lived assets used in operations when the cash flows
estimated to be generated by

41



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##### 



those assets are less than the carrying amount of
those items. The net carrying value of assets not fully
recoverable is reduced to fair value. Our estimate of fair value
represents our best estimate based on industry trends and
reference to market transactions and is subject to variability.
Based on our analysis of the estimated discounted 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.


In April 2002, the FASB issued
SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13,
and Technical Corrections, which revises current guidance
with respect to gains and losses on early extinguishment of
debt. Under SFAS No. 145, gains and losses on early
extinguishment of debt will no longer be treated as
extraordinary items unless they meet the criteria for
extraordinary treatment in APB Opinion No. 30. Horizon
will be required to adopt SFAS No. 145 effective
January 1, 2003. Upon adoption, we will be required to
reclassify the extraordinary loss on early extinguishment of
debt from the year ended December 31, 2001, as this amount
will no longer qualify for extraordinary treatment under
SFAS No. 145.

In November 2002, the FASB issued FASB
Interpretation No. 45 (FIN 45), Guarantors
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45
elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also clarifies
that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation
undertaken in issuing the guarantee. FIN 45 does not
prescribe a specific approach for subsequently measuring the
guarantors recognized liability over the term of the
related guarantee. It also incorporates, without change, the
guidance in FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others, which is
being superseded. We will apply the recognition and measurement
provisions of FIN 45 on a prospective basis to guarantees
issued or modified after December 31, 2002. We are
currently evaluating the recognition and measurement provisions
of FIN 45 and have not determined the impact this statement
will have on our consolidated financial position or results of
operations. The disclosure requirements in this interpretation
are effective beginning with the December 31, 2002
financial statements.

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,
Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the
fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. SFAS No. 148 does not permit the use
of the original SFAS No. 123 prospective method of
transition for changes to the fair value based method made in
fiscal years beginning after December 15, 2003. The
adoption of this standard 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. 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 dry-dock costs of $5.8 million in
2002, $7.1 million in 2001 and $2.0 million in 2000.
As of December 31, 2002, deferred dry-dock costs totaled
$12.9 million. Expensing dry-dock costs would likely result
in greater variability of our quarterly earnings as a
substantial portion of our dry-dock activities take place during
the first and fourth quarters.

42



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##### 





|   |                               
|-- | ------------------------------
|2. | Loss on Extinguishment of Debt

In March 2001, we paid $30.0 million to
reduce the outstanding principal balance under our term loan,
which was subject to a penalty of $0.9 million
($0.6 million net of taxes of $0.3 million), or
$0.03 per share-diluted, for the early extinguishment of
debt. The penalty was recorded as an extraordinary loss in 2001.
Upon adoption of SFAS No. 145, we will be required to
reclassify the extraordinary loss to other expense for the year
ended December 31, 2001.



|   |                     
|-- | --------------------
|3. | Contract Receivables

Contract receivables are generally billed upon
the completion of small contracts and are progress billed on
larger contracts in accordance with contract terms and
milestones. Costs in excess of billings solely represent costs
incurred and estimated earnings on jobs in progress.

Contract receivables billed consist of the
following (in thousands):

|                      |  |              |        |      |  |   |        | 
|--------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                      |  |             
|                      |  | December 31,
|                      |  |             
|                      |  | 2002         |        | 2001
|                      |  |              |        |     
|Completed contracts   |  | $            | 15,808 |      |  | $ | 23,047 | 
|Contracts in progress |  |              | 35,966 |      |  |   | 29,281 | 
|Retained              |  |              | 588    |      |  |   | 103    | 
|                      |  |              |        |      |  |   |        | 
|                      |  | $            | 52,362 |      |  | $ | 52,431 | 
|                      |  |              |        |      |  |   |        | 

Contracts in progress are as follows (in
thousands):

|                                                                          |                             |              |          |        |   |   |          |        |  
|------------------------------------------------------------------------- | --------------------------- | ------------ | -------- | ------ | - | - | -------- | ------ | -
|                                                                          |                             |             
|                                                                          |                             | December 31,
|                                                                          |                             |             
|                                                                          |                             | 2002         |          | 2001  
|                                                                          |                             |              |          |       
|Costs incurred to date                                                    |                             | $            | 285,545  |        |   | $ | 235,261  |       
|Estimated earnings to date                                                |                             |              | 41,403   |        |   |   | 37,385   |       
|                                                                          |                             |              |          |        |   |   |          |       
|                                                                          |                             |              | 326,948  |        |   |   | 272,646  |       
|Less: Billings to date                                                    |                             |              | (249,056 | )      |   |   | (178,073 | )     
|                                                                          |                             |              |          |        |   |   |          |       
|                                                                          |                             | $            | 77,892   |        |   | $ | 94,573   |       
|                                                                          |                             |              |          |        |   |   |          |       
|Included in accompanying balance sheets under the
    following captions: |                             |              |          |        |   |   |          |       
|                                                                          | Costs in excess of billings |              | $        | 78,494 |   |   | $        | 96,433 |  
|                                                                          | Billings in excess of costs |              |          | (602   | ) |   |          | (1,860 | )
|                                                                          |                             |              |          |        |   |   |          |       
|                                                                          |                             | $            | 77,892   |        |   | $ | 94,573   |       
|                                                                          |                             |              |          |        |   |   |          |       

We have not experienced material losses from
uncollected receivables. Our principal customers are national
oil companies, and major and independent oil and gas companies
and their affiliates. The concentration of customers in the
energy industry may impact our overall credit exposure, either
positively or negatively, since these customers may be similarly
affected by changes in economic or other conditions. Billed and
unbilled receivables from Pemex totaled $76.9 million at
December 31, 2002. Accordingly, there is significant
concentration of risk with that single customer.

Cumulative revenues recognized from 2000 through
2002 on all Pemex projects in Mexico total $286.8 million,
including $57.0 million of claims made under three Pemex
contracts for extra work related to interferences, interruptions
and other delays. Of the $57.0 million of claims,
$54.2 million relates to our second major project for
Pemex, which was completed during the fourth quarter of 2002.
The remaining $2.8 million of claims relates to two more
recent projects for Pemex. Unapproved claims related to the
Pemex projects developed primarily from client delays and
changes in the initial scope of work.

43



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##### 



A summary of the balance of claims remaining in
costs in excess of billings related to the Pemex projects are as
follows (in millions):

|                                |                                                                            |   |      |      | 
|------------------------------- | -------------------------------------------------------------------------- | - | ---- | ---- | 
|Claims included in 2001 revenue |                                                                            | $ | 42.8 |     
|Claims included in 2002 revenue |                                                                            |   | 14.2 |     
|                                |                                                                            |   |      |     
|                                | Total claims                                                               |   |      | 57.0 | 
|Claims billed to Pemex          |                                                                            |   | (4.0 | )   
|                                |                                                                            |   |      |     
|                                | Claims included in costs in excess of billings as
    of December 31, 2002 |   | $    | 53.0 | 
|                                |                                                                            |   |      |     

During November 2002, we engaged a consulting
firm in Mexico to assist us in the administration of the claims
to be made against Pemex. After considering the time necessary
for the consultants to comply with Pemexs requirements and
communication with new Pemex management, we believe that it will
take longer to process and collect these claims than previously
expected. We now expect to formally submit these claims in
accordance with Pemexs requirements through the second
quarter of 2003, with collections expected by the end of the
third quarter of 2003. The unapproved claims we have included as
revenue through December 31, 2002 are expected to be
substantially less than the actual claims to be presented to
Pemex, and we believe we will 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 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.



|   |                                             
|-- | --------------------------------------------
|4. | Detail of Certain Balance Sheet
    Accounts

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

|                                                                        |  |              |         |      |  |   |         |  
|----------------------------------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                                        |  |             
|                                                                        |  | December 31,
|                                                                        |  |             
|                                                                        |  | 2002         |         | 2001
|                                                                        |  |              |         |     
|Barges, vessels and related equipment                                   |  | $            | 268,770 |      |  | $ | 226,704 |  
|Land and buildings                                                      |  |              | 19,726  |      |  |   | 16,509  |  
|Machinery and equipment                                                 |  |              | 245     |      |  |   | 245     |  
|Office furniture and equipment                                          |  |              | 5,554   |      |  |   | 3,908   |  
|Leasehold improvements                                                  |  |              | 3,440   |      |  |   | 2,498   |  
|                                                                        |  |              |         |      |  |   |         |  
|                                                                        |  |              | 297,735 |      |  |   | 249,864 |  
|Less  Accumulated depreciation                                         |  |              | (39,888 | )    |  |   | (28,418 | )
|                                                                        |  |              |         |      |  |   |         |  
|Property and equipment, net                                             |  | $            | 257,847 |      |  | $ | 221,446 |  
|                                                                        |  |              |         |      |  |   |         |  
|Depreciation expense is included in the following
    expense accounts: |  |              |         |      |  |   |         |  
|Cost of contract revenues                                               |  | $            | 10,851  |      |  | $ | 9,127   |  
|Selling, general and administrative expenses                            |  |              | 619     |      |  |   | 1,128   |  
|                                                                        |  |              |         |      |  |   |         |  
|                                                                        |  | $            | 11,470  |      |  | $ | 10,255  |  
|                                                                        |  |              |         |      |  |   |         |  

44



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##### 



Accrued liabilities consist of the following (in
thousands):

|                                |  |              |        |      |  |   |        | 
|------------------------------- |  | ------------ | ------ | ---- |  | - | ------ | 
|                                |  |             
|                                |  | December 31,
|                                |  |             
|                                |  | 2002         |        | 2001
|                                |  |              |        |     
|Foreign value added tax payable |  | $            | 3,771  |      |  | $ | 5,767  | 
|Accrued capital expenditures    |  |              | 3,762  |      |  |   | 4,791  | 
|Other                           |  |              | 3,108  |      |  |   | 2,294  | 
|                                |  |              |        |      |  |   |        | 
|                                |  | $            | 10,641 |      |  | $ | 12,852 | 
|                                |  |              |        |      |  |   |        | 



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

Notes payable consist of the following (in
thousands):

|                                                                                                                                                                                                                                                                                                                |  |              |  |        
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | -------
|                                                                                                                                                                                                                                                                                                                |  |             
|                                                                                                                                                                                                                                                                                                                |  | December 31,
|                                                                                                                                                                                                                                                                                                                |  |             
|                                                                                                                                                                                                                                                                                                                |  | 2002         |  | 2001   
|                                                                                                                                                                                                                                                                                                                |  |              |  |        
|Term loan payable to The CIT Group due in 84
    monthly principal installments of $411, plus interest, maturing
    June 30, 2006, collateralized by mortgages on certain
    vessels. Interest at Libor plus 2.65% (4.03% and 4.73% at
    December 31, 2002 and 2001, respectively)                          |  | $34,469      |  | $39,402
|Revolving credit facility to Southwest Bank of
    Texas, N.A. due April 2, 2004, collateralized by accounts
    receivable. Interest at Southwest Banks prime rate minus
    1/4% (4.00% and 4.50% at December 31, 2002 and 2001,
    respectively)                                                           |  | 19,200       |  | 15,000 
|Term loan payable to GMAC due in monthly
    installments of $98, maturing January 29, 2009,
    collateralized by a mortgage on the Sea Horizon. Interest
    at Libor plus 2.5% (3.89% and 4.58% at December 31, 2002
    and 2001, respectively)                                                             |  | 13,899       |  | 11,407 
|Term loan payable to GE Capital due in monthly
    installments of $115 beginning February 1, 2002, maturing
    January 1, 2012, collateralized by a mortgage on the
    Pecos Horizon. Interest at the commercial paper rate plus
    2.45% (4.17% and 4.85% at December 31, 2002 and 2001,
    respectively) |  | 10,288       |  | 11,200 
|Revolving credit facility to The CIT Group due
    May 10, 2004, collateralized by mortgages on certain
    vessels. Interest at Libor plus 2.9% (4.34% and 5.02% at
    December 31, 2002 and 2001, respectively)                                                                                              |  | 9,224        |  | 26,700 
|Term loan payable to South Trust Bank due in
    monthly installments of $72, maturing on August 31, 2006,
    collateralized by property located in Port Arthur. Interest at
    South Trust Banks prime rate plus 1/2% (4.75% and 5.25% at
    December 31, 2002 and 2001, respectively)                     |  | 7,004        |  | 7,490  
|Revolving credit facility to Southwest Bank of
    Texas, N.A. due April 3, 2004, collateralized by accounts
    receivable. Interest at Southwest Banks prime rate (4.25%
    and 4.75% at December 31, 2002 and 2001, respectively)                                                                          |  | 2,500        |  | 6,000  

45



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##### 



|                                                                                                                                                                                                                                                                                           |  |              |  |         
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------ |  | --------
|                                                                                                                                                                                                                                                                                           |  |             
|                                                                                                                                                                                                                                                                                           |  | December 31,
|                                                                                                                                                                                                                                                                                           |  |             
|                                                                                                                                                                                                                                                                                           |  | 2002         |  | 2001    
|                                                                                                                                                                                                                                                                                           |  |              |  |         
|Term loan payable to Southwest Bank of Texas,
    N.A. due in monthly installments of $15, maturing
    November 1, 2006, collateralized by property located in
    Port Arthur. Interest at Southwest Banks prime rate (4.25%
    and 4.75% at December 31, 2002 and 2001, respectively) |  | 1,643        |  | 1,822   
|Term loan payable to ABN Amro Bank due in monthly
    installments of $1, maturing September 19, 2006. Interest
    at 4.93%                                                                                                                                                               |  | 59           |  | 74      
|Term loan payable to ABN Amro Bank due in monthly
    installments of $1, maturing December 20, 2006. Interest at
    4.93%                                                                                                                                                                |  | 38           |  |        
|                                                                                                                                                                                                                                                                                           |  |              |  |         
|Total long-term debt                                                                                                                                                                                                                                                                       |  | 98,324       |  | 119,095 
|Less  Current maturities                                                                                                                                                                                                                                                                  |  | (8,262)      |  | (7,681) 
|                                                                                                                                                                                                                                                                                           |  |              |  |         
|Long-term debt, net of current maturities                                                                                                                                                                                                                                                  |  | $90,062      |  | $111,414
|                                                                                                                                                                                                                                                                                           |  |              |  |         



| |                
| | ---------------
| | Loan Facilities

At December 31, 2002, we had approximately
$98.3 million in total outstanding debt. This represents an
approximate decrease of $20.8 million from
December 31, 2001. This decrease in debt is due to the use
of $20.0 million in equity offering proceeds to pay down
our loans. Of the $98.3 million of outstanding debt,
$30.9 million represents borrowings on our three revolving
credit facilities and $67.4 million represents borrowing on
the seven term-debt facilities. At December 31, 2002, we
had $31.4 million available under our three revolving
facilities. Interest rates vary from Libor plus 2.5% to prime
plus 0.5%. Our average interest rate at December 31, 2002
was 4.21%, and our term-debt borrowings currently require
$680,000 in total 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 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 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.

In September and December 2002, we amended one of
our revolving credit facilities to increase the financial ratio
related to our financial leverage of debt to EBITDA (earnings
before interest, taxes, depreciation, amortization) for periods
ending on or before June 30, 2003. We have experienced a
reduction in our EBITDA primarily due to reduced demand, lower
margins on projects and the $2.0 million casualty loss
related to the Lone Star Horizon in the third quarter of
2002. We were in compliance with all of our amended debt
covenants at December 31, 2002.

We incurred debt to fund our working capital
requirements in Mexico due to the timing of collections related
to our Pemex claims. Also, we may be required to borrow funds to
meet working capital requirements for 2003 contingent upon the
timing of the collection of our Pemex receivables and claims. If
we are required to make additional borrowings in excess of our
current debt facilities, we will be required to amend financial
covenants under our revolving credit facilities. Although there
can be no assurance, we believe that we will be able to borrow
additional funds collateralized by mortgages on our vessels,
refinance debt and amend financial covenants as required.

46



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##### 



Maturities of long-term debt for each of the
years ending December 31 are as follows (in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 8,262  | 
|2004       |  |   | 39,252 | 
|2005       |  |   | 23,116 | 
|2006       |  |   | 14,089 | 
|2007       |  |   | 2,757  | 
|Thereafter |  |   | 10,848 | 
|           |  |   |        | 
|           |  | $ | 98,324 | 
|           |  |   |        | 



|   |             
|-- | ------------
|6. | Income Taxes

Our provision for income taxes in the statement
of operations excludes $306,000 of deferred tax benefit that is
presented in the extraordinary loss for 2001 and $743,000 of
deferred tax provision that is presented in the cumulative
effect of a change in accounting principle for 2000. Total tax
expense (benefit) for the years ended December 31, 2002,
2001 and 2000 consists of (in thousands):

|        |          |                         |        |        |   |      |       |       |  |   |       |       | 
|------- | -------- | ----------------------- | ------ | ------ | - | ---- | ----- | ----- |  | - | ----- | ----- | 
|        |          |                        
|        |          | Year Ended December 31,
|        |          |                        
|        |          | 2002                    |        | 2001   |   | 2000
|        |          |                         |        |        |   |     
|Federal |          |                         |        |        |   |      |       |       |  |   |       |      
|        | Current  |                         | $      | 639    |   |      | $     |      |  |   | $     |      | 
|        | Deferred |                         |        | (3,718 | ) |      |       | 4,511 |  |   |       | 3,645 | 
|        |          |                         |        |        |   |      |       |       |  |   |       |      
|        |          | $                       | (3,079 | )      |   | $    | 4,511 |       |  | $ | 3,645 |      
|        |          |                         |        |        |   |      |       |       |  |   |       |      

The source of income before income tax expense
(benefit) is as follows:

|              |  |   |        |   |  |   |        |  |  |   |       | 
|------------- |  | - | ------ | - |  | - | ------ |  |  | - | ----- | 
|United States |  | $ | (7,848 | ) |  | $ | 15,770 |  |  | $ | 7,895 | 
|Foreign       |  |   | (780   | ) |  |   | 308    |  |  |   |      | 
|              |  |   |        |   |  |   |        |  |  |   |       | 
|              |  | $ | (8,628 | ) |  | $ | 16,078 |  |  | $ | 7,895 | 
|              |  |   |        |   |  |   |        |  |  |   |       | 

The income tax expense (benefit) for the years
ended December 31, 2002, 2001 and 2000 differs from the
amount computed by applying the U.S. statutory federal
income tax rate of 34 percent to consolidated income before
income taxes as follows (dollars in thousands):

|                                                         |  |                         |        |      |  |      |       |    |  |   |       |   |  |  |      |   |  |   |       |  |  |  |      |  
|-------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ----- | -- |  | - | ----- | - |  |  | ---- | - |  | - | ----- |  |  |  | ---- | -
|                                                         |  |                        
|                                                         |  | Year Ended December 31,
|                                                         |  |                        
|                                                         |  |                         |        |      |  |     
|                                                         |  | 2002                    |        | 2001 |  | 2000
|                                                         |  |                         |        |      |  |     
|                                                         |  |                         |        |      |  |      |       |    |  |  
|Expense (benefit) computed at federal statutory
    rate |  | $                       | (2,934 | )    |  |      | (34.0 | )% |  | $ | 5,161 |   |  |  | 34.0 | % |  | $ | 3,407 |  |  |  | 34.0 | %
|Increase (decrease) in provision from:                   |  |                         |        |      |  |      |       |    |  |   |       |   |  |  |      |   |  |   |       |  |  |  |      |  
|State income tax net of federal benefit                  |  |                         | 65     |      |  |      | 0.7   |    |  |   |      |   |  |  |     |   |  |   |      |  |  |  |     |  
|Foreign taxes                                            |  |                         | 275    |      |  |      | 3.2   |    |  |   |      |   |  |  |     |   |  |   |      |  |  |  |     |  
|Nondeductible expenses                                   |  |                         | 161    |      |  |      | 1.9   |    |  |   | 193   |   |  |  | 1.2  |   |  |   | 238   |  |  |  | 2.8  |  
|Foreign income exclusion                                 |  |                         | (646   | )    |  |      | (7.5  | )  |  |   | (843  | ) |  |  | (5.5 | ) |  |   |      |  |  |  |     |  
|                                                         |  |                         |        |      |  |      |       |    |  |   |       |   |  |  |      |   |  |   |       |  |  |  |      |  
|                                                         |  | $                       | (3,079 | )    |  |      | (35.7 | )% |  | $ | 4,511 |   |  |  | 29.7 | % |  | $ | 3,645 |  |  |  | 36.8 | %
|                                                         |  |                         |        |      |  |      |       |    |  |   |       |   |  |  |      |   |  |   |       |  |  |  |      |  

The decrease in our effective tax rate and
difference from the statutory rate for 2001 is due primarily to
the cumulative effect of the initial application of the
extraterritorial income exclusion for income primarily earned in
Mexico from October 1, 2000 to December 31, 2001. The
exclusion for 2002 consists of income earned in Mexico and parts
of Southeast Asia from January 1, 2002 to December 31,
2002. The exclusion allows us to exclude a qualifying portion of
income earned outside the United States for tax purposes. The
impact of this exclusion on future periods will vary depending
upon the amount of qualifying income earned outside the United
States.

47



---



##### 



The tax effects of the temporary differences that
give rise to the significant portions of the deferred tax assets
and liabilities are presented below (in thousands):

|              |                                          |              |   |        |   |  |   |         |  
|------------- | ---------------------------------------- | ------------ | - | ------ | - |  | - | ------- | -
|              |                                          |             
|              |                                          | December 31,
|              |                                          |             
|              |                                          | 2002         |   | 2001  
|              |                                          |              |   |       
|Assets       |                                          |              |   |        |   |  |   |        
|              | Net operating loss carryforwards         |              | $ | 29,416 |   |  | $ | 21,561  |  
|              | Gain on asset sales                      |              |   | 967    |   |  |   | 967     |  
|              | Accrued expense not currently deductible |              |   | 500    |   |  |   |        |  
|              | Contributions carryover                  |              |   | 44     |   |  |   | 16      |  
|              | Fixed asset basis difference             |              |   | 3,245  |   |  |   |        |  
|              | Alternative minimum tax carryforwards    |              |   | 917    |   |  |   | 917     |  
|              |                                          |              |   |        |   |  |   |        
|              | Total gross deferred tax assets          |              |   | 35,089 |   |  |   | 23,461  |  
|Liabilities  |                                          |              |   |        |   |  |   |        
|              | Book/tax depreciation difference         |              |   | 44,161 |   |  |   | 36,251  |  
|              |                                          |              |   |        |   |  |   |        
|              | Net deferred tax liabilities             |              | $ | (9,072 | ) |  | $ | (12,790 | )
|              |                                          |              |   |        |   |  |   |        

The realization of a significant portion of
deferred tax assets is based in part on our estimates of the
timing of reversals of certain temporary differences and on the
generation of taxable income before such reversals. The net
operating loss carryforwards of approximately $86.5 million
at December 31, 2002 begin to expire in the year 2012. Our
ability to utilize the net operating loss carryforwards could be
limited by a change in ownership as defined by federal income
tax regulations.



|   |                              
|-- | -----------------------------
|7. | Commitments and Contingencies



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

We are involved in various routine legal
proceedings primarily involving claims for personal injury under
the Jones Act and general maritime laws which we believe are
incidental to the conduct of our business. We believe that these
proceedings, individually and in the aggregate, if adversely
determined, would not have a material adverse effect on our
financial position and results of operations.



| |       
| | ------
| | Leases

We lease office space at various locations under
operating leases that expire through 2008. Our operating leases
for our corporate office are subject to increases for variable
operating expenses. Rental expense was $2.4 million for
2002, $1.5 million for 2001 and $1.0 million for 2000.
Future minimum non-cancelable lease commitments under these
agreements for the years ending December 31 are as follows
(in thousands):

|           |  |   |        | 
|---------- |  | - | ------ | 
|2003       |  | $ | 2,684  | 
|2004       |  |   | 2,510  | 
|2005       |  |   | 2,504  | 
|2006       |  |   | 2,341  | 
|2007       |  |   | 2,347  | 
|Thereafter |  |   | 2,489  | 
|           |  |   |        | 
|           |  | $ | 14,875 | 
|           |  |   |        | 



| |          
| | ---------
| | Insurance

We participate in a retrospectively rated
insurance agreement. In our opinion, we have adequately accrued
for all liabilities arising from these agreements based upon the
total incremental amount that would be paid based upon the
with-and-without calculation assuming experience to date and
assuming termination.

48



---



##### 





| |                      
| | ---------------------
| | Employment Agreements

We have entered into employment agreements with
three executive officers that expire in 2004, and we have
purchased $5.0 million in key-man life
insurance with respect to our Chief Executive Officer, for which
Horizon is the named beneficiary.



| |                       
| | ----------------------
| | Cal Dive Joint Venture

In March 2001, we formed a joint venture, 50%
owned by us, with Cal Dive to perform small diameter, deepwater
reel pipelaying projects in the U.S. Gulf of Mexico with
the Intrepid, a vessel owned by Cal Dive. Operations of
the joint venture would be jointly managed and staffed. If both
Cal Dive and Horizon decide to commence joint venture
operations, 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.



|   |                      
|-- | ---------------------
|8. | Employee Benefit Plan

We have a 401(k) plan for all eligible employees
and we make annual contributions to the plan, at the discretion
of management. We contributed $406,000, $331,000 and $247,000 of
common stock to the plan during 2002, 2001 and 2000,
respectively. We intend to continue to make future contributions
with Horizon common stock.



|   |                     
|-- | --------------------
|9. | Stockholders Equity

Public
Offerings of Common Stock

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.

In February 2001, we sold 3,800,000 shares
of common stock in a secondary offering. We received
$66.0 million after deducting the underwriting discount and
expenses. We used $30.0 million to reduce indebtedness, and
$5.6 million for the initial purchase of the Pecos
Horizon. The remainder was used for general corporate
purposes.



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

On January 11, 2001, our board of directors
adopted a stockholders rights plan. In connection with the
plan, the board of directors approved the authorization of
100,000 shares of $1.00 par value per share,
designated the Series A Participating Cumulative Preferred
Stock. Under the plan, preferred stock purchase rights were
distributed as a dividend at a rate of one right for each share
of our common stock held as of record as of the close of
business on January 11, 2001. Additional rights will be
issued in respect of all shares of common stock issued while the
rights plan is in effect. Each right entitles stockholders of
common stock to buy a fraction of a share of the new series of
preferred stock at an exercise price of $50. The rights will
become exercisable and detach from the common stock, only if a
person or group acquires 20% or more of the outstanding common
stock, or announces a tender or exchange offer that, if
consummated, would result in a person or group beneficially
owning 20% or more of the outstanding common stock. Once
exercisable, each right will entitle the holder (other than the
acquiring person) to acquire common stock with a value of twice
the exercise price of the rights. Horizon will generally be able
to redeem the rights at $.001 per right at any time until
the close of business on the tenth day after the rights become
exercisable. The rights will expire on January 11, 2011,
unless redeemed or exchanged at an earlier date.



| |              
| | -------------
| | Stock Options

In January 1998, the board of directors and the
stockholders approved the Stock Incentive Plan (the Plan). The
Plan provides for the granting of stock options to directors,
executive officers, other employees and certain non-employee
consultants. The amended Plan has 3.15 million shares
available for issuance as

49



---



##### 



optioned shares and terminates in April 2009. The
terms of the option awards (including vesting schedules) are
established by the Compensation Committee of the board of
directors, but generally vest ratably over three years and
unexercised options expire ten years from the date of issue. In
May 2002, the board of directors and the stockholders approved
the 2002 Stock Incentive Plan (the 2002 Plan). The 2002 Plan has
2.3 million shares available for issuance as optioned
shares and shall remain in effect until all awards granted under
the 2002 Plan have been satisfied. This plan has the same
characteristics as the Plan approved in 1998. At
December 31, 2002, we had options for 2.3 million
shares of common stock remaining to be issued in aggregate under
both plans.


The following table summarizes activity under
both plans for the years ended December 31, 2002, 2001 and
2000:

|                                 |  |        |           |               |  |   |       | 
|-------------------------------- |  | ------ | --------- | ------------- |  | - | ----- | 
|                                 |  |        |           | Weighted     
|                                 |  | Shares |           | Average Price
|                                 |  |        |           |              
|Outstanding at December 31, 1999 |  |        | 1,909,000 |               |  | $ | 8.67  | 
|Granted                          |  |        | 218,500   |               |  | $ | 8.85  | 
|Forfeited and canceled           |  |        | (79,503   | )             |  | $ | 9.30  | 
|Exercised                        |  |        | (42,618   | )             |  | $ | 8.48  | 
|                                 |  |        |           |               |  |   |       | 
|Outstanding at December 31, 2000 |  |        | 2,005,379 |               |  | $ | 8.67  | 
|Granted                          |  |        | 910,000   |               |  | $ | 17.07 | 
|Forfeited and canceled           |  |        | (715,043  | )             |  | $ | 17.42 | 
|Exercised                        |  |        | (324,166  | )             |  | $ | 9.10  | 
|                                 |  |        |           |               |  |   |       | 
|Outstanding at December 31, 2001 |  |        | 1,876,170 |               |  | $ | 9.34  | 
|Granted                          |  |        | 916,000   |               |  | $ | 6.90  | 
|Forfeited and canceled           |  |        | (27,966   | )             |  | $ | 7.52  | 
|Exercised                        |  |        | (45,984   | )             |  | $ | 6.17  | 
|                                 |  |        |           |               |  |   |       | 
|Outstanding at December 31, 2002 |  |        | 2,718,220 |               |  | $ | 8.59  | 

The following table summarizes information on
stock options outstanding and exercisable as of
December 31, 2002, pursuant to both plans:

|                |  |             |           |                     |  |                     |      |             |  |                  |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ----------- | --------- | ------------------- |  | ------------------- | ---- | ----------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |             |           |                     |  |                     |      |            
|                |  |             |           | Options Outstanding |  |                    
|                |  |             |           |                     |  | Options Exercisable
|                |  |             |           | Weighted Average    |  |                     |      |            
|Range of        |  | Shares      |           | Remaining           |  | Weighted Average    |      | Shares      |  | Weighted Average
|Exercise Prices |  | Outstanding |           | Contractual Life    |  | Exercise Price      |      | Exercisable |  | Exercise Price  
|                |  |             |           |                     |  |                     |      |             |  |                 
|$17.12 to 23.28 |  |             | 129,300   |                     |  |                     | 8.23 |             |  | $                | 19.98 |  |  |  | 59,756    |  |  | $ | 20.29 | 
|$10.97 to 17.12 |  |             | 579,845   |                     |  |                     | 5.74 |             |  | $                | 13.16 |  |  |  | 525,174   |  |  | $ | 13.11 | 
|$ 4.81 to 10.97 |  |             | 2,009,075 |                     |  |                     | 7.81 |             |  | $                | 6.54  |  |  |  | 1,339,203 |  |  | $ | 6.44  | 
|                |  |             |           |                     |  |                     |      |             |  |                  |       |  |  |  |           |  |  |   |       | 
|$ 4.81 to 23.28 |  |             | 2,718,220 |                     |  |                     | 7.39 |             |  | $                | 8.59  |  |  |  | 1,924,133 |  |  | $ | 8.69  | 
|                |  |             |           |                     |  |                     |      |             |  |                  |       |  |  |  |           |  |  |   |       | 



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

As of December 31, 2002, treasury stock
consisted of 912,207 shares at a cost of $6.0 million,
following the issuance of 61,298 and 29,895, shares for the
Companys 401(k) contributions in 2002 and 2001,
respectively. Treasury stock is stated at the average cost basis.

50



---



##### 





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

The following table presents information
necessary to calculate earnings per share for the three years
ended December 31, 2002 (in thousands, except per share
amounts):

|                                                                     |  |      |        |      |  |      |        |  |  |   |        | 
|-------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ | 
|                                                                     |  | 2002 |        | 2001 |  | 2000
|                                                                     |  |      |        |      |  |     
|Net income (loss)                                                    |  | $    | (5,949 | )    |  | $    | 10,693 |  |  | $ | 6,374  | 
|Average common shares outstanding                                    |  |      | 25,573 |      |  |      | 22,431 |  |  |   | 18,824 | 
|                                                                     |  |      |        |      |  |      |        |  |  |   |        | 
|Basic earnings per share                                             |  | $    | (0.22  | )    |  | $    | 0.48   |  |  | $ | 0.34   | 
|                                                                     |  |      |        |      |  |      |        |  |  |   |        | 
|Average common and dilutive potential common
    shares outstanding: |  |      |        |      |  |      |        |  |  |   |        | 
|Average common shares outstanding                                    |  |      | 25,573 |      |  |      | 22,431 |  |  |   | 18,824 | 
|Assumed exercise of stock options                                    |  |      |       |      |  |      | 655    |  |  |   | 631    | 
|                                                                     |  |      |        |      |  |      |        |  |  |   |        | 
|                                                                     |  |      | 25,573 |      |  |      | 23,086 |  |  |   | 19,455 | 
|                                                                     |  |      |        |      |  |      |        |  |  |   |        | 
|Diluted earnings per share                                           |  | $    | (0.22  | )    |  | $    | 0.46   |  |  | $ | 0.33   | 
|                                                                     |  |      |        |      |  |      |        |  |  |   |        | 

As of December 31, 2002, we had outstanding
options covering an aggregate of 2,718,220 shares of common
stock, of which 1,924,133 shares were exercisable. Excluded
from the computation of diluted earnings per share are options
to purchase 2,718,220 shares of common stock
outstanding as of December 31, 2002 at a weighted average
price of $8.59 per share, 166,800 shares of common
stock as of December 31, 2001 at a weighted average price
of $19.06 per share and no shares in 2000, as they would be
antidilutive.



|    |                           
|--- | --------------------------
|10. | Related Party Transactions

In August 1998, we entered into a master services
agreement with Odyssea Marine, Inc. (Odyssea), an entity
wholly-owned by Elliott Associates, L.P. and Elliott
International, L.P., collectively our largest stockholder,
to charter certain marine vessels from Odyssea. As of
December 31, 2002, we owed Odyssea $4.2 million for
charter services compared to $0.6 million at
December 31, 2001. Odyssea billed Horizon and Horizon paid
Odyssea for services rendered under the agreement as follows (in
millions):

|                         |  |      |      |      |  |      |      |  |  |   |      | 
|------------------------ |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                         |  | 2002 |      | 2001 |  | 2000
|                         |  |      |      |      |  |     
|Amount billed to Horizon |  | $    | 18.3 |      |  | $    | 16.1 |  |  | $ | 11.3 | 
|Amount paid to Odyssea   |  | $    | 14.7 |      |  | $    | 15.8 |  |  | $ | 11.0 | 

We have loaned $332,000 to three of our executive
officers. In October 2000, we loaned $142,000 to R. Clay
Etheridge, Executive Vice President and Chief Operations
Officer. The principal amount remains outstanding. In April and
May 2002, we loaned $110,000 to Bill J, Lam, President and
Chief Executive Officer and $80,000 to David W. Sharp,
Executive Vice President and Chief Financial Officer,
respectively. Both of these loan amounts have been paid in full.



|    |              
|--- | -------------
|11. | 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. Repairs to
the Lone Star Horizon were completed during the fourth
quarter of 2002 at a cost of $5.0 million. 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 2002, we recorded this $2.0 million loss
as other expense, and we believe the insurance will cover the
cost of the repairs. As of December 31, 2002, we included
the $3.0 million insurance claim in current assets. We
collected an initial reimbursement of $1.2 million in
February 2003.

51



---



##### 





|    |                       
|--- | ----------------------
|12. | Geographic Information

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

|              |                      |                         |   |       |       |      |   |       |       |  |   |       |       | 
|------------- | -------------------- | ----------------------- | - | ----- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|              |                      |                        
|              |                      | Year Ended December 31,
|              |                      |                        
|              |                      | 2002                    |   | 2001  |       | 2000
|              |                      |                         |   |       |       |     
|Revenues:     |                      |                         |   |       |       |      |   |       |       |  |   |      
|              | Domestic             |                         | $ | 156.6 |       |      | $ | 128.1 |       |  | $ | 101.0 |      
|              | Latin America        |                         |   | 106.3 |       |      |   | 142.2 |       |  |   | 57.9  |      
|              | West Africa          |                         |   | 1.4   |       |      |   |      |       |  |   |      |      
|              | Southeast Asia       |                         |   | 17.3  |       |      |   |      |       |  |   |      |      
|              | Other                |                         |   | 1.8   |       |      |   | 1.9   |       |  |   | 1.6   |      
|              |                      |                         |   |       |       |      |   |       |       |  |   |      
|              |                      | Total                   |   | $     | 283.4 |      |   | $     | 272.2 |  |   | $     | 160.5 | 
|              |                      |                         |   |       |       |      |   |       |       |  |   |      
|Gross Profit: |                      |                         |   |       |       |      |   |       |       |  |   |      
|              | Domestic             |                         | $ | 12.4  |       |      | $ | 21.1  |       |  | $ | 19.2  |      
|              | Latin America        |                         |   | 18.4  |       |      |   | 18.2  |       |  |   | 9.3   |      
|              | West Africa          |                         |   | (2.8  | )     |      |   |      |       |  |   |      |      
|              | Southeast Asia       |                         |   | 1.6   |       |      |   |      |       |  |   |      |      
|              | Other                |                         |   | 0.8   |       |      |   | 0.8   |       |  |   | 0.7   |      
|              | Unallocated costs(1) |                         |   |      |       |      |   | (5.1  | )     |  |   | (4.8  | )    
|              |                      |                         |   |       |       |      |   |       |       |  |   |      
|              |                      | Total                   |   | $     | 30.4  |      |   | $     | 35.0  |  |   | $     | 24.4  | 
|              |                      |                         |   |       |       |      |   |       |       |  |   |      

|                       |                |                    |   |       |       |  |   |       |       | 
|---------------------- | -------------- | ------------------ | - | ----- | ----- |  | - | ----- | ----- | 
|                       |                |                   
|                       |                | As of December 31,
|                       |                |                   
|                       |                | 2002               |   | 2001 
|                       |                |                    |   |      
|Long-lived assets (2): |                |                    |   |       |       |  |   |      
|                       | Domestic       |                    | $ | 168.4 |       |  | $ | 145.3 |      
|                       | Latin America  |                    |   | 21.5  |       |  |   | 42.7  |      
|                       | West Africa    |                    |   | 19.6  |       |  |   |      |      
|                       | Southeast Asia |                    |   | 34.3  |       |  |   | 18.4  |      
|                       | Other          |                    |   | 14.0  |       |  |   | 15.0  |      
|                       |                |                    |   |       |       |  |   |      
|                       |                | Total              |   | $     | 257.8 |  |   | $     | 221.4 | 
|                       |                |                    |   |       |       |  |   |      



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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 December 31, 2002 and 2001. 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 located in the Latin America geographic
    segment.

13. Quarterly Results of Operations
(Unaudited)

The marine construction industry in the
U.S. Gulf of Mexico is seasonal, with contracts being
awarded in the spring and early summer and the work being
performed before the onset of adverse weather conditions in the
winter. Seasonality and adverse weather conditions historically
have resulted in lower revenues in the first and fourth
quarters. Full year results are not a direct multiple of any
quarter or combination of quarters because of this seasonality.

52



---



##### 



The following table sets forth selected quarterly
information for 2002 and 2001 (in thousands, except per share
data). We believe that all necessary adjustments have been
included in the amounts stated below to present fairly the
results of such periods.

|                                            |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |        |  
|------------------------------------------- | ---------------------------------------------- | ------------- | ------ | ------- | - | -------- | ------ | ------- |  | - | ------ | ------ |  | - | ------- | ------ | -
|                                            |                                                |              
|                                            |                                                | Quarter Ended
|                                            |                                                |              
|                                            |                                                | March 31      |        | June 30 |   | Sept. 30 |        | Dec. 31
|                                            |                                                |               |        |         |   |          |        |        
|2002                                        |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|Contract revenues                           |                                                | $             | 66,103 |         |   | $        | 64,291 |         |  | $ | 64,977 |        |  | $ | 88,039  |       
|Gross profit                                |                                                |               | 5,047  |         |   |          | 9,540  |         |  |   | 11,642 |        |  |   | 4,165   |       
|Operating income (loss)(1)                  |                                                |               | 1,546  |         |   |          | 5,149  |         |  |   | 5,790  |        |  |   | (13,788 | )     
|Net income (loss)(1)                        |                                                |               | 377    |         |   |          | 2,614  |         |  |   | 1,831  |        |  |   | (10,371 | )     
|                                            |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|EARNINGS PER SHARE:                         |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|                                            | Net income (loss) per share  BASIC            |               | $      | 0.02    |   |          | $      | 0.10    |  |   | $      | 0.07   |  |   | $       | (0.39  | )
|                                            | Net income (loss) per share  DILUTED          |               | $      | 0.02    |   |          | $      | 0.10    |  |   | $      | 0.07   |  |   | $       | (0.39  | )
|Shares used in computing net income (loss): |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|                                            | Basic                                          |               |        | 23,279  |   |          |        | 26,260  |  |   |        | 26,346 |  |   |         | 26,366 |  
|                                            | Diluted                                        |               |        | 23,582  |   |          |        | 26,926  |  |   |        | 26,348 |  |   |         | 26,366 |  
|2001                                        |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|Contract revenues                           |                                                | $             | 54,056 |         |   | $        | 83,348 |         |  | $ | 60,965 |        |  | $ | 73,839  |       
|Gross profit                                |                                                |               | 9,539  |         |   |          | 12,969 |         |  |   | 7,682  |        |  |   | 4,843   |       
|Operating income                            |                                                |               | 5,947  |         |   |          | 9,457  |         |  |   | 4,660  |        |  |   | 1,198   |       
|Net income before extraordinary loss        |                                                |               | 2,656  |         |   |          | 5,435  |         |  |   | 2,752  |        |  |   | 418     |       
|Extraordinary loss, net of taxes of ($306)  |                                                |               | (568   | )       |   |          |       |         |  |   |       |        |  |   |        |       
|Net income                                  |                                                |               | 2,088  |         |   |          | 5,435  |         |  |   | 2,752  |        |  |   | 418     |       
|                                            |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|EARNINGS PER SHARE  BASIC:                 |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|                                            | Net income before extraordinary loss           |               | $      | 0.13    |   |          | $      | 0.24    |  |   | $      | 0.12   |  |   | $       | 0.02   |  
|                                            | Extraordinary loss                             |               |        | (0.03   | ) |          |        |        |  |   |        |       |  |   |         |       |  
|                                            |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|Net income per share  BASIC                |                                                | $             | 0.10   |         |   | $        | 0.24   |         |  | $ | 0.12   |        |  | $ | 0.02    |       
|                                            |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|EARNINGS PER SHARE  DILUTED:               |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|                                            | Net income per share before extraordinary loss |               | $      | 0.12    |   |          | $      | 0.23    |  |   | $      | 0.12   |  |   | $       | 0.02   |  
|                                            | Extraordinary loss                             |               |        | (0.02   | ) |          |        |        |  |   |        |       |  |   |         |       |  
|                                            |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|Net income per share  DILUTED              |                                                | $             | 0.10   |         |   | $        | 0.23   |         |  | $ | 0.12   |        |  | $ | 0.02    |       
|                                            |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|Shares used in computing net income:        |                                                |               |        |         |   |          |        |         |  |   |        |        |  |   |         |       
|                                            | Basic                                          |               |        | 20,443  |   |          |        | 22,930  |  |   |        | 23,036 |  |   |         | 23,265 |  
|                                            | Diluted                                        |               |        | 21,506  |   |          |        | 23,909  |  |   |        | 23,351 |  |   |         | 23,390 |  



---



|    |                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Operating loss and net loss for the quarter
    ending December 31, 2002 includes a $9.9 million
    impairment pre-tax loss related to the Phoenix Horizon.

53



---



##### 






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on our behalf by the
undersigned, thereunto duly authorized on March 28, 2003.



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



| |     |                   
| | --- | ------------------
| | By: | /s/ DAVID W. SHARP

| |                             
| | ----------------------------
| |                             
| | David W. Sharp              
| | Executive Vice President and
| | Chief Financial Officer     

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                             |  |                                                                          |  |                |  | 
|-------------------------------------------- |  | ------------------------------------------------------------------------ |  | -------------- |  | 
|                                             |  |                                                                          |  |               
|Signature                                    |  | Title                                                                    |  | Date          
|                                             |  |                                                                          |  |               
|                                            
|/s/ J. LOUIS FRANKJ. Louis Frank             |  | Chairman of the Board                                                    |  | March 28, 2003
|                                            
|/s/ BILL J. LAMBill J. Lam                   |  | President and Director (Principal Executive
    Officer)                 |  | March 28, 2003
|                                            
|/s/ DAVID W. SHARPDavid W. Sharp             |  | Chief Financial Officer (Principal Financial and
    Accounting Officer) |  | March 28, 2003
|                                            
|/s/ MICHAEL R. LATINAMichael R. Latina       |  | Director                                                                 |  | March 28, 2003
|                                            
|/s/ KEN R. LESUERKen R. LeSuer               |  | Director                                                                 |  | March 28, 2003
|                                            
|/s/ JOHN T. MILLSJohn T. Mills               |  | Director                                                                 |  | March 28, 2003
|                                            
|/s/ EDWARD L. MOSES, JR.Edward L. Moses, Jr. |  | Director                                                                 |  | March 28, 2003
|                                            
|/s/ PHIL D. WEDEMEYERPhil D. Wedemeyer       |  | Director                                                                 |  | March 28, 2003

54



---



##### 






CERTIFICATIONS PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

I, Bill J. Lam, certify that:

1. I have reviewed this Annual Report on
Form 10-K of Horizon Offshore, Inc.;

2. Based on my knowledge, this Annual Report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
Annual Report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
Annual Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual
Report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this Annual Report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this Annual
    Report (the Evaluation Date ); and                                                                                                     
|
| | (c) presented in this Annual Report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this Annual Report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ BILL J. LAM                          
| |                                          
| | Bill J. Lam                              
| | President and Chief Executive
    Officer
| | (Principal Executive Officer)            

Date: March 28, 2003

55



---



##### 



I, David W. Sharp, certify that:

1. I have reviewed this Annual Report on
Form 10-K of Horizon Offshore, Inc.;

2. Based on my knowledge, this Annual Report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
Annual Report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
Annual Report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual
Report;

4. The registrants other certifying
officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this Annual Report is being prepared;
|
| | (b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this Annual
    Report (the Evaluation Date); and                                                                                                      
|
| | (c) presented in this Annual Report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officers and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this Annual Report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                              
| | -----------------------------
| | /s/ DAVID W. SHARP           
| |                              
| | David W. Sharp               
| | Executive Vice President and 
| | Chief Financial Officer      
| | (Principal Financial Officer)

Date: March 28, 2003

56



---



##### 






EXHIBIT INDEX

|        |       |  |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                           
|------- | ----- |  |  | ----------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |            
|Number  |       |  |  | Description
|        |       |  |  |            
|        | 3.1   |  |  |            |  | Amended and Restated Certificate of Incorporation
    of the Company(1)                                                                                                                                                                                                                                                                                                                                   
|        | 3.2   |  |  |            |  | Bylaws of the Company(1)                                                                                                                                                                                                                                                                                                                                                                                  
|        | 4.1   |  |  |            |  | Specimen Common Stock certificate(1)                                                                                                                                                                                                                                                                                                                                                                      
|        | 4.2   |  |  |            |  | Rights Agreement, dated as of January 11,
    2002, between Horizon Offshore, Inc. and Mellon Investor
    Services LLC, as Rights Agent, including (i) as
    Exhibit A-the Form of Certificate of Designations,
    (ii) as Exhibit B-the Forms of Rights Certificate,
    Assignment and Election to Purchase, and (iii) as
    Exhibit C-the Summary Description of the Stockholder Rights
    Plan(7)
|        | 10.1  |  |  |            |  | Form of Indemnity Agreement by and between the
    Company and each of its directors(1)                                                                                                                                                                                                                                                                                                                   
|        | 10.2  |  |  |            |  | The Companys Stock Incentive Plan(1)*                                                                                                                                                                                                                                                                                                                                                                    
|        | 10.3  |  |  |            |  | Form of Stock Option Agreement under the
    Companys Stock Incentive Plan(1)*                                                                                                                                                                                                                                                                                                                           
|        | 10.4  |  |  |            |  | Registration Rights Agreement dated as of
    December 4, 1997 among the Company, Highwood Partners,
    L.P., and Westgate International, L.P.(1)                                                                                                                                                                                                                                                        
|        | 10.5  |  |  |            |  | Loan Agreement dated December 30, 1998 among
    Horizon Vessels, Inc., Horizon Offshore Contractors, Inc., The
    CIT Group/ Equipment Financing, Inc., as agent, and the other
    lenders specified therein(6)                                                                                                                                                                                        
|        | 10.6  |  |  |            |  | Amendment No. 1 to Loan Agreement dated as
    of January 30, 1999 among Horizon Vessels, Inc., Horizon
    Offshore Contractors, Inc., The CIT Group/ Equipment Financing,
    Inc., as agent, and the other lenders specified therein(5)                                                                                                                                                                
|        | 10.7  |  |  |            |  | Amendment No. 2 to Loan Agreement dated as
    of May 25, 1999 among Horizon Vessels, Inc., Horizon
    Offshore Contractors, Inc., The CIT Group/ Equipment Financing,
    Inc., as agent, and the other lenders specified therein(5)                                                                                                                                                                    
|        | 10.8  |  |  |            |  | Amendment No. 3 to Loan Agreement dated as
    of November 30, 1999 among Horizon Vessels, Inc., Horizon
    Offshore Contractors, Inc., The CIT Group/ Equipment Financing,
    Inc., as agent, and the other lenders specified therein(5)                                                                                                                                                               
|        | 10.9  |  |  |            |  | Amendment No. 4 to Loan Agreement dated as
    of January 31, 2000 among Horizon Vessels, Inc., Horizon
    Offshore Contractors, Inc., The CIT Group/ Equipment Financing,
    Inc., as agent, and the other lenders specified therein(5)                                                                                                                                                                
|        | 10.10 |  |  |            |  | Employment and Non-Competition Agreement dated as
    of September 1, 1999 between the Company and Clay
    Etheridge(2)*                                                                                                                                                                                                                                                                                 
|        | 10.11 |  |  |            |  | Amendment No. 5 to the Loan Agreement dated
    as of June 30, 2000 among Horizon Vessels, Inc., Horizon
    Offshore Contractors, Inc., The CIT Group/ Equipment Financing
    Inc., as agent, and the other lenders specified therein(3)                                                                                                                                                                
|        | 10.12 |  |  |            |  | Employment Agreement dated October 11, 1999
    between Horizon Offshore Contractors, Ltd. and James Devine(4)*                                                                                                                                                                                                                                                                                           
|        | 10.13 |  |  |            |  | Loan Agreement, dated March 26, 2001 between
    Horizon Offshore Contractors, Inc., Horizon Subsea Services,
    Inc., Horizon Offshore Vessels, Inc. and Southwest Bank of
    Texas, N.A.(8)                                                                                                                                                                                                           
|        | 10.14 |  |  |            |  | Loan Agreement dated June 29, 2001, between
    Horizon Vessels, Inc. and General Electric Capital Corporation(9)                                                                                                                                                                                                                                                                                         
|        | 10.15 |  |  |            |  | Employment and Non-Competition Agreement dated as
    of April 1, 2001 between the Company and David W. Sharp(11)*                                                                                                                                                                                                                                                                                        
|        | 10.16 |  |  |            |  | Credit Agreement dated May 10, 2001, among
    Horizon Vessels, Inc., Horizon Offshore Contractors, Inc.,
    Horizon Offshore, Inc. and The CIT Group/ Equipment Financing,
    Inc.(9)                                                                                                                                                                                                                  
|        | 10.17 |  |  |            |  | Employment Agreement and Non-Competition
    Agreement dated June 1, 2001 between the Company and Bill
    Lam(11)*                                                                                                                                                                                                                                                                                       
|        | 10.18 |  |  |            |  | Loan Agreement dated June 29, 2001, among
    Horizon Vessels, Inc., Horizon Offshore, Inc., Horizon Offshore
    Contractors, Inc. and SouthTrust Bank(11)                                                                                                                                                                                                                                               

57



---



##### 



|        |       |  |  |             |  |                                                                                                                                                                                                                                                             
|------- | ----- |  |  | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |            
|Number  |       |  |  | Description
|        |       |  |  |            
|        | 10.19 |  |  |            |  | Loan Agreement dated August 31, 2001,
    between Horizon Vessels International Ltd. and GMAC Business
    Credit, LLC(10)                                                                                                                                  
|        | 10.20 |  |  |            |  | Loan Agreement dated August 15, 2001, among
    Horizon Offshore Contractors, Inc., Horizon Subsea Services,
    Inc., Horizon Vessels, Inc., Horizon, L.L.C. and Southwest Bank
    of Texas, N.A.(10)                                                     
|        | 10.21 |  |  |            |  | First Amendment to Employment Agreement dated
    July 28, 2001 between Horizon Offshore Contractors, Ltd.
    and James Devine(11)*                                                                                                                        
|        | 10.22 |  |  |            |  | First Amendment to Loan Agreement dated as of
    April 17, 2002 among Horizon Offshore Contractors, Inc.,
    Horizon Subsea Services, Inc., Horizon Vessels, Inc. and
    Southwest Bank of Texas, N.A., as Agent(12)                                     
|        | 10.23 |  |  |            |  | First Amendment to EXIM Guaranteed Loan Agreement
    dated as of April 17, 2002 among Horizon Offshore
    Contractors, Inc., Horizon Subsea Services, Inc., Horizon
    Vessels, Inc., Horizen, L.L.C. and Southwest Bank of Texas,
    N.A., as Agent(12)
|        | 10.24 |  |  |            |  | Horizon Offshore, Inc. 2002 Stock Incentive
    Plan(13)*                                                                                                                                                                                                   
|        | 10.25 |  |  |            |  | Fourth Amendment to Loan Agreement dated as of
    September 30, 2002, among Horizon Offshore Contractors,
    Inc., Horizon Subsea Services, Inc., Horizon Vessels, Inc. and
    Southwest Bank of Texas, N.A.(14)                                         
|        | 10.26 |  |  |            |  | Third Amendment to EXIM Guaranteed Loan Agreement
    dated as of September 30, 2002, among Horizon Offshore
    Contractors, Inc., Horizon Subsea Services, Inc., Horizon
    Vessels, Inc., Horizen, L.L.C., and Southwest Bank of Texas,
    N.A.(14)    
|        | 10.27 |  |  |            |  | Fifth Amendment to Loan Agreement dated as of
    March 6, 2003, among Horizon Offshore Contractors, Inc.,
    Horizon Subsea Services, Inc., Horizon Vessels, Inc. and
    Southwest Bank of Texas, N.A.(15)                                               
|        | 10.28 |  |  |            |  | Fourth Amendment to EXIM Guaranteed Loan
    Agreement dated as of March 6, 2003, among Horizon Offshore
    Contractors, Inc., Horizon Subsea Services, Inc., Horizon
    Vessels, Inc., Horizen, L.L.C., and Southwest Bank of Texas,
    N.A.(15)        
|        | 10.29 |  |  |            |  | Employment and Non-Competition Agreement dated
    May 31, 2002 between the Company and J. Louis Frank(15)*                                                                                                                                                 
|        | 10.30 |  |  |            |  | Amended and Restated Employment Agreement dated
    January 1, 2003 between the Company and James Devine(15)*                                                                                                                                               
|        | 10.31 |  |  |            |  | Loan Agreement dated October 2, 2000 between
    Horizon Offshore, Inc. and R. Clay Etheridge(15)                                                                                                                                                           
|        | 21.1  |  |  |            |  | Subsidiaries of the Company(15)                                                                                                                                                                                                                             
|        | 23.1  |  |  |            |  | Consent of PricewaterhouseCoopers LLP(15)                                                                                                                                                                                                                   
|        | 99.1  |  |  |            |  | Bill J. Lam-Certification Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002(15)                                                                                                                                                                 
|        | 99.2  |  |  |            |  | David W. Sharp-Certification Pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002(15)                                                                                                                                                              



---



| |     |                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to the Companys
    Registration Statement on Form S-1 (Registration Statement
    No. 333-43965).
|
| | (2) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2000.       
|
| | (3) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2000.        
|
| | (4) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2000.   
|
| | (5) | Incorporated by reference to the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1999.          
|
| | (6) | Incorporated by reference to the Companys
    Annual Report on Form 10-K for the year ended
    December 31, 1998.          

58



---



##### 





| |     |                                                                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (7) | Incorporated herein by reference to
    Exhibits 1, 2, 3 and 4 to the Companys Registration
    Statement on Form 8-A12B, filed with the Commission on
    January 18, 2002.
|
| | (8) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2001.                                                       
|
| | (9) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    June 30, 2001.                                                        



|     |                                                                                                                           
|---- | --------------------------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2001.
|    
|(11) | Incorporated by reference to the Companys
    Annual Report on Form 10K-405 for the year ended
    December 31, 2001.    
|    
|(12) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    March 31, 2002     
|    
|(13) | Incorporated by reference to Exhibit A to
    our Definitive Schedule 14A filed on April 8, 2002.                         
|    
|(14) | Incorporated by reference to the Companys
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2002.
|    
|(15) | Filed herewith.                                                                                                           



| |   |                                                             
| | - | ------------------------------------------------------------
| | * | Management Contract or Compensatory Plan or
    Arrangement.

59