UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

GulfMark Offshore, Inc.

Delaware		76-0526032
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
Incorporation or organization)
10111 Richmond Avenue, Suite 340
Houston, Texas		77042
(Address of principal executive offices)		(Zip Code)

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

     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 filings 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 in S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the 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 o.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

Large accelerated filer o      Accelerated filer þ       Non-accelerated filer o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ

     The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter was $416,481,078 calculated by reference to the closing price of $27.31 for the registrant’s common stock on the NASDAQ National Market on that date.

     Number of shares of common stock outstanding as of March 9, 2006: 20,424,325.

The information called for by Part III, Items 10, 11, 12, 13 and 14, will be included in a
definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the end of
the fiscal year covered by this Form 10-K, and is incorporated herein by reference.
Exhibit Index Located on Page 64

 

 

TABLE OF CONTENTS

				Page
PART I
Items 1 and 2.		Business and Properties			3
		General Business			3
		The Company			3
Item 1A.		Risk Factors			11
Item 1B.		Unresolved Staff Comments			16
Item 3.		Legal Proceedings			16
Item 4.		Submission of Matters to a Vote of Security Holders			16
PART II
Item 5.		Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			17
Item 6.		Selected Consolidated Financial Data			18
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk			33
Item 8.		Consolidated Financial Statements and Supplementary Data			34
Item 9.		Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			55
Item 9A.		Controls and Procedures			55
Item 9B.		Other Information			59
PART III
Item 10.		Directors and Executive Officers of the Registrant			59
Item 11.		Executive Compensation			59
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			59
Item 13.		Certain Relationships and Related Transactions			59
Item 14.		Principal Accounting Fees and Services			59
PART IV
Item 15.		Exhibits and Financial Statement Schedules			59
General Form Contract - Keppel Sinmarine Pte Ltd
Subsidiaries
Consent of UHY Mann Frankfort Stein & Lipp CPAs LLP
Consent of Ernst & Young, LLP
Certification of B.A. Streeter Pursuant to Section 302
Certification of E.A. Guthrie Pursuant to Section 302
Certification of B.A. Streeter Pursuant to Section 906
Certification of E.A. Guthrie Pursuant to Section 906

PART I

ITEMS 1. and 2. Business and Properties

GENERAL BUSINESS

     GulfMark Offshore, Inc. is a Delaware corporation that, together with its subsidiaries, provides offshore marine services primarily to companies involved in offshore exploration and production of oil and natural gas. Unless otherwise indicated, references to “we”, “us”, “our” and the “Company” refer to GulfMark Offshore, Inc. and its subsidiaries. Our vessels transport materials, supplies and personnel to offshore facilities, as well as move and position drilling structures. The majority of our operations are conducted in the North Sea, with the balance in offshore Southeast Asia and the Americas. Periodically, we will contract vessels into other regions to meet our customers’ requirements.

     GulfMark Offshore, Inc. has the following operating segments: the North Sea, Southeast Asia and the Americas. Our chief operating decision maker regularly reviews financial information about each of these operating segments in deciding how to allocate resources and evaluate our performance. The business within each of these geographic regions has similar economic characteristics, services, distribution methods and regulatory concerns. All of the operating segments are considered reportable segments under Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information”. For financial information about our operating segments and geographic areas, see “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Segment Results” included in Part II, Item 7, and Note 9 to our Consolidated Financial Statements included in Part II, Item 8.

     Our principal executive offices are located at 10111 Richmond Avenue, Suite 340, Houston, Texas 77042, and our telephone number at that address is (713) 963-9522. We file annual, quarterly, and special reports, proxy statements and other information with the SEC. Our SEC filings are available free of charge to the public over the Internet on our website at http://www.gulfmark.com and at the SEC’s website at http://www.sec.gov. Filings are available on our website as soon as reasonably practicable after we electronically file or furnish them to the SEC. You may also read and copy any document we file at the SEC’s Public Reference Room at the following location: 100 F Street, NE, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

THE COMPANY

Offshore Marine Services Industry Overview

     Our customers employ our vessels to provide services supporting the construction, positioning and ongoing operation of offshore oil and natural gas drilling rigs and platforms. This industry employs various types of vessels, referred to broadly as offshore support vessels, or OSVs, that are used to transport materials, supplies, and personnel and position drilling structures. Offshore marine service providers are employed by oil and natural gas companies that are engaged in the offshore exploration and production of oil and natural gas and related services. Services provided by companies in this industry are performed in numerous locations worldwide. The North Sea, offshore Southeast Asia, offshore West Africa, offshore Middle East, offshore Brazil and the Gulf of Mexico are each major markets that employ a large number of vessels. Vessel usage is also significant in other international markets, including offshore India, offshore Australia, offshore Trinidad, the Persian Gulf and the Mediterranean Sea. The industry is relatively fragmented, with more than 20 major participants and numerous small regional competitors. We currently operate our fleet of 59 offshore supply vessels in the following regions: 34 vessels in the North Sea, 11 vessels offshore Southeast Asia, five vessels offshore Brazil, two vessels in the Mediterranean Sea, two vessels offshore India, two vessels in the Middle East, two vessels offshore Mexico and one offshore West Africa. The vessels in the Mediterranean Sea, offshore India, the Middle East and offshore West Africa are operated out of our North Sea region.

     Our business is directly impacted by the level of activity in worldwide offshore oil and natural gas exploration, development and production, which in turn is influenced by trends in oil and natural gas prices. Additionally, oil and natural gas prices are affected by a host of geopolitical and economic forces, including the fundamental principles of supply and demand. Although commodity prices have remained high by historical standards over the last several years, upstream expenditures by oil and gas exploration and development companies have been volatile. Beginning in the second half of 2004 and throughout 2005, oil and natural gas companies have increased their exploration and development activities, after reduced levels of activities were experienced in 2002 through early 2004. Each of the major geographic offshore oil and natural gas production regions has unique characteristics that influence the economics of exploration and production and consequently the market demand for vessels in support of these activities. While there is

some vessel interchangeability between geographic regions, barriers such as mobilization costs and vessel suitability restrict migration of some vessels between regions. This is most notably the case in the North Sea, where vessel design requirements dictated by the harsh operating environment restrict relocation of vessels into that market. These same design characteristics make the North Sea capable vessels unsuitable for certain underdeveloped areas where draft restrictions and, to a lesser degree, higher operating costs restrict migration out of the market. The effect of these restrictions on vessel movement is to segment various regions into separate markets.

Size of Vessel Fleet

     The size of our fleet has changed from 52 vessels on December 31, 2004 to 59 vessels on March 1, 2006. In March 2005, we took delivery of two new build vessels that are under long-term charters in Mexico. In May 2005, we signed a purchase agreement for a new vessel under construction in China, which we took delivery of in October 2005 to service the Southeast Asia region. Also, during 2005, our managed vessel fleet increased by four vessels to 11 as of March 1, 2006. The bareboat chartered vessel obtained in 2005 was returned in 2006. The following table summarizes the fleet changes since December 31, 2004:

					Bareboat
		Owned			Chartered			Managed			Total
		Vessels			Vessels			Vessels			Fleet
December 31, 2004		45			—			7				52
New Build Program		2			—			—				2
Vessel Purchase		1			—			—				1
Vessel Additions		—			1			3				4
December 31, 2005		48			1			10				59
Vessel Returns		—			(1	)		—				(1	)
Vessel Additions		—			—			1				1
March 1, 2006		48			0			11				59

Vessel Classifications

     Offshore support vessels generally fall into seven functional classifications derived from their primary or predominant operating characteristics or capabilities. However, these classifications are neither precise nor rigid, and it is not unusual for a vessel to fit into more than one of the categories. These functional classifications are:

•

Platform Supply Vessels, or PSVs, serve drilling and production facilities and support offshore construction and maintenance work. They are differentiated from other offshore support vessels by their cargo handling capabilities, particularly their large capacity and versatility. PSVs utilize space on deck and below deck and are used to transport supplies such as fuel, water, drilling fluids, equipment and provisions. PSVs range in size from 150’ to 200’. Large PSVs or LgPSVs, range up to 300’ in length, with a few vessels somewhat larger, and are particularly suited for supporting large concentrations of offshore production locations because of their large, clear after deck and below deck capacities. The majority of the LgPSVs we operate function primarily in this classification but are also capable of service in construction support.

•

Anchor Handling, Towing and Supply Vessels, or AHTSs, are used to set anchors for drilling rigs and to tow mobile drilling rigs and equipment from one location to another. In addition, these vessels typically can be used in limited supply roles when they are not performing anchor handling and towing services. They are characterized by shorter after decks and special equipment such as towing winches. Vessels of this type with less than 10,000 brake horsepower, or BHP, are referred to as small AHTSs or, SmAHTSs, while AHTSs in excess of 10,000 BHP are referred to as large AHTSs, or LgAHTSs. The most powerful North Sea Class AHTSs have upwards of 25,000 BHP. All our AHTSs can also function as PSVs.

•

Construction Support Vessels are vessels such as pipe-laying barges or specially designed vessels, such as pipe carriers, used to transport the large cargos of material and supplies required to support the construction and installation of offshore platforms and pipelines. A large number of our LgPSVs also function as pipe carriers. Our North Sea fleet has the distinction of being one of the only significant concentrations of pipe carrier capable vessels outside of Scandinavian control.

•

Standby Rescue Vessels, or Stby, perform a safety patrol function for an area and are required for all manned locations in the United Kingdom, or U.K., sector of the North Sea. These vessels typically remain on station to provide a safety backup to offshore

rigs and production facilities and carry special equipment to rescue personnel. They are equipped to provide first aid, shelter and, in some cases, function as supply vessels.

•

Crewboats, or Crew, transport personnel and cargo to and from production platforms and rigs. Older crewboats (early 1980s build) are typically 100’ to 120’ in length, and are designed for speed and to transport personnel. Newer crewboat designs are generally larger, 130’ to 185’ in length, and can be longer with greater cargo carrying capacities. Vessels in this category are also called fast supply vessels, or FSVs. They are used primarily to transport cargo on a time-sensitive basis. We do not currently operate any vessels in this category.

•

Specialty Vessels, or SpVs, generally have special features to meet the requirements of specific jobs. The special features can include large deck spaces, high electrical generating capacities, slow controlled speed and varied propulsion thruster configurations, extra berthing facilities and long-range capabilities. These vessels are primarily used to support floating production storing and offloading, or FPSOs; diving operations; remotely operated vehicles, or ROVs; survey operations and seismic data gathering; as well as oil recovery, oil spill response and well stimulation. Some of our owned vessels frequently provide specialty functions.

•

Utility Vessels are typically 90’ to 150’ in length and are used to provide limited crew transportation, some transportation of oilfield support equipment and, in some locations, standby functions. We do not currently operate any vessels in this category.

The North Sea Market

     We define the North Sea market as offshore Norway, Denmark, the Netherlands, Germany, Great Britain, Ireland, the Norwegian Sea and the area West of Shetlands. Historically, this has been the most demanding of all exploration frontiers due to harsh weather, erratic sea conditions, significant water depth and long sailing distances. Exploration and production operators in the North Sea market have typically been large and well-capitalized entities (such as major oil and gas companies and state-owned oil and gas companies), in large part because of the significant financial commitment required in this market. Recently, however, there have also been a number of independent operators who have begun to move into the North Sea. Projects in the North Sea tend to be fewer in number but larger in scope, with longer planning horizons than projects in regions with less demanding environments. Due to these factors, vessel demand in the North Sea has historically been more stable and less susceptible to abrupt swings than vessel demand in other regions.

     This market can be broadly divided into three areas: exploration, production platform support and field development or construction. Support of the more volatile exploration segment of the market represents the primary demand for AHTSs. While supply vessels support the exploration segment, they also support the production and field construction segments, which generally are not affected by the volatility in demand for the AHTSs.

     Our North Sea-based fleet is oriented toward supply vessels which work in the more stable segments of production platform support and field development or construction, and includes 30 owned (21 PSVs, 4 AHTSs, and 5 SpV vessels) and 11 managed PSVs. Onshore bases in Aberdeen, Scotland; Liverpool, England and Sandnes, Norway support these vessels. Vessels that are based in the North Sea but operate temporarily out of the region are included in our North Sea vessel count and related statistics, unless deployed to one of our other regions under long-term contracts.

     The North Sea market was generally a very stable market from the early 1990’s through late 2001 with minor periods of disruption caused by fluctuating expenditures for oil and natural gas exploration and development, primarily by the major oil companies that dominated this market. In late 2000, commodity prices and increased drilling activity resulted in improved vessel utilization and day rates through 2001 and into the first part of 2002. Subsequent to the terrorist attacks on September 11, 2001, both oil and natural gas prices remained significantly higher; however, despite these higher commodity price levels, exploration and development activity in the region did not increase accordingly. At the same time, there was an increase in the number of new build vessels delivered into the market in 2002 through 2004 which resulted in the 2003-2004 period having the lowest utilization in the region in the last decade. While the number of high capacity vessels in this market remained fairly constant over the last ten years at approximately two hundred, delivery of over four hundred vessels of the same design capacity have gone into service in other international markets or displaced older equipment in the North Sea. These displaced vessels have subsequently mobilized to other international markets, either permanently or for temporary assignments.

     There was also a transformation in the customer base in the region that began in 2003 as the major oil and natural gas companies disposed of prospects and mature producing properties in the North Sea to independent oil and natural gas companies. This was in part caused by legislative initiatives in the U.K., which made these properties attractive to the independents. The independent companies

typically had shorter horizons with regard to exploration and development activities than the major oil and natural gas companies, which in turn resulted in a decline in the availability of long-term contracts for vessel services at economically attractive day rates. The consequence of this transformation and curtailment of activities by the major companies was an increase in the number of vessels available in the spot market which in turn depressed both utilization of vessels and day rates. In the second quarter of 2004, an increase in long-term drilling rig contracts occurred in the North Sea, particularly in the Norwegian sector, which specifically related to the opening of the Barent Sea to exploration activities by the Norwegian government. In addition, several large projects including the Orman Lange, Snovhit and Alvheim Field developments resulted in the oil and gas companies that contracted the drilling rigs to tender for vessel services in support for these rigs. Late in the third quarter of 2004, utilization and day rates for vessels in the region began to improve with some consistency for the remainder of 2004.

     In 2005 there were significant improvements in industry fundamentals as the major oil and natural gas companies re-initiated capital expenditures in the North Sea as exploration activities have become more extensive and longer in duration. This has been evidenced by drilling rig commitments extending throughout 2006 and 2007 with some contracts into 2010. This, coupled with spending by the independents, created strong demand for vessels. Strong day rates and high utilization has continued through 2005 and into 2006.

     Even though this region typically has weaker periods in the winter months of December through February, with a few exceptions, utilization and day rates are expected to remain strong throughout these months. Forward visibility with regard to vessel demand over the balance of 2006 into 2007 is directly related to drilling and development activities in the region as well as construction work required in support of these activities and demands outside of the region which will draw vessels to other international markets. Geopolitical events, the demand for oil and natural gas in both mature and emerging countries and a host of other factors will influence the expenditures of both independent and major oil and gas companies in the near term; however, based on current conditions and the available information regarding future drilling plans for the region, we anticipate a healthy market throughout the balance of 2006 and into 2007. Currently we are constructing two new generation LgPSVs in Norway. Both of these vessels are scheduled to be delivered in 2007.

The Southeast Asia Market

     The Southeast Asia market is defined as offshore Asia bounded roughly on the west by the Indian subcontinent and on the north by China. This market includes offshore Brunei, Cambodia, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. The design requirements for vessels in this market are generally similar to the requirements of the shallow water Gulf of Mexico. However, advanced exploration technology and rapid growth in energy demand among many Pacific Rim countries have led to more remote drilling locations, which has increased both the overall demand in this market and the technical requirements for vessels. We believe that a number of exploration and production projects planned or underway could increase the future demand for offshore marine services in the Southeast Asia market.

     The Southeast Asia market differs country by country, but the competitive environment is broadly characterized by a large number of small companies, in contrast to many of the other major offshore exploration and production areas of the world, where a few large operators dominate the market. Affiliations with local companies are generally necessary to maintain a viable marketing presence. Our management has been involved in the region since the mid-1970s, and we currently maintain long-standing business relationships with a number of local companies. We currently have 11 vessels deployed in this market.

     Vessels in this market are typically smaller than those operating in areas such as the North Sea. However, the varying weather conditions, annual monsoons and long distances between supply centers in Southeast Asia have allowed for a variety of vessel designs to compete in this market, each suited for a particular set of operating parameters. Vessels designed for the Gulf of Mexico and other areas, where moderate weather conditions prevail, have historically made up the bulk of the Southeast Asia fleet. Demand for larger, newer and higher specification vessels is developing in the region where deepwater projects occur or where oil and natural gas companies employ larger fleets of vessels. This development led us to mobilize both the Highland Legend from the North Sea to this market in late 2002 and the Highland Patriot in early 2004 to meet the changing market in the region, as these vessels are larger than the typical vessels of the region. Additionally in 2004, we sold three of our older vessels serving Southeast Asia and in October 2005, we took delivery of a new vessel constructed in China, the Sea Intrepid.

     Changes in supply and demand dynamics have led, at times, to an excess number of vessels in markets such as the Gulf of Mexico. It is possible that vessels currently located in the Arabian/Persian Gulf area, West Africa or the Gulf of Mexico could relocate to Southeast Asia. However, not all vessels currently located in those regions would be able to operate in Southeast Asia. Furthermore, transferring a vessel from the Gulf of Mexico to this region would involve significant cash and opportunity costs. Offshore

exploration drilling has increased in the area and is expected to continue for several years. Currently, we are constructing six new generation AHTS vessels for the region and have purchased three additional new AHTS vessels, including the Sea Intrepid, that could also work there. Demand in the area remained strong throughout 2005.

The Americas Market

     We define the Americas market as offshore North, Central and South America. Historically, our activity in the Americas has been in Brazil; however, we now have two AHTS vessels offshore Mexico on five year primary term contracts with Pemex. Similar to the North Sea, the Brazilian market requires highly sophisticated vessels due to the harsh operating environment. We have been successful in meeting the market requirements through owned, managed and bareboat chartered vessels and will look to our existing and new build fleet to meet the expanding demand for vessels in this market.

     Over the last several years, the Brazilian government has opened up the petroleum industry to private investment. The early bid rounds resulted in extensive commitments by major international oil companies and consortiums of independents, many of whom have explored and to some extent will continue to explore the offshore blocks awarded in the lease sales. This created a demand for deepwater AHTSs, to some extent, and PSVs in support of the drilling and exploration activities that has been met primarily from mobilization of vessels from other regions. In addition, Petrobras, the Brazilian national oil company, continues to expand operations. This expansion has created, and could continue to create, additional demand for offshore support vessels. We have been active in bidding on additional work with both Petrobras and the consortiums.

     Currently, we operate five vessels in Brazil, including the Brazilian new build Austral Abrolhos, which was delivered in September 2004 and is contracted through May 2008 to Enterprise Oil do Brasil Ltda., a subsidiary of the Royal Dutch/Shell Group, in support of its Brazilian program in the Campos Basin. The Seapower has been operating in Brazil since 1995 under a contract with Petrobras, which runs into October 2007. The Highland Scout has been contracted to Petrobras since January 2000 and is contracted into April 2007. The North Stream and the Highland Warrior were mobilized to the region during 2004 and are contracted through June 2006 and August 2008, respectively.

     We have two new build vessels, Coloso and Titan, under five-year primary-term contracts to Pemex in the Gulf of Mexico. This represents our first entry into the Mexican market and is anticipated to create additional future opportunities in the Gulf of Mexico as Pemex increases the size and capability of the vessel fleet required to support its drilling operations. The vessels arrived in Mexico from the shipyard in Singapore and began their contracts in late May 2005.

Other Markets

     We have contracted our vessels outside of our operating segment regions principally on short-term charters in places such as offshore West Africa and the Mediterranean region. We currently have a managed vessel in addition to one of our owned vessels working in support of drilling operations offshore India, one of our owned vessels operating offshore Nigeria, two owned vessels operating in the Middle East and two owned vessels operating in the Mediterranean region. We look to our core markets for the bulk of our term contracts; however, when the economics of a contract are attractive, or we believe it is strategically advantageous, we will operate our vessels in markets outside of our core regions. The operations of these vessels are managed through offices in the North Sea region.

New Vessel Construction and Acquisition Program

     During the period 2000-2005, we added thirteen new vessels to the fleet as part of our long range growth strategy—nine in the North Sea, three in the Americas and one offshore Southeast Asia. In continuation of our growth strategy, we committed in 2005 to build six new 10,600 BHP AHTS vessels for a total cost of approximately $140 million. The vessels are of a new design we developed in conjunction with the builder and which incorporates Dynamic Positioning 2 (DP-2) certification. They have a large carrying capacity anticipated to be in excess of 2,700 tons. Keppel Singmarine Pte, Ltd. will build the vessels in Singapore to meet the growing demand of our customer base offshore Southeast Asia. The first vessel is scheduled to be delivered in the fourth quarter of 2007 followed by one approximately each quarter thereafter, with the final delivery in the fourth quarter of 2008. At the end of 2005, we had spent approximately $20.2 million on this new vessel construction program.

     As a complement to the six new vessels in the construction program, we are acquiring two vessels already under construction. The first vessel is an identical sister ship to the new build delivered in 2005 for the Southeast Asia region. Currently being built in China, it is a 5,150 BHP, 70 ton bollard pull AHTS with an estimated cost below $10 million. Delivery is expected toward the middle of

2006. The second acquired vessel is a result of our exercise of a first right of refusal granted under the previous purchase agreement. This vessel is currently being built by Jaya Shipbuilding and Engineering PTE LTD at their Batam, Indonesia yard near Singapore. It is a 70 meter, 5,500 BHP, approximately 70 ton bollard pull, DP-2 AHTS with an estimated cost of $14.5 million and is expected to be delivered during the fourth quarter of 2006. The scheduled delivery dates of these vessels fit well with our new build program delivery schedule with two vessels delivering in 2006 and the first of the Singapore new builds delivering in 2007.

     We also agreed to participate in a joint venture for the construction of two new design large platform supply vessels, 4,850 deadweight ton diesel electric powered Aker PSV 09 designs, at an estimated cost of $30 million for each vessel with delivery in 2007. Gulf Offshore N.S. Ltd (U.K.), or one of our other North Sea region affiliates, will be the majority investor with the option and intent to purchase 100% of the vessels. At the end of 2005, we purchased 100% of the first vessel out of the joint venture. The construction cost is based on a fixed contract amount denominated in Norwegian kroner. On September 30, 2005, we entered into a forward contract to minimize our foreign currency exchange risk, which is designated as a fair value hedge and expected to be highly effective as the terms of the forward contract are generally the same as the purchase commitment. Any gains or losses resulting from the changes in the fair value would adjust the asset value.

     Interest is capitalized in connection with the construction of the vessels. During 2005 and 2004, $0.8 million and $1.6 million, respectively, was capitalized in connection with the construction of vessels.

Our Fleet

     Our existing fleet as of March 1, 2006 is 59 vessels. Of these vessels, 48 are owned by us (see table below) and 11 are under management for other owners.

				Type						Length		BHP				DWT
Fleet		Vessel		(a)		Flag		Built		(feet)		(b)				(c)
NORTH SEA BASED		Highland Bugler		LgPSV		UK		2002		221			5,450				3,115
		Highland Champion		LgPSV		UK		1979		265			4,800				3,910
		Highland Citadel		LgPSV		UK		2003		236			5,450				3,200
		Highland Drummer		LgPSV		UK		1997		221			5,450				3,115
		Highland Eagle		LgPSV		UK		2003		236			5,450				3,200
		Highland Fortress		LgPSV		UK		2001		236			5,450				3,200
		Highland Monarch		LgPSV		UK		2003		221			5,450				3,115
		Highland Navigator		LgPSV		UK		2002		275			9,600				4,250
		Highland Pioneer		LgPSV		UK		1983		224			5,400				2,500
		Highland Piper		LgPSV		UK		1996		221			5,450				3,115
		Highland Pride		LgPSV		UK		1992		265			6,600				3,080
		Highland Rover		LgPSV		UK		1998		236			5,450				3,200
		Highland Star		LgPSV		UK		1991		265			6,600				3,075
		North Challenger		LgPSV		Norway		1997		221			5,450				3,115
		North Fortune		LgPSV		Norway		1983		264			6,120				3,366
		North Mariner		LgPSV		Norway		2002		275			9,600				4,400
		North Prince		LgPSV		UK		1978		259			6,000				2,717
		North Traveller		LgPSV		Norway		1998		221			5,450				3,115
		North Truck		LgPSV		Norway		1983		265			6,120				3,370
		North Vanguard		LgPSV		Norway		1990		265			6,600				4,000
		Safe Truck		LgPSV		UK		1996		221			5,450				3,115
		Highland Courage		AHTS		UK		2002		260			16,320				2,750
		Highland Endurance		AHTS		UK		2003		260			16,320				2,750
		Highland Valour		AHTS		UK		2003		260			16,320				2,750
		North Crusader		AHTS		Panama		1984		236			12,000				2,064
		Clwyd Supporter		SpV		UK		1984		266			10,700				1,350
		Highland Spirit		SpV		UK		1998		202			6,000				1,800
		Highland Sprite		SpV		UK		1986		194			3,590				1,442
		Sefton Supporter		SpV		UK		1971		250			1,620				1,219
		Sentinel		SpV		UK		1979		266			4,600				4,141
SOUTHEAST ASIA BASED		Highland Guide		LgPSV		Panama		1999		218			4,640				2,800
		Highland Legend		PSV		Panama		1986		194			3,600				1,442
		Highland Patriot		LgPSV		Panama		1982		233			4,800				2,649
		Sea Diligent		SmAHTS		Panama		1981		192			4,610				1,219
		Sea Eagle		SmAHTS		Panama		1976		185			3,850				1,215
		Sea Endeavor		SmAHTS		Panama		1981		191			3,900				1,000
		Sea Explorer		SmAHTS		Panama		1981		192			5,750				1,500
		Sea Intrepid		SmAHTS		Panama		2005		191			5,150				1,500
		Sea Searcher		SmAHTS		Panama		1976		185			3,850				1,215
		Sem Courageous		SmAHTS		Malaysia		1981		191			3,900				1,220
		Sem Valiant		SmAHTS		Malaysia		1981		191			3,900				1,220
AMERICAS BASED		Austral Abrolhos(d)		AHTS		Brazil		2004		215			7,100				2,000
		Highland Scout		LgPSV		Panama		1999		218			4,640				2,800
		Highland Warrior		LgPSV		Panama		1981		265			5,300				4,049
		North Stream		LgPSV		Norway		1998		276			9,600				4,585
		Seapower		SpV		Panama		1974		222			7,040				1,205
		Coloso		SmAHTS		Mexico		2005		199			5,916				1,674
		Titan		SmAHTS		Mexico		2005		199			5,916				1,674

(a)Legend:		LgPSV — Large platform supply vessel
		PSV — Platform supply vessel
		AHTS — Anchor handling, towing and supply vessel
		SmAHTS — Small anchor handling, towing and supply vessel
		SpV — Specialty vessel, including towing and oil spill response

(b)		Brake horsepower.
(c)		Deadweight tons.

(d)

The Austral Abrolhos is subject to an annual right of its charterer to purchase the vessel during the term of the charter, which commenced May 2, 2003 and, subject to the charterer’s right to extend, terminates May 2, 2016, at a purchase price in the first year of $26.8 million declining to an adjusted purchase price of $12.9 million in the thirteenth year.

     The table above does not include 11 managed vessels.

Customers, Contract Terms and Competition

     Our principal customers are major integrated oil and natural gas companies, large independent oil and natural gas exploration and production companies working in international markets, and foreign government-owned or controlled oil and gas companies. Additionally, our customers also include companies that provide logistic, construction and other services to such oil and gas companies and foreign government organizations. The contracts are industry standard time charters for periods ranging from a few days or months to more than five years. While certain contracts do contain cancellation provisions, the contracts are generally not cancelable except for unsatisfactory performance by the vessel. During 2005, under multiple contracts in the ordinary course of business, one customer, BP, accounted for 11.0% of total consolidated revenues. No other single customer accounted for 10% or more of our total consolidated revenues for 2005.

     Contract or charter durations vary from single-day to multi-year in length, based upon many different factors that vary by market. Additionally, there are “evergreen” charters (also known as “life of field” or “forever” charters), and at the other end of the spectrum, there are “spot” charters and “short duration” charters, which can vary from a single voyage to charters of less than six months. Longer duration charters are more common where equipment is not as readily available or specific equipment is required. In the North Sea, multi-year charters have been more common and constitute a significant portion of that market. Term charters in the Southeast Asia region are less common than in the North Sea and generally less than two years in length. In addition, charters for vessels in support of floating production are typically “life of field” or “full production horizon charters”. As a result of options and frequent renewals, the stated duration of charters may have little correlation with the length of time the vessel is actually contracted to a particular customer.

     Bareboat charters are contracts for vessels, generally for a term in excess of one year, whereby the owner transfers all market exposure for the vessel to the charterer in exchange for an arranged fee. The charterer has the right to market the vessel without direction from the owner. As of March 1, 2006 we have no bareboat chartered vessels in our fleet.

     Managed vessels add to the market presence of the manager but provide limited direct financial contribution. Management fees are typically based on a per diem rate and are not subject to fluctuations in the charter hire rates. The manager is typically responsible for disbursement of funds for operating the vessel on behalf of the owner. Depending on the level of service provided by the manager, fees for services are generally less than $10,000 per month per vessel. Currently, we have 11 vessels under management.

     Substantially all of our charters are fixed in British pounds, Norwegian kroner, Brazilian reais or U.S. dollars. We attempt to reduce currency risk by matching each vessel’s contract revenue to the currency in which its operating expenses are incurred. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Currency Fluctuations and Inflation.”

     We compete with approximately 10-15 companies in the North Sea market and numerous small and large competitors in the Southeast Asia and Americas markets principally on the basis of suitability of equipment, price and service. Also, in certain foreign countries, preferences are given to vessels owned by local companies. We have attempted to mitigate some of the impact of such preferences through affiliations with local companies. Some of our competitors have significantly greater financial resources than we do.

Fleet Availability

     A portion of our available fleet is committed under contracts of various terms. The following table outlines the percentage of our forward days under contract as of March 1, 2005 and March 1, 2006:

		As of March 1, 2006								As of March 1, 2005
		2006				2007				2005				2006
		Vessel Days				Vessel Days				Vessel Days				Vessel Days
North Sea-Based Fleet			82.6	%			41.9	%			61.3	%			40.6	%
Southeast Asia-Based Fleet			42.7	%			9.9	%			59.9	%			12.7	%
Americas-Based Fleet			92.8	%			73.5	%			96.6	%			78.5	%
Overall Fleet			75.0	%			39.2	%			65.8	%			40.3	%

     These commitments provide us with a forward view of vessel EBITDA in the respective periods based on the contract rates that are in effect on each of the contracts comprising the forward days less the estimated costs of operating the vessels in each geographical area. The increase in the percentage of contracted days at March 1, 2006, as compared to March 1, 2005, for the current year is

primarily a reflection of increased drilling and exploration activity in late 2005 and continuing into 2006, which resulted in higher demand for support vessels.

Environmental and Government Regulation

     We must comply with extensive government regulation in the form of international conventions, federal and state laws and regulations in jurisdictions where our vessels operate and/or are registered. These conventions, laws and regulations govern matters of environmental protection, worker health and safety, vessel and port security, and the manning, construction and operation of vessels. We believe that we are in material compliance with all applicable laws and regulations. The International Maritime Organization, or IMO, recently made the regulations of the International Safety Management Code, or ISM Code, mandatory. The ISM Code provides an international standard for the safe management and operation of ships, pollution prevention and certain crew and vessel certifications which became effective on July 1, 2002. IMO has recently adopted the International Ship & Port Facility Security Code, or ISPS Code, which became effective on July 1, 2004. The ISPS Code provides that owners or operators of certain vessels and facilities must provide security and security plans for their vessels and facilities and obtain appropriate certification of compliance. We believe all of our vessels presently are certificated in accordance with ISPS Code. The risks of incurring substantial compliance costs, liabilities and penalties for non-compliance are inherent in offshore marine operations. Compliance with environmental, health and safety laws and regulations increases our cost of doing business. Additionally, environmental, health and safety laws change frequently. Therefore, we are unable to predict the future costs or other future impact of these laws on our operations. There is no assurance that we can avoid significant costs, liabilities and penalties imposed as a result of governmental regulation in the future.

Seasonality

     Operations in the North Sea are generally at their highest levels during the months from April to August and at their lowest levels during November to February. Vessels operating offshore Southeast Asia are generally at their lowest utilization rates during the monsoon season, which moves across the Asian continent between September and early March. The actual monsoon season for a specific Southeast Asian location is about two months. In addition, operations in any market may be affected by unusually long or short construction seasons due to, among other things, abnormal weather conditions, as well as market demand associated with increased drilling and development activities.

Employees

     At December 31, 2005, we had 1,212 employees located in the United States, the United Kingdom, Norway, Southeast Asia, Brazil and other areas depending on vessel location. Through our contract with a crewing agency, we participate in the negotiation of collective bargaining agreements for 953 contract crew members who are members of two North Sea unions, under evergreen employment agreements, and a Brazilian union. Wages are renegotiated annually in June for the North Sea union. We have no other collective bargaining agreements; however, we do employ crew members who are members of national unions but we do not participate in the negotiation of these collective bargaining agreements. Relations with our employees are considered satisfactory. To date, our operations have not been interrupted by strikes or work stoppages.

Properties

     Our principal executive offices are located in Houston, Texas. For local support, we have offices and warehouse facilities in: Singapore; Aberdeen, Scotland; Liverpool, England; Sandnes, Norway; Macae, Brazil and Paraiso, Mexico. All facilities, except one owned facility in Aberdeen, Scotland, are leased. Our operations generally do not require highly specialized facilities, and suitable facilities are generally available on a lease basis as required.

ITEM 1A. Risk Factors

We rely on the oil and natural gas industry, and volatile oil and natural gas prices impact demand for our services.

     Demand for our services depends on activity in offshore oil and natural gas exploration, development and production. The level of exploration, development and production activity is affected by factors such as:

	•		prevailing oil and natural gas prices;
	•		expectations about future prices;
	•		the cost of exploring for, producing and delivering oil and natural gas;

	•		the sale and expiration dates of available offshore leases;
	•		demand for petroleum products;
	•		current availability of oil and natural gas resources;
	•		the rate of discovery of new oil and natural gas reserves in offshore areas;
	•		local and international political and economic conditions;
	•		technological advances; and
	•		ability of oil and natural gas companies to generate or otherwise obtain funds for capital.

     During recent years, the level of offshore exploration, development and production activity has been volatile. Currently, there is a period of high prices for oil and natural gas, and oil and natural gas companies have increased their exploration and development activities. This activity increase began in the second half of 2004 and continued into 2005 and early 2006 after reduced levels of activity were experienced in 2002-2004 despite high prices for oil and natural gas during that period. A decline in the worldwide demand for oil and natural gas or prolonged low oil or natural gas prices in the future below historical oil and gas prices, however, would likely result in reduced exploration and development of offshore areas and a decline in the demand for our offshore marine services. Any such decrease in activity is likely to reduce our day rates and our utilization rates and, therefore, could have a material adverse effect on our financial condition and results of operations.

     An increase in the supply of offshore support vessels would likely have a negative effect on charter rates for our vessels, which could reduce our earnings.

     Charter rates for marine support vessels depend in part on the supply of the vessels. Excess vessel capacity in the industry may result from:

	•		constructing new vessels;
	•		moving vessels from one offshore market area to another; or
	•		converting vessels formerly dedicated to services other than offshore marine services.

     In the last ten years, construction of vessels of the type operated by us for use in the North Sea and elsewhere has significantly increased. The addition of new capacity to the worldwide offshore marine fleet is likely to increase competition in those markets where we presently operate which, in turn, could reduce day rates, utilization rates and operating margins which would adversely affect our financial condition and results of operations.

     Government regulation and environmental risks reduce our business opportunities and increase our costs.

     We must comply with extensive government regulation in the form of international conventions, federal and state laws and regulations in jurisdictions where our vessels operate and are registered. These conventions, laws and regulations govern:

	•		oil spills and other matters of environmental protection;
	•		worker health, safety and training;
	•		construction and operation of vessels; and
	•		vessel and port security.

     We believe that we are in compliance with the laws and regulations to which we are subject. We are not a party to any material pending regulatory litigation or other proceeding and we are unaware of any threatened litigation or proceeding, which, if adversely determined, would have a material adverse effect on our financial condition or results of operations. However, the risks of incurring substantial compliance costs, liabilities and penalties for noncompliance are inherent in offshore marine services operations. Compliance with environmental, health, safety and vessel and port security laws increases our costs of doing business. Additionally, environmental, health, safety and vessel and port security laws change frequently. Therefore, we are unable to predict the future costs or other future impact of environmental, health, safety and vessel and port security laws on our operations. There can be no assurance that we can avoid significant costs, liabilities and penalties imposed on us as a result of government regulation in the future.

     We are subject to hazards customary for the operation of vessels that could adversely affect our financial performance if we are not adequately insured or indemnified.

     Our operations are subject to various operating hazards and risks, including:

•

catastrophic marine disaster;

•

adverse sea and weather conditions;

•

mechanical failure;

•

navigation errors;

•

collision;

•

oil and hazardous substance spills, containment and clean up;

•

labor shortages and strikes;

•

damage to and loss of drilling rigs and production facilities; and

•

war, sabotage and terrorism risks.

     These risks present a threat to the safety of personnel and to our vessels, cargo, equipment under tow and other property, as well as the environment. We could be required to suspend our operations or request that others suspend their operations as a result of these hazards. In such event, we would experience loss of revenue and possibly property damage, and additionally, third parties may have significant claims against us for damages due to personal injury, death, their property damage, pollution and loss of business.

     We maintain insurance coverage against substantially all of the casualty and liability risks listed above, subject to deductibles and certain exclusions. We have renewed our primary insurance program for the insurance year 2006-2007, and have negotiated terms for renewal in 2007-2008 for our primary coverage. Additionally, there is no assurance that our insurance coverage will be available beyond the renewal periods, adequate to cover future claims that may arise.

     Substantially all our revenues are derived from our international operations and those operations are subject to government regulation and operating risks.

     We derive substantially all of our revenues from foreign sources. We therefore face risks inherent in conducting business internationally, such as:

	•		foreign currency exchange fluctuations or imposition of currency exchange controls;
	•		legal and government regulatory requirements;
	•		difficulties and costs of staffing and managing international operations;
	•		language and cultural differences,
	•		potential vessel seizure or nationalization of assets;
	•		import-export quotas or other trade barriers;
	•		difficulties in collecting accounts receivable and longer collection periods;
	•		political and economic instability;
	•		imposition of currency exchange controls; and
	•		potentially adverse tax consequences.

     In the past, these conditions or events have not materially affected our operations. However, we cannot predict whether any such conditions or events might develop in the future. Also, our subsidiary structure and our operations are in part based on certain assumptions about various foreign and domestic tax laws, currency exchange requirements and capital repatriation laws. While we believe our assumptions are correct, there can be no assurance that taxing or other authorities will reach the same conclusion. If our assumptions are incorrect, or if the relevant countries change or modify such laws or the current interpretation of such laws, we may suffer adverse tax and financial consequences, including the reduction of cash flow available to meet required debt service and other obligations. Any of these factors could materially adversely affect our international operations and, consequently, our business, operating results and financial condition.

     Our international operations are vulnerable to currency exchange rate fluctuations and exchange rate risks.

     We are exposed to foreign currency exchange rate fluctuations and exchange rate risks as a result of our foreign operations. To minimize the financial impact of these risks, we attempt to match the currency of our debt and operating costs with the currency of the revenue streams. We occasionally enter into forward foreign exchange contracts to hedge specific exposures, but we do not speculate in foreign currencies. Because we conduct a large portion of our operations in foreign currencies, any increase in the value of the U.S. dollar in relation to the value of applicable foreign currencies could potentially adversely affect our operating revenues when translated into U.S. dollars.

     Vessel construction and repair projects are subject to risks, including delays and cost overruns, that could have an adverse impact on our results of operations.

     Our vessel construction and repair projects are subject to the risks of delay and cost overruns inherent in any large construction project, including:

	•		shortages of equipment;
	•		unforeseen engineering problems;
	•		work stoppages;
	•		weather interference;
	•		unanticipated cost increases; and
	•		shortages of materials or skilled labor.

     Significant cost overruns or delays in connection with our repair projects would adversely affect our financial condition and results of operations. Significant delays could also result in penalties under, or the termination of, most of the long-term contracts under which we plan to operate our vessels.

     Our current operations and future growth may require significant additional capital, and our substantial indebtedness could impair our ability to fund our capital requirements.

     Expenditures required for the repair, certification and maintenance of a vessel typically increase with vessel age. These expenditures may increase to a level at which they are not economically justifiable. We cannot assure you that we will have sufficient resources to maintain our fleet either by extending the economic life of existing vessels through major refurbishment or by acquiring new or used vessels.

     Our industry is highly competitive, which depresses vessel prices and utilization and adversely affects our financial performance.

     We operate in a competitive industry. The principal competitive factors in the marine support and transportation services industry include:

	•		price, service and reputation of vessel operations and crews;
	•		national flag preference;
	•		operating conditions;
	•		suitability of vessel types;
	•		vessel availability;
	•		technical capabilities of equipment and personnel;
	•		safety and efficiency;
	•		complexity of maintaining logistical support; and
	•		cost of moving equipment from one market to another.

     Many of our competitors have substantially greater resources than we have. Competitive bidding and downward pressures on profits and pricing margins could adversely affect our business, financial condition and results of operations.

     The operations of our fleet may be subject to seasonal factors.

     Operations in the North Sea are generally at their highest levels during the months from April to August and at their lowest levels during November to February. Vessels operating offshore Southeast Asia are generally at their lowest utilization rates during the monsoon season, which moves across the Asian continent between September and early March. The actual monsoon season for a

specific Southeast Asian location is about two months. In addition, operations in any market may be affected by unusually long or short construction seasons due to, among other things, abnormal weather conditions, as well as market demand associated with increased drilling and development activities.

     We are subject to war, sabotage and terrorism risk.

     War, sabotage, and terrorist attacks or any similar risk may affect our operations in unpredictable ways, including changes in the insurance markets, disruptions of fuel supplies and markets, particularly oil, and the possibility that infrastructure facilities, including pipelines, production facilities, refineries, electric generation, transmission and distribution facilities, could be direct targets of, or indirect casualties of, an act of terror. War or risk of war may also have an adverse effect on the economy. Terrorist attacks have made it difficult to obtain insurance coverage, the costs for which has increased and could continue to increase. We will evaluate the need to maintain this coverage as it applies to our fleet in the future. Instability in the financial markets as a result of war, sabotage or terrorism could also affect our ability to raise capital and could also adversely affect the oil, gas and power industries and restrict their future growth.

     We depend on key personnel.

     We depend to a significant extent upon the efforts and abilities of our executive officers and other key management personnel. There is no assurance that these individuals will continue in such capacity for any particular period of time. The loss of the services of one or more of our executive officers or key management personnel could adversely affect our operations.

     We have previously identified material weaknesses under the Sarbanes-Oxley Act relating to the effectiveness of our internal controls over financial reporting and we may identify additional material weaknesses in the future.

     As a result of Section 404 of the Sarbanes-Oxley Act, or Sarbanes-Oxley, and the rules issued thereunder by the SEC and the Public Company Accounting Oversight Board, or PCAOB, we are required to include a report on our internal controls over financial reporting with our annual report on Form 10-K beginning with the Form 10-K for the year ended December 31, 2004. Our report must include an assessment by management on the effectiveness of our internal controls as well as a report from our independent registered public accounting firm attesting to management’s assessment. Further, our report is required to include a disclosure of any “material weakness” in our internal controls over financial reporting we have identified. Management’s report on the effectiveness of our internal controls is contained in Part II, Item 9A(b), and the report from our independent registered public accounting firm attesting to management’s assessment is contained in Part II, Item 9A(e).

     We assessed the effectiveness of our internal control over financial reporting at December 31, 2005 and 2004, and in making this assessment, used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework in accordance with the standards of the PCAOB. As previously reported, three material weaknesses were identified as of December 31, 2004. A material weakness was identified related to the financial statement close process, including insufficient controls over properly analyzing and reconciling inter-company accounts, maintaining appropriate support and analyses of certain non-routine accruals, properly analyzing certain deferred cost accounts, and properly assessing the accounting and reporting implications related to new contractual agreements. We identified a second material weakness related to the accounting for the effects of foreign currencies, including insufficient controls over the analysis of the foreign currency translation and transaction impact on inter-company amounts, as well as amounts owed to third parties denominated in non-functional currencies. A third material weakness was identified related to accounting for income taxes associated with new international operations, including insufficient controls over the proper identification and application of the relevant Brazilian tax rules to the calculation of the tax provision of our new Brazilian operations. Our lack of adequate accounting and tax resources, in terms of size, technical expertise and institutional knowledge (due to unusually high levels of personnel turnover in the finance and accounting organization) to address certain of the financial and tax reporting aspects of our multi-national operations, was the underlying cause of these material weaknesses.

     In response to the material weaknesses identified in 2004, we implemented a remediation program, including the establishment of additional controls that are intended to strengthen our financial reporting and to specifically address the identified material weaknesses as follows:

•

Financial statement close process. As previously reported, we have enhanced our corporate accounting function by creating and filling several new positions, including those of Accounting Manager and Assistant Controller-Financial Reporting, to provide greater review and analysis of financial results at both the corporate and subsidiary levels. In the second quarter of 2005, we filled two newly created positions of Internal Audit Director and Information Technology Director. The Internal Audit Director has coordinated the ongoing monitoring of Sarbanes-Oxley compliance and has performed financial and operational audits. The Information Technology Director will implement a global information

technology strategy for us, and has played a major role in the evaluation of our information system as we look to improve the automation of both foreign currency and inter-company transactions. Overall, newly hired staff has and should continue to bring experience, stability and the skills related to the review and analysis of complex activity in large multi-national companies. Beginning in the first quarter of 2005, an outside consultant evaluated and assisted us in establishing improved controls over the process associated with inter-company transactions. The consultant also assisted in the training of the new and existing personnel in the execution of the controls and processes established. As of the end of 2005, this material weakness has been remediated.

	•		Translation and transaction effects of foreign currency exchange. The outside consultant also assisted us in implementing procedures to continue to analyze the foreign currency impact on our inter-company and third party transactions. In addition, the consultant trained our staff to identify, segregate, analyze and measure the foreign currency impact on future transactions. Where these processes cannot be automated, we have established processes to ensure proper review of the required calculations in the interim, until it is determined whether or not a new information system can automate the calculations. These steps will enable the appropriate measurement of the foreign currency translation and transaction impact on our consolidated financial statements as identified in the material weakness. As of the end of 2005, this material weakness has been remediated.
	•		Taxes related to new Brazilian operations. During 2005, there has been tremendous effort made to improve the internal control processes related to taxes and ensure an appropriate level of research, analysis and review of complex international tax issues associated with our existing and future tax jurisdictions by proactively training staff, reviewing tax consequences of transactions, improving documentation, and continuing to engage third-party tax service providers for more complex areas of our income tax accounting. We also hired a Corporate Tax Director who began working at GulfMark mid January 2006. The Corporate Tax Director has extensive international tax experience with the majority of that experience in oil and gas services industry, including the marine transportation business segment. This position is responsible for the analysis and monitoring of taxes in all of our existing tax jurisdictions and related tax accounting guidance and review. As of the end of 2005, this material weakness has been remediated.

     We believe that these actions and resulting improvement in controls will strengthen our disclosure controls and procedures, as well as our internal control over financial reporting, and have remediated the material weaknesses that we identified in our internal control over financial reporting at December 31, 2004. We estimate that the remedial steps outlined above cost us approximately $0.7 million in 2005, excluding reallocation of internal resources. For information on our disclosure controls, and internal controls over financial reporting, at December 31, 2005, see Item 9A “Controls and Procedures.”

     Although we have taken the foregoing steps to correct the identified internal control deficiencies, these measures may not ensure that we will implement and maintain adequate controls over our financial reporting in the future. Any failure to implement required new or improved controls, or difficulties encountered in their implementations, could cause us to fail to meet our future reporting obligations. In addition, we may in the future identify further material weaknesses or significant deficiencies in our internal controls over financial reporting.

ITEM 1B. Unresolved Staff Comments

NONE

ITEM 3. Legal Proceedings

General

     Various legal proceedings and claims that arise in the ordinary course of business may be instituted or asserted against us. Although the outcome of litigation cannot be predicted with certainty, we believe, based on discussions with legal counsel and in consideration of reserves recorded, that an unfavorable outcome of these legal actions would not have a material adverse effect on our consolidated financial position and results of our operations. We cannot predict whether any such claims may be made in the future.

ITEM 4. Submission of Matters to a Vote of Security Holders

NONE

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     Our common stock is traded on the NASDAQ National Market under the symbol “GMRK.” The following table sets forth the range of high and low sales prices for our common stock for the periods indicated, as reported:

		2005								2004
		High				Low				High				Low
Quarter ended March 31,		$	28.34			$	19.55			$	17.15			$	13.28
Quarter ended June 30,		$	28.14			$	21.19			$	18.59			$	13.08
Quarter ended September 30,		$	32.73			$	26.49			$	17.72			$	13.61
Quarter ended December 31,		$	34.84			$	26.19			$	22.75			$	16.00

     For the period from January 1, 2006 through March 8, 2006, the range of low and high sales prices of our common stock was $25.54 to $34.07, respectively. On March 8, 2006, the closing sale price of our common stock as reported by the NASDAQ National Market was $26.05 per share. At March 8, 2006, there were 565 stockholders of record.

     We have not declared or paid cash dividends during the past five years. Pursuant to the terms of the indenture under which the Senior Notes (as hereinafter defined) are issued, we may be restricted from declaring or paying dividends; however, we currently anticipate that, for the foreseeable future, any earnings will be retained for the growth and development of our business. The declaration of dividends is at the discretion of our Board of Directors. Our dividend policy will be reviewed by the Board of Directors at such time as may be appropriate in light of future operating conditions, dividend restrictions of subsidiaries and investors, financial requirements, general business conditions and other factors.

     Equity compensation plan information required by this item may be found in Note 7 of the “Notes to the Consolidated Financial Statements” in Part II, Item 8 herein.

     On July 21, 2004, we sold $160,000,000 of 7.75% Senior Notes due 2014, or the Old Notes, to Lehman Brothers, Inc., Jefferies & Company, Inc. and Morgan Stanley & Co. The Old Notes were sold privately under exemptions from registration from the provisions of Section 5 of the Securities Act provided by Rule 144A and Regulation S. As a condition to the sale of the Old Notes, we entered into a registration rights agreement with the initial purchasers, pursuant to which we filed a registration statement on Form S-4, Reg. No. 333-120521, enabling holders of the Old Notes to exchange them for publicly registered notes, or the Exchange Notes, with essentially the same terms. On June 10, 2005, we closed the exchange offer for the Old Notes.

     The net proceeds from our sale of the Old Notes were approximately $156.1 million. We used a portion of the proceeds from the sale of the Old Note (i) to repurchase $130,000,000 aggregate principal amount and to pay accrued and unpaid interest of our then outstanding 8.75% senior notes due 2008 in the tender offer for those notes and their subsequent redemption, (ii) to repay a portion of indebtedness under our credit facilities, (iii) to pay fees and expenses, and (iv) for general corporate purposes, including the payment of other debt. We did not receive any proceeds from the exchange offer.

     Lehman Brothers Inc. acted as sole dealer-manager in connection with the tender offer for our 8.75% senior notes due 2008 and was an initial purchaser in the offering of the Old Notes. Lehman Brothers Inc. received customary fees in the amount of $0.3 million and $1.9 million, respectively, plus reimbursement of certain expenses for those services.

     See also Note 4 to our Consolidated Financial Statements “Long Term Debt”.

ITEM 6. Selected Consolidated Financial Data

     The data that follows should be read in conjunction with our Consolidated Financial Statements and the notes thereto included in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, included in Item 7.

		Year Ended December 31
		2005				2004				2003				2002				2001
		(Dollars in thousands)
Operating Data:
Revenues		$	204,042			$	139,312			$	129,900			$	133,919			$	114,063
Direct operating expenses			82,803				71,239				69,836				58,007				43,403
Drydock expense (a)			9,192				8,966				—				—				—
Bareboat charter expense			3,864				1,410				6,505				9,287				8,931
General and administrative expenses			19,572				15,666				10,801				10,027				7,623
Depreciation and amortization			28,875				26,137				28,031				21,414				15,327
Operating income			59,736				15,894				14,727				35,184				38,779
Interest expense			(19,017	)			(17,243	)			(12,988	)			(12,149	)			(12,770	)
Interest income			569				276				238				1,211				1,201
Debt refinancing costs			—				(6,524	)			—				—				—
Gain on sale of assets			—				2,282				16				181				—
Other income (expense), net			484				1,517				(1,267	)			2,493				(1,501	)
Income tax (provision) benefit			(3,382	)			6,476				(192	)			(2,959	)			12,213
Income before cumulative effect of change in accounting principle		$	38,390			$	2,678			$	534			$	23,961			$	37,922
Cumulative effect on prior years of change in accounting principle – net of $773 related tax effect (a)			—				(7,309	)			—				—				—
Net income (loss)		$	38,390			$	(4,631	)		$	534			$	23,961			$	37,922
Amounts per common share (basic):
Income before cumulative effect of change in accounting principle		$	1.92			$	0.13			$	0.03			$	1.25			$	2.31
Cumulative effect on prior years of change in accounting principle			—			$	(0.36	)			—				—				—
Net income (loss)		$	1.92			$	(0.23	)		$	0.03			$	1.25			$	2.31
Weighted average common shares (basic)			20,031				19,938				19,919				19,132				16,388
Amounts per common share (diluted):
Income before cumulative effect of change in accounting principle		$	1.86			$	0.13			$	0.03			$	1.22			$	2.26
Cumulative effect on prior years of change in accounting principle			—			$	(0.36	)			—				—				—
Net income (loss)		$	1.86			$	(0.23	)		$	0.03			$	1.22			$	2.26
Weighted average common shares (diluted) (b)			20,666				19,938				20,272				19,566				16,806
Statement of Cash Flows Data:
Cash provided by operating activities		$	64,913			$	25,561			$	20,150			$	34,872			$	37,535
Cash used in investing activities			(43,343	)			(40,404	)			(91,575	)			(88,299	)			(80,363	)
Cash provided by (used in) financing activities			(15,674	)			23,005				68,646				39,720				31,526
Effect of exchange rate changes on cash			765				1,031				1,707				1,192				(812	)
Other Data:
Adjusted EBITDA (c)			88,611				42,031				42,758				56,598				54,106
Cash dividends per share			—				—				—				—				—
Total vessels in fleet (d)			59				52				53				55				51
Average number of owned or chartered vessels (e)			47.2				45.6				46.8				43.5				38.0

		As of December 31,
		2005				2004				2003				2002				2001
		(In thousands)
Balance Sheet Data:
Cash		$	24,190			$	17,529			$	8,336			$	9,619			$	22,671
Vessels and equipment including construction in progress, net			510,446				538,978				485,502				379,208				262,364
Total assets			613,915				632,718				575,501				486,547				352,051
Long-term debt (f)			247,685				258,022				236,589				165,233				180,669
Total stockholders’ equity			320,096				316,157				292,128				254,779				133,392

The following table summarizes the calculation of EBITDA and Adjusted EBITDA for the periods indicated.

		Year Ended December 31,
		2005				2004				2003				2002				2001
		(In thousands)
Net income (loss)		$	38,390			$	(4,631	)		$	534			$	23,961			$	37,922
Cumulative effect of change in accounting principle			—				7,309				—				—				—
Interest expense			19,017				17,243				12,988				12,149				12,770
Interest income			(569	)			(276	)			(238	)			(1,211	)			(1,201	)
Debt refinancing costs			—				6,524				—				—				—
Income tax (benefit) provision			3,382				(6,476	)			192				2,959				(12,213	)
Depreciation and amortization			28,875				26,137				28,031				21,414				15,327
EBITDA			89,095				45,830				41,507				59,272				52,605
Adjustments:
Gain on sale of assets			—				(2,282	)			(16	)			(181	)			—
Other (i)			(484	)			(1,517	)			1,267				(2,493	)			1,501
Adjusted EBITDA		$	88,611			$	42,031			$	42,758			$	56,598			$	54,106

                             (i) Includes foreign currency transaction adjustments.

(d)

Includes managed vessels in addition to those that are owned and chartered at the end of the applicable period. See “Our Fleet” in Items 1 and 2 for further information concerning our fleet.

(e)

Average number of vessels is calculated based on the aggregate number of vessel days available during each period divided by the number of calendar days in such period. Includes owned and bareboat chartered vessels only, and is adjusted for additions and dispositions occurring during each period.

(f)

Excludes current portion of long-term debt.

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     This information should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, contained herein. See also “Selected Consolidated Financial Data.”

Our Business Strategy

     Our goal is to enhance our position as a premier provider of offshore marine services in international markets by achieving higher vessel utilization rates, relatively stable growth rates and returns on investments that are superior to those of our competitors. Key elements in implementing our strategy include:

Developing and maintaining a large, modern, diversified and technologically advanced fleet: Our fleet size, location and profile allow us to provide a full range of services to our customers from platform supply work to specialized floating, production, storage and offloading, or FPSO support, including anchor handling and remotely operated vehicle, or ROV, operations. We regularly upgrade our fleet to improve capability, reliability and customer satisfaction. We also seek to take advantage of attractive opportunities to acquire or build new vessels to expand our fleet. We took delivery of 10 new build vessels between 2001 and 2004, and acquired a vessel in December 2004. Additionally, two new build vessels were delivered in the second quarter of 2005. Also in 2005, we committed to build 11 new vessels, one of which was delivered during the fourth quarter. We believe our relatively young fleet, which requires less maintenance and refurbishment work during required drydockings than older fleets, allows for less downtime, resulting in more dependable operations for both our customers and us.

Enhancing fleet utilization through development of specialty applications for our vessels: We operate some of the most technologically advanced vessels available. Our highly efficient, multiple-use vessels provide our customers maximum flexibility and are constructed with design elements such as dynamic positioning, firefighting, moon pools, ROV handling and oil spill response capabilities. In addition, we design and equip new build vessels specifically to meet customer needs.

Focusing on attractive international markets: We have elected to conduct our current operations mainly in the North Sea, offshore Southeast Asia and offshore Americas markets because we believe there are higher barriers to entry, lower volatility of day rates and greater potential for increasing day rates in those markets than in other markets. Furthermore, our operating experience in these markets has enabled us to anticipate and profitably respond to trends in these markets, such as the increasing demand for multi-function vessels met by our recent additions to our North Sea fleet. In addition, we have capacity, under appropriate market conditions, to alter the geographic focus of our operations to a limited degree by shifting vessels between our existing markets and by entering new ones as they develop economically and become more profitable.

Managing our risk profile through chartering arrangements: We utilize various contractual arrangements in our fleet operations, including long-term charters, short-term charters, sharing arrangements and vessel pools. Sharing arrangements provide us and our customers the opportunity to benefit from rising charter rates by subchartering the contracted vessels to third parties at prevailing market rates during any downtime in the customers’ operations. We operate and participate in pooling arrangements where vessels of similar specifications enter into a marketing alliance. We believe these contractual arrangements help us reduce volatility in both day rates and vessel utilization and are beneficial to our customers.

General

     We provide marine support and transportation services to companies involved in the offshore exploration and production of oil and natural gas. Our vessels transport drilling materials, supplies and personnel to offshore facilities, as well as move and position drilling structures. The majority of our operations are based in the North Sea with 34 vessels operating from the area. We also have 11 vessels operating in Southeast Asia, five vessels in Brazil, two in the Mediterranean Sea, two vessels in India, two in the Middle East, one in West Africa and two vessels in Mexico. Our fleet has grown in both size and capability, from an original 11 vessels in 1990 to our present number of 59 vessels, through strategic acquisitions and new construction of technologically advanced vessels, partially offset by dispositions of certain older, less profitable vessels. At March 1, 2006, our fleet includes 48 owned vessels and 11 managed vessels.

     Our results of operations are affected primarily by day rates, fleet utilization and the number and type of vessels in our fleet. Utilization and day rates, in turn, are influenced principally by the demand for vessel services from the exploration and production sectors of the oil and natural gas industry. The supply of vessels to meet this fluctuating demand is related directly to the perception of future activity in both the drilling and production phases of the oil and natural gas industry as well as the availability of capital to build new vessels to meet the changing market requirements.

     From time to time, we bareboat charter vessels with revenues and operating expenses reported in the same income and expense categories as our owned vessels. The chartered vessels, however, incur bareboat charter fees instead of depreciation expense. Bareboat charter fees are generally higher than the depreciation expense on owned vessels of similar age and specification. The operating income realized from these vessels is therefore adversely affected by the higher costs associated with the bareboat charter fees. These vessels are included in calculating fleet day rates and utilization in the applicable periods.

     We also provide management services to other vessel owners for a fee. We do not include charter revenues and vessel expenses of these vessels in our operating results. However, management fees are included in operating revenues. These vessels have been excluded for purposes of calculating fleet rates per day worked and utilization in the applicable periods.

     Our operating costs are primarily a function of fleet configuration and utilization levels. The most significant direct operating costs are wages paid to vessel crews, maintenance and repairs, and marine insurance. Generally, fluctuations in vessel utilization have little effect on direct operating costs in the short term. As a result, direct operating costs as a percentage of revenues may vary substantially due to changes in day rates and utilization.

     In addition to direct operating costs, we incur fixed charges related to the depreciation of our fleet and costs for routine drydock inspections, maintenance and repairs designed to ensure compliance with applicable regulations and maintaining certifications for our vessels with various international classification societies. The aggregate number of drydockings and other repairs undertaken in a given period generally determines maintenance and repair expenses. The demands of the market, the expiration of existing contracts,

the start of new contracts, and the availability allowed by our customers have influenced, and will continue to influence the timing of drydocks.

Critical Accounting Policies and Estimates

     The Consolidated Financial Statements and Notes to Consolidated Financial Statements contain information that is pertinent to management’s discussion and analysis. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of any contingent assets and liabilities. Management believes these accounting policies involve judgment due to the sensitivity of the methods, assumptions and estimates necessary in determining the related asset and liability amounts. We believe we have exercised proper judgment in determining these estimates based on the facts and circumstances available to management at the time the estimates were made.

Change in Accounting Principle

     Effective January 1, 2004, we began expensing the costs associated with the periodic requirements of the various classification societies, which requires each vessel to be placed in drydock twice in a five-year period. Generally, drydock costs include refurbishment of structural components as well as major overhauls of operating equipment, and is subject to scrutiny by the relevant classification society. Previously, costs incurred in connection with drydockings were capitalized and amortized over 30 months, which approximated the period between required drydockings.

     The industry’s accounting practices have historically allowed three methods to account for these expenditures: (1) defer and amortize, (2) accrue in advance, and (3) expense as incurred. There are no authoritative criteria for determining a preferable method of accounting for drydock expenditures. However, we have determined that expensing these costs as incurred is the method predominantly used in our industry peer group and is a more rational basis for recognizing major maintenance expenditures in our financial statements.

     As a result of this change, we recorded a non-cash cumulative effect charge of $7.3 million, net of tax ($0.36 per basic and diluted common share), in the consolidated statement of operations for 2004. The effect of the change in accounting principle in 2004 also decreased income before the cumulative effect of change in accounting principle by approximately $1.9 million by reversing the current drydock amortization expense of $7.1 million and recognizing the expense for current drydock expenditures of $9.0 million. The following table illustrates the pro forma effects of retroactive application of this change in accounting principle on net income and earnings per share if we had expensed drydock costs in prior years.

		2003				2002				2001
		(In thousands)
Net income, as reported		$	534			$	23,961			$	37,922
Net income, pro forma			588				24,023				36,089
Earnings per share:
Basic – as reported		$	0.03			$	1.25			$	2.31
Basic – pro forma			0.03				1.26				2.20
Diluted – as reported			0.03				1.22				2.26
Diluted – pro forma			0.03				1.23				2.15

Allowance for Doubtful Accounts

     Our customers are primarily major and independent oil and gas companies and oil service companies. Given our experience where our historical losses have been insignificant and our belief that our related credit risks are minimal, our major and independent oil and gas company and oil service company customers are granted credit on customary business terms. Our exposure to foreign government-owned and controlled oil and gas companies, as well as companies that provide logistics, construction or other services to such oil and natural gas companies, may result in longer payment terms; however, we monitor our aged accounts receivable on an ongoing basis and provide an allowance for doubtful accounts on a case-by-case basis as conditions warrant. We make critical estimates for the allowance for doubtful accounts based on the age of the receivable, collection history from the particular customer and management’s judgment of the ability of the customer to pay. Historically, we have collected appreciably all of our accounts receivable balances. In 2005, we wrote-off approximately $1.2 million deemed to be uncollectible, which primarily represented one customer that had been included in the 2004 allowance for doubtful accounts. At December 31, 2005 and 2004, respectively, we provided an allowance for doubtful accounts of $0.1 million and $1.3 million. Additional allowances for doubtful accounts may be necessary as a result of our ongoing assessment of our customers’ ability to pay. Because amounts due from individual customers can

be significant, future adjustments to our allowance for doubtful accounts could be material if one or more individual customer balances are deemed uncollectible. If an account receivable were deemed uncollectible and all reasonable collection efforts were exhausted, the balance would be removed from accounts receivable and the allowance for doubtful accounts.

     In the fourth quarter of 2004, our Audit Committee adopted a management recommendation regarding the allowance for doubtful accounts receivable for significantly aged receivables. See “Business—Internal Controls.”

Deferred Costs

     Since inception, we have capitalized the costs associated with the periodic requirements of the various classification societies, which requires the vessels to be placed in drydock twice in a five-year period. Generally, drydocking costs include refurbishment of structural components as well as major overhaul of operating equipment, subject to scrutiny by the relevant classification society. Historically, these costs have been amortized over a 30-month period. As discussed in the “Change in Accounting Principle” section above, we have changed our accounting for these costs. Effective January 1, 2004, we began expensing these costs as incurred. A charge of $7.3 million, net of tax ($0.36 per basic and diluted common share), reflecting the cumulative effect of this accounting change was recorded at January 1, 2004.

     In connection with new long-term contracts, incremental costs incurred that directly relate to mobilization of a vessel from one region to another are deferred and recognized over the primary contract term. Should the contract be terminated by either party prior to the end of the contract term, the deferred amount would be immediately expensed. In contrast, costs of relocating vessels from one region to another without a contract are expensed as incurred.

     Deferred financing costs are capitalized as incurred and are amortized over the expected term of the related debt. Should the specific debt terminate by means of payment in full, tender offer or lender termination, the associated deferred financing costs would be immediately expensed. In the third quarter of 2004, a charge of $6.5 million was recognized relating to the retirement of our 8.75% senior notes. Those costs included $4.4 million from the payment of tender offer premiums and $2.1 million from the write-off of unamortized debt issuance costs and unamortized debt discount.

Long-Lived Assets and Goodwill

     Our long-lived tangible assets consist primarily of vessels and construction-in-progress. Our goodwill primarily relates to the 1998 acquisition of Brovig Supply AS and the 2001 acquisition of Sea Truck Holding AS. The determination of impairment of all long-lived assets, including goodwill, is conducted when indicators of impairment are present and at least annually on December 31 for goodwill. Impairment testing on tangible long-lived assets is performed on an asset-by-asset basis and impairment testing on goodwill is performed on a reporting-unit basis for the reporting units where the goodwill is recorded.

     The implied fair value of any asset or reporting unit is determined by discounting the projected future operating cash flows or by using other fair value approaches based on a multiple of earnings measurement. Management makes critical estimates and judgments to determine projected future operating cash flow, particularly in regard to projected revenues and costs. An impairment indicator is deemed to exist if the implied fair value of the asset or reporting unit is less than the book value.

     At December 31, 2005 and 2004, we performed our impairment test and determined there was no goodwill impairment. There are many assumptions and estimates underlying the determination of the implied fair value of the reporting unit, such as future expected utilization and the average day rates for the vessels, vessel additions and attrition, operating expenses and tax rates. Although we believe our assumptions and estimates are reasonable, deviations from our estimates by actual performance could result in an adverse material impact on our results of operations. Examples of events or circumstances that could give rise to an impairment of an asset (including goodwill) include: prolonged adverse industry or economic change; significant business interruption; unanticipated competition that has the potential to dramatically reduce our earning potential; legal issues; or the loss of key personnel.

Income Taxes

     A significant portion of our earnings originate in the North Sea, a region in which certain jurisdictions including the United Kingdom and Norway provide alternative taxing structures created specifically for qualified shipping companies, referred to as “tonnage tax” regimes. The tonnage tax regimes provide for a tax based on the net tonnage weight of a qualified vessel, resulting in significantly lower taxes than those that would apply if we were not a qualified shipping company in those jurisdictions. Under the applicable tonnage tax regime, earnings from our qualified shipping activities in Norway are not currently taxed. The Norwegian

tonnage tax regime includes, among other things, provisions that will, upon (i) the voluntary or involuntary exit from the tonnage tax regime, (ii) the payment of a dividend, and/or (iii) complete liquidation, trigger an ordinary 28% income tax on the qualified shipping company’s statutory accumulated untaxed net earnings, if any. If the Company were to exit from the tonnage tax regime ((i) or (iii) above), the computation of the amount subject to tax at 28% would be equal to (a) the market value of all the assets owned within the tonnage tax regime less (b) the amount of any undistributed previously taxed earnings at the beginning of the exit year and (c) paid-in-share capital, including any premiums. The resulting exit computation taxable gain or loss would, subject to certain conditions, be recognized over five years beginning with the exit year. In the case of an actual dividend ((ii) above), the amount subject to tax would be limited to the amount of the dividend grossed-up for such taxes. We have not recorded a tax provision for any of these three possible taxable events, and should any of these events occur in the future, we will have to record a 28% income tax expense in the period in which such event does occur. At December 31, 2005, the accumulated untaxed book earnings for our qualified Norwegian shipping activities was approximately $23.5 million, which, if paid as a dividend, would result in a tax liability of approximately $6.6 million. We believe that the likelihood is remote that we will trigger any of these events and have to pay income tax on some or all of the accumulated untaxed net earnings under Norway’s tonnage tax regime. The United Kingdom tonnage tax regime provisions do not include similar requirements for possible future taxation of shipping activities income. The tonnage tax regimes in the North Sea significantly reduce the cash required for taxes in that region.

     Almost all of our tax provision is for taxes in regions outside of the United Kingdom and Norway. Should our operations structure change or should the tonnage tax regime laws change, we could be required to provide for taxes at rates much higher than currently reflected in our consolidated financial statements. Additionally, if our pre-tax earnings in a higher tax jurisdiction increase, there could be a significant increase in our annual effective tax rate. That increase could cause volatility in the comparison of our effective tax rate from period to period.

     In 2004, we reduced a deferred income tax liability from $4.9 million to $0.3 million related to certain of the Company’s amended 2001, 2002 and 2003 U.K. corporation tax returns, which had then recently been reviewed, or examined, by and agreed with the U.K. Inland Revenue, thereby, finalizing U.K. taxes for those tax returns.

     The American Jobs Creation Act of 2004 increased the foreign tax credit carryforwards period to ten years. We have $2.3 million of such foreign tax credit carryforwards that begin to expire in 2009. A valuation allowance has been established against the full amount of these credits less the tax benefit of the deduction. We, also, have certain foreign operating loss carryforwards of approximately $6.0 million for which we have established a full valuation allowance. We have considered estimated future taxable income in the relevant tax jurisdictions to utilize these credit and loss carryforwards and have considered what we believe to be ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. This information is based on estimates and assumptions including projected taxable income. If these estimates and related assumptions change in the future or if we determine that we would not be able to realize other deferred tax assets in the future, an adjustment to the valuation allowance would be recorded in the period such determination was made.

     The Jobs Act also includes specific tax reform related to foreign shipping income. This legislation favorably impacted us beginning January 1, 2005, with the majority of our foreign shipping income no longer subject to tax in the United States of America. In 2005, we reviewed our global operating structure and executed a world-wide restructuring to maximize potential growth and cash flow, lower income taxes, and create a more favorable corporate structure for the expansion of our business.

Commitments and Contingencies

     We have contingent liabilities and future claims for which we have made estimates of the amount of the eventual cost to liquidate these liabilities or claims. These liabilities and claims may involve threatened or actual litigation where damages have not been specifically quantified but we have made an assessment of our exposure and recorded a provision in our accounts for the expected loss. Other claims or liabilities, including those related to taxes in foreign jurisdictions, may be estimated based on our experience in these matters and, where appropriate, the advice of outside counsel or other outside experts. Upon the ultimate resolution of the uncertainties surrounding our estimates of contingent liabilities and future claims, our future reported financial results would be impacted by the difference between our estimates and the actual amounts paid to settle the liabilities. In addition to estimates related to litigation and tax liabilities, other examples of liabilities requiring estimates of future exposure include contingencies arising out of acquisitions and divestitures. Our contingent liabilities are based on the most recent information available to us regarding the nature of the exposure. Such exposures change from period to period based upon updated relevant facts and circumstances, which can cause the estimate to change. In the recent past, our estimates for contingent liabilities have been sufficient to cover the actual amount of our exposure.

Multi-employer Pension Obligation

     Certain of our subsidiaries participate in an industry-wide, multi-employer, defined benefit pension fund based in the U.K., the Merchant Navy Officers Pension Fund (“MNOPF”). We have been informed of an estimated £234.0 million, or $402.6 million, total fund deficit calculated by the fund’s actuary based on the most recent actuary study. Under the direction of a court order, the deficit is to be remedied through future funding contributions from all participating employers.

     In 2005 we received invoices from the MNOPF for $1.8 million, which represents the amount calculated by the fund as our current share of the deficit. Under the terms of the invoice, we paid $0.3 million with the remaining due in annual installments over nine years. Accordingly, we recorded the full amount of $1.8 million as a direct operating expense and the $1.5 million remaining obligation is recorded as a liability. The amount of our ultimate share of the deficit could change depending on future actuarial valuations and fund calculations which are due to occur every three years, the next of which is scheduled for the end of March 2006. Our share of the fund’s deficit will be dependent on a number of factors including the updated actuarial study, the number of participating employers, and the final method used in allocating the required contribution among participating employers.

Consolidated Results of Operations

Comparison of the Fiscal Years Ended December 31, 2005 and December 31, 2004

     Our revenues increased from $139.3 million in 2004 to $204.0 million in 2005, resulting mainly from continued increased activity in the North Sea that started in late 2004, the full year effect of two vessel additions in the second half of 2004, the addition early in 2005 of a bareboat chartered vessel, and the delivery of three new build vessels in the second and fourth quarters of 2005. For the year ended December 31, 2005, net income was $38.4 million, or $1.86 per diluted share, compared to $2.7 million, or $0.13 per diluted share before the cumulative effect of change in accounting principle resulting in a charge of $7.3 million, or $0.36 per diluted share for 2004. Including the cumulative effect of the change in accounting principle, our net loss for 2004 was $4.6 million, or $0.23 per diluted share.

     The North Sea market showed continued improvement, with increases in both day rates and utilization. Additionally, we experienced an increase in capacity resulting from two vessel additions in the North Sea, one late in 2004 and one early in 2005, as well as three 2005 new build additions, two in the Americas region late in the second quarter and one in the Southeast Asia region in the fourth quarter. Day rates improved during the year in all our regions, indicating continued strong demand for our vessels.

     All our regions experienced an increase in revenue resulting mainly from a $33.6 million increase in day rates mainly attributable to improved market conditions and stronger exploration and development activities. Additionally, an increase in capacity of $17.1 million, mainly due to the vessel additions listed above partially offset by one fewer operating day in 2005, as 2004 was a leap year, also contributed to the increase in revenues. We also experienced a utilization increase of $14.0 million, with increases experienced in all of our regions.

		Year ended December 31,
		(Dollars in thousands)
										Increase
		2005				2004				(Decrease)
Average Rates Per Day Worked (a) (b):
North Sea-Based Fleet (c)		$	15,530			$	11,862			$	3,668
Southeast Asia-Based Fleet			5,849				5,137				712
Americas-Based Fleet			11,518				12,137				(619	)
Overall Utilization (a) (b):
North Sea-Based Fleet (c)			91.9	%			80.9	%			11.0	%
Southeast Asia-Based Fleet			91.6	%			82.2	%			9.4	%
Americas-Based Fleet			95.6	%			91.6	%			4.0	%
Average Owned or Chartered Vessels (a) (d):
North Sea-Based Fleet			30.8				29.4				1.4
Southeast Asia-Based Fleet			10.2				11.6				(1.4	)
Americas-Based Fleet			6.2				4.6				1.6
Total			47.2				45.6				1.6

     Direct operating expenses increased $11.6 million in 2005 over 2004. This increase was due mainly to vessel additions throughout the year coupled with salary and travel costs related to vessels operating in Africa and Turkey, and higher costs resulting from a stronger Norwegian kroner compared to the reporting currency. Drydock expense remained somewhat stable, increasing $0.2 million, and bareboat charter expense increased $2.5 million to $3.9 million as we entered into an additional bareboat charter agreement in 2005. General and administrative expenses increased $3.9 million in 2005, as the implementation of Sarbanes-Oxley related controls and procedures and other regulatory requirements resulted in higher professional fees and higher salary-related expenses. Depreciation expense increased by $2.7 million from 2004 to 2005 due mainly to the vessel additions described above.

     Interest expense increased $1.8 million due mainly to the higher weighted average interest rate on our revolving debt. During 2004, we also incurred an expense of $6.5 million related to the redemption of our $130 million 8.75% senior notes. The gain on sale of assets of $2.3 million in 2004 primarily reflects the sale of three of our oldest Southeast Asia based vessels, the Seawhip, the Seawitch and the Sea Conquest. Additionally, the income of $0.5 million in the other category compared to $1.5 million in 2004 was mainly due to the 2004 favorable foreign currency movements on inter-company accounts anticipated to be settled.

     The income tax benefit of $6.5 million for 2004 reflects the reversal of previously provided deferred tax liabilities for our North Sea operations, as our United Kingdom subsidiary finalized an Inland Revenue audit relating to tonnage tax. Our tax provision can fluctuate significantly based on the mix of vessels working in higher tax jurisdictions. As such, income tax expense in 2005 was $3.4 million.

Comparison of the Fiscal Years Ended December 31, 2004 and December 31, 2003

     Our revenues increased from $129.9 million in 2003 to $139.3 million in 2004, largely as a result of the increase in North Sea activity late in the year, the full year effect of 2003 new build deliveries and the addition of two vessels during the second half of 2004. For the year ended December 31, 2004, income was $2.7 million, or $0.13 per diluted share before the cumulative effect of change in accounting principle resulting in a charge of $7.3 million, or $0.36 per diluted share. Including the cumulative effect of the change in accounting principle, our net loss for 2004 was $4.6 million, or $0.23 per diluted share. For the year ended December 31, 2003, net income was $0.5 million, or $0.03 per diluted share.

     The weakness in exploration and development activities in the North Sea that started in 2002 began showing signs of recovery beginning late in the third quarter of 2004, with increasing day rates and utilization evident. Additionally, we experienced an increase in capacity resulting from the full year effect of the four newly built vessels delivered in 2003 and the addition of two additional vessels to our fleet in 2004, one in September and the other in December. Day rates improved during the year with the increases in the foreign currency exchange rate between the British pound and Norwegian kroner against the U.S. dollar being part of the improvement in rates.

     Revenue increased in all our regions except Southeast Asia, where the sale of three vessels during the year and slightly lower utilization resulted in a decrease of $0.4 million in revenue. In the Americas, revenue levels and average rates increased because of the change in our equipment mix. Overall, we experienced an increase in capacity of $4.2 million, mainly due to the factors listed above as well as one additional operating day in 2004. Day rates showed an increase of $8.2 million mainly attributable to stronger British pound and Norwegian kroner against the weak U.S. dollar, as day rates are generally denominated in international currencies. The decrease in revenues attributed to lower utilization was $2.9 million, resulting mainly from the weakness in the North Sea early in the year and the large number of vessels that were working on the spot market as a result.

		Year ended December 31,
		(Dollars in thousands)
										Increase
		2004				2003				(Decrease)
Average Rates Per Day Worked (a) (b):
North Sea-Based Fleet (c)		$	11,862			$	11,042			$	820
Southeast Asia-Based Fleet			5,137				5,075				62
Americas-Based Fleet			12,137				11,707				430
Overall Utilization (a) (b):
North Sea-Based Fleet (c)			80.9	%			78.3	%			2.6	%
Southeast Asia-Based Fleet			82.2	%			83.8	%			(1.6	%)
Americas-Based Fleet			91.6	%			92.8	%			(1.2	%)
Average Owned or Chartered Vessels (a) (d):
North Sea-Based Fleet			29.4				30.8				(1.4	)
Southeast Asia-Based Fleet			11.6				12.0				(0.4	)
Americas-Based Fleet			4.6				4.0				0.6
Total			45.6				46.8				(1.2	)

     Direct operating expenses increased $1.4 million in 2004 over 2003. This increase was due to higher costs resulting from stronger currencies in the operating regions compared to the reporting currency and change in our equipment mix. Bareboat charter expense decreased $5.1 million to $1.4 million as we returned the last bareboat chartered vessel to its owner during 2004. We currently have no bareboat chartered vessels in our fleet. General and administrative expenses increased $4.9 million in 2004, as the implementation of Sarbanes-Oxley related controls and procedures and other regulatory requirements resulted in higher professional fees and higher salary-related expenses. Also, an increase in the allowance for doubtful accounts of $0.9 million contributed to this increase. Drydock expense of $9.0 million in 2004 relates to the change in accounting principle described above and in Note 1 to the Consolidated Financial Statements. Depreciation and amortization expense decreased by $1.9 million from 2004 to 2003 mainly due to the reclassification of drydock expense resulting from the change in accounting principle.

     Interest expense increased $4.3 million due mainly to the higher outstanding balance and a higher weighted average interest rate on our line of credit, resulting from the conversion of the line of credit from U.S. dollars to British pounds at the end of 2003. During 2004, we also incurred an expense of $6.5 million related to the redemption of our $130 million 8.75% senior notes. The gain on sale of assets of $2.3 million primarily reflects the sale of three of our oldest Southeast Asia based vessels, the Seawhip, the Seawitch and the Sea Conquest. Additionally, we reported income in the other category of $1.5 million, compared to $1.3 million expense in 2003, resulting from favorable foreign currency movements on inter-company accounts anticipated to be settled.

     The income tax benefit of $6.5 million for 2004 reflects the reversal of previously provided deferred tax liabilities for our North Sea operations, as our United Kingdom subsidiary finalized an Inland Revenue audit relating to tonnage tax. Substantially all of our tax provision is for deferred taxes, and can fluctuate significantly based on the mix of vessels working in the higher tax jurisdictions.

Segment Results

     As discussed in “General Business” included in Part I, Items 1 and 2, we operate three operating segments: the North Sea, Southeast Asia and the Americas, each of which is considered a reportable segment under SFAS No. 131. Prior to 2004, we reported all operations in a single segment. In 2004, our segment reporting was changed to conform to the manner in which our chief operating decision maker reviews, and we manage, our business. Substantially all of our revenues are derived from and all of our long-lived assets located in foreign jurisdictions.

     Management evaluates segment performance primarily based on operating income. Cash and debt are managed centrally. Because the regions do not manage those items, the gains and losses on foreign currency remeasurements associated with these items are excluded from operating income. Furthermore, gains and losses from sale of assets are also excluded from operating income, as strategic decisions relating to asset acquisitions and divestitures are generally made centrally as well. Management considers segment operating income to be a good indicator of each segment’s operating performance from its continuing operations, as it represents the results of the ownership interest in operations without regard to financing methods or capital structures. Each operating segment’s operating income is summarized in the following table, and detailed discussions follow.

Operating Income by Operating Segment

		Year ended December 31,
		2005				2004				2003
		(In thousands)
North Sea		$	55,897			$	10,591			$	5,547
Southeast Asia			10,007				6,230				8,657
Americas			4,421				5,942				4,652
Total reportable segment operating income			70,325				22,763				18,856
Other			(10,589	)			(6,869	)			(4,129	)
Total reportable segment and other operating income		$	59,736			$	15,894			$	14,727

North Sea Region:

		Year ended December 31,
		2005				2004				2003
		(In thousands)
Revenues		$	160,276			$	103,190			$	96,120
Operating expenses			82,295				71,818				68,038
Depreciation and amortization expense			22,084				20,781				22,535
Operating income		$	55,897			$	10,591			$	5,547

Comparison of Fiscal Year Ended December 31, 2005 and December 31, 2004

     Revenues for 2005 increased $57.1 million, compared to 2004. The increase was primarily driven by increased capacity of $13.0 million due to a full year effect of a vessel acquired in December 2004, the addition of a bareboat chartered vessel early in 2005, and the addition of vessels mobilized into the region from other parts of the world during the year. Additionally, day rates increased by $32.0 million principally due to the continued improvement in exploration and development activities in the North Sea and increases in foreign currency exchange rates between the Norwegian kroner against the U.S. dollar, and an increase in utilization of $12.0 million due to the strength in the market. Operating expenses and depreciation expense increased by $10.5 million and $1.3 million, respectively from 2004 to 2005, primarily due to the vessel additions, and, in the case of the increase in operating expenses, also due to higher salaries and travel costs related to vessels operating offshore Africa and offshore Turkey, higher vessel utilization, as well as a $1.8 million pension expense related to the MNOPF as discussed in “Critical Accounting Policies and Estimates”.

Comparison of Fiscal Year Ended December 31, 2004 and December 31, 2003

     Revenues for 2004 increased $7.1 million, compared to 2003. The increase was primarily driven by increased capacity of $3.2 million due to a full year effect of newly built vessels delivered in 2003 partially offset by vessels mobilized out of the region and increased day rates of $8.7 million principally due to increases in foreign currency exchange rates between the British pound and Norwegian kroner against the U.S. dollar, offset by utilization decrease of $4.8 million due the weaknesses in the market. Operating expenses and depreciation and amortization expense increased in total by $2.0 million from 2003 to 2004, primarily due to stronger currencies in the operating region compared to the U.S. dollar. Depreciation and amortization expense also decreased due to the reversal of drydock amortization and recording drydock expenses as incurred in 2004, which are now recorded in operating expenses.

Southeast Asia Region:

		Year ended December 31,
		2005				2004				2003
		(In thousands)
Revenues		$	19,570			$	17,505			$	17,907
Operating expenses			6,942				8,810				6,438
Depreciation and amortization expense			2,621				2,465				2,812
Operating income		$	10,007			$	6,230			$	8,657

Comparison of Fiscal Year Ended December 31, 2005 and December 31, 2004

     An increase in revenues of $2.1 million in 2005 compared to 2004 can be attributed primarily to increased day rates of $1.3 million due to improvement in market conditions in the area. Additionally, utilization increased by $1.2 million in 2005 due mainly to the operation of a vessel mobilized to the area from another region. Offsetting these increases was a decrease in capacity directly related to the 2004 sale of three older vessels and one less operating day in 2005 compared to 2004, partially offset by the addition of one new build vessel and mobilization into the area of an additional vessel from another region. Operating expenses decreased by $1.9 million due to the decrease in the number of vessels in the region resulting from the above mentioned vessel sale. Depreciation expense increased by $0.2 million due to the addition of one higher specification new build vessel, offset by the sale of three older vessels in 2004.

Comparison of Fiscal Year Ended December 31, 2004 and December 31, 2003

     Revenues for 2004 decreased by $0.4 million compared to 2003 due primarily to lower day rates of $0.6 million. Additionally, we experienced lower utilization of $0.2 million due to the sale of three vessels in 2004, partially offsetting this increase was higher capacity of $0.4 million resulting from mobilization of a vessel from another location. Operating expenses increased by $2.4 million largely due to the mobilization of a vessel from another region. Depreciation and amortization expense decreased due to the reversal of drydock amortization and recording drydock expense in 2004.

Americas Region:

		Year ended December 31,
		2005				2004				2003
		(In thousands)
Revenues		$	24,196			$	18,617			$	15,873
Operating expenses			15,814				9,925				8,676
Depreciation and amortization expense			3,961				2,750				2,545
Operating income		$	4,421			$	5,942			$	4,652

Comparison of Fiscal Year Ended December 31, 2005 and December 31, 2004

     Revenues of $24.2 million for 2005 increased by $5.6 million compared to 2004 due to increased capacity of $4.8 million resulting from the delivery of two new build vessels and the full year effect of one vessel delivered in the third quarter of 2004. Partially offsetting this increase was the full year effect of two vessels that were mobilized out of the region in 2004. Utilization increased by $0.8 million due to market improvement. Operating expenses increased by $5.9 million resulting mainly from the increased size of the fleet in the area, and depreciation expense increased by $1.2 million due to the net addition of vessels.

Comparison of Fiscal Year Ended December 31, 2004 and December 31, 2003

     Revenues for 2004 increased by $2.7 million compared to 2003 due to increased capacity, day rate and utilization with the mobilization of the North Stream and the Highland Warrior into the region, and the delivery of the Austral Abrolhos to the Brazil market in 2004 offset by the mobilization of the Highland Piper to the North Sea during 2004 and the full year effect of the return of a

bareboat chartered vessel to its owner during 2003. Operating expenses and depreciation and amortization expense increased in total by $1.5 million due to the net addition of vessels.

Liquidity and Capital Resources

     Our ongoing liquidity requirements are generally associated with our need to service debt, fund working capital, acquire or improve equipment and make other investments. Since inception, we have been active in the acquisition of additional vessels through both the resale market and new construction. Bank financing, equity capital and internally generated funds have historically provided funding for these activities. Internally generated funds are directly related to fleet activity and vessel day rates, which are ultimately determined by the supply and demand for crude oil and natural gas.

     We anticipate that the cash on hand and future cash flow from operations for the twelve months ending December 31, 2006, will be adequate to repay our debts due during such period, to make normal recurring capital additions and improvements, and to meet working capital requirements. We believe that our current cash and cash flows from operations will provide sufficient resources to finance our operating requirements. However, our ability to fund working capital, capital expenditures and debt service in excess of cash on hand will be dependent upon the success of our operations. We are currently renegotiating our revolving debt agreements as discussed below.

Long-Term Debt

     The Multi-currency Bank Credit Facility, which we entered into with a syndicate of five banks, is presently secured by eight of our vessels. The maximum commitment amount was originally $100 million. During the third quarter of 2004, the facility began its $4 million quarterly reduction phase, which will continue until the fourth quarter of 2007. A final payment of $44 million will be due in March 2008. At December 31, 2005, the Multi-currency Bank Credit Facility had a balance of $59.7 million. Interest on outstanding balances accrues at LIBOR plus a margin ranging from 1.2% to 1.5% depending on our ratio of funded debt to total capitalization, or Leverage Ratio. At December 31, 2005, all outstanding borrowings under the Multi-currency Bank Credit Facility were denominated in British pounds in order to match the currency associated with the revenue stream for the collateral vessels. As of December 31, 2005, the weighted average interest rate on the outstanding borrowings under the Credit Facility was 5.8%. The Multi-currency Bank Credit Facility requires us not to exceed a maximum Leverage Ratio and to maintain a specified interest coverage ratio and a minimum net worth. We were in compliance with all Multi-currency Bank Credit Facility covenants at December 31, 2005.

     On December 23, 2004, we entered into a new Multi-currency Senior Secured Acquisition Credit Facility providing for a $50 million revolving credit facility which is secured by eight vessels. This credit facility has a final maturity date of the earlier of January 31, 2008 or three calendar years from the first drawdown date. At December 31, 2005, we had $19.7 million outstanding under this credit facility. Outstanding borrowings on this facility were denominated in U.S. dollars ($12.0 million), with the balance denominated in British pounds ($7.7 million). As of December 31, 2005, the weighted average interest rate on the outstanding borrowings under this facility was 5.5%.

     We have received a term sheet, subject to a number of conditions, relating to a new $175 million secured revolving credit agreement which will replace our three existing bank credit agreements and mature in 2012. If we enter into the credit agreement, the loans will be secured by certain vessels. We are currently reviewing draft loan documents reflecting the term sheet and expect to close on the new facility by the end of the first quarter of 2006. Any outstanding balances under the existing agreements will be refinanced with the new facility. In the event we do not complete the transactions contemplated by the term sheet, we anticipate that we will seek other lenders or amend our existing credit facilities, none of which expire until 2008.

     On July 2, 2004, we commenced a tender offer to purchase all of our outstanding $130 million aggregate principal amount of 8.75% senior notes due 2008 for cash in an amount up to 103.29% of the principal amount thereof, plus accrued and unpaid interest. In connection with the tender offer, we also solicited and received the consent of the holders of our 8.75% senior notes to amend the indenture governing the 8.75% senior notes to eliminate substantially all of the restrictive covenants contained in the indenture. We used the net proceeds of the debt offering discussed below to purchase the 8.75% senior notes, to repay a portion of indebtedness outstanding under the Multi-currency Bank Credit Facility, and for general corporate purposes.

     On July 21, 2004, we issued $160 million aggregate principal amount of 7.75% senior notes due 2014. The 7.75% senior notes pay interest semi-annually on January 15 and July 15, commencing January 15, 2005 and contain the following redemption provisions:

•		At any time before July 15, 2007, we may redeem up to 35% of the 7.75% senior notes with net cash proceeds of certain equity offerings, as long as at least 65% of the aggregate principal amount of the 7.75% senior notes issued pursuant to the indenture remains outstanding after the redemption.
•		Prior to July 15, 2009, we may redeem all or part of the 7.75% senior notes by paying a make-whole premium, plus accrued and unpaid interest and, if any, liquidation damages.
•		The 7.75% senior notes may be callable beginning on July 15 of 2009, 2010, 2011, and 2012 and thereafter at redemption prices of 103.875%, 102.583%, 101.292% and 100% of the principal amount plus accrued interest.

     The 7.75% senior notes are general unsecured obligations and rank equally in right of payment with all existing and future unsecured senior indebtedness and are senior to all future subordinated indebtedness. The 7.75% senior notes are effectively subordinated to all future secured obligations to the extent of the assets securing such obligations and all existing and future indebtedness and other obligations of our subsidiaries and trade payables incurred in the ordinary course of business. Under certain circumstances, our payment obligations under the 7.75% senior notes may be jointly and severally guaranteed on a senior unsecured basis by one or more of our subsidiaries.

     The indenture under which the 7.75% senior notes are issued imposed operating and financial restrictions on us. These restrictions affect, and in many cases limited or prohibited, among other things, our ability to incur additional indebtedness, make capital expenditures, create liens, sell assets and make dividends or other payments. We were in compliance with all indenture covenants at December 31, 2005.

     We also have a credit facility relating to our 2001 acquisition of Sea Truck Holding AS consisting of three tranches, each secured by certain vessels. In December 2005, we paid off one of the three tranches and had $10.7 million outstanding on the additional two tranches as of December 31, 2005. This debt amortizes in various quarterly amounts until maturity in 2008.

Current Year Cash Flow

     At December 31, 2005, we had cash on hand of $24.2 million. Cash provided by operating activities for the year ended December 31, 2005, was $64.9 million compared to $25.6 million in the previous year. The increase was primarily attributable to higher operating income reflecting a continued strengthening of the North Sea market and new vessel additions during 2005.

     Cash used in investing activities for the years ended December 31, 2005 and 2004 was $43.3 million and $40.4 million, respectively. In 2004, we sold three of our oldest Southeast Asia vessels for $5.9 million. The proceeds from this sale decreased the reported cash used in investing activities. Before this decrease, cash used in investing activities decreased by $2.9 million from 2004 to 2005, mainly due to lower expenditures relating to purchases of vessels and equipment in 2005.

     In 2005, we used $15.7 million in financing activities, while in 2004, we had $23.0 million provided by financing activities. The reason for the change is the increased amount of repayments of debt as a proportion of borrowings in 2005 compared to 2004.

     Most all of our tax liabilities are for deferred taxes. The tonnage tax regimes in both the U.K. and Norway reduce the cash required for taxes in each of these regions. Our tax provision can therefore fluctuate greatly depending on the mix of income from low tax jurisdictions of the U.K. and Norway versus income outside of these areas. We experienced an increase in the number of our vessels working outside the North Sea in 2005.

Debt and Other Contractual Obligations

     The following table summarizes our contractual obligations at December 31, 2005 and the effect these obligations are expected to have on liquidity and cash flows in future periods (in millions):

		2006				2007				2008				2009				2010				Thereafter
Repayment of Long-Term Debt, Excluding Debt Discount of $0.6 million		$	2.1			$	38.1			$	50.1			$	—			$	—			$	160.0
New Build Program Commitments			41.3				104.4				23.0				—				—				—
Non-Cancelable Operating Leases			0.5				0.4				0.4				0.3				0.3				1.1
Other			0.2				0.2				0.2				0.2				0.2				0.9
Total		$	44.1			$	143.1			$	73.7			$	0.5			$	0.5			$	162.0

Other Commitments

     We execute letters of credit, performance bonds and other guarantees in the normal course of business that ensure our performance or payments to third parties. The aggregate notional value of these instruments was $10.9 million at December 31, 2005. All of these instruments have an expiration date within two years. In the past, no significant claims have been made against these financial instruments. Management believes the likelihood of demand for payment under these instruments is minimal and expects no material cash outlays to occur from these instruments.

Transactions with Related Parties

     For information regarding transactions with related parties, see Note 8 to our Consolidated Financial Statements included in Part II, Item 8.

Currency Fluctuations and Inflation

     In areas where currency risks are potentially high, we normally accept only a small percentage of charter hire in local currency. The remainder is paid in U.S. dollars. Substantially all of our operations are international, therefore we are exposed to currency fluctuations and exchange rate risks. Charters for vessels in the North Sea fleet are primarily denominated in British pounds with a portion denominated in Norwegian kroner. Operating costs are substantially denominated in the same currency as charter hire in order to reduce the risk of currency fluctuations. The North Sea fleet generated 79% of our total consolidated revenue for the year ended December 31, 2005. In 2005, the British pound/U.S. dollar exchange rate ranged from a high of £ = U.S. $1.93 to a low of £ = U.S. $1.71 with an average of £ = U.S. $1.82 for the year. During the same period the Norwegian kroner/U.S. dollar exchange rate ranged from a high of kr = U.S. $0.165 to a low of kr = U.S. $0.147 with an average of kr = U.S. $0.155. At March 1, 2006, the exchange rates were £ = U.S. $1.75 and kr = U.S. $0.149.

     Our outstanding debt of $249.8 million includes $171.4 million denominated in U.S. dollars with the balance denominated in British pounds. A substantial portion of our revenue is generated in British pounds. We have evaluated these conditions and have determined that it is in our interest not to use any financial instruments to hedge this exposure under present conditions. Our strategy is in part based on a number of factors including the following:

•		the cost of using hedging instruments in relation to the risks of currency fluctuations;
•		the propensity for adjustments in British pound-denominated vessel day rates over time to compensate for changes in the purchasing power of British pounds as measured in U.S. dollars;
•		the level of U.S. dollar-denominated borrowings available to us; and
•		the conditions in our U.S. dollar-generating regional markets.

     One or more of these factors may change and, in response, we may begin to use financial instruments to hedge risks of currency fluctuations. We will from time to time hedge known liabilities denominated in foreign currencies to reduce the effects of exchange rate fluctuations on our financial results, such as the fair value hedge associated with the purchase of vessels in our joint venture. See “Business – New Vessel Construction and Acquisition Program”.

     Reflected in the accompanying balance sheet at December 31, 2005, is a $41.7 million accumulated other comprehensive income primarily relating to the higher British pound and Norwegian kroner exchange rate at December 31, 2005 in comparison to the exchange rate when we invested capital in these markets. Changes in the accumulated other comprehensive income are non-cash items that are primarily attributable to investments in vessels and U.S. dollar-based capitalization between the parent company and its foreign subsidiaries. The current year change reflects the strengthening in the U.S. dollar compared to the functional currencies of our major operating subsidiaries, particularly in the U.K. and Norway. To date, general inflationary trends have not had a material effect on our operating revenues or expenses. One of the major consumables for the fleet is diesel fuel, the price of which has escalated significantly over the

last year. Except for one contract, which has a cost flow-through provision, fuel is provided by our customers; therefore, escalating fuel prices have not and in all probability will not adversely affect our operating cost structure.

New Accounting Pronouncements

     The following new accounting standard was issued, but had not yet been adopted by GulfMark as of December 31, 2005: SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”).

     In December of 2004, the Financial Accounting Standards Board, or FASB, issued SFAS No. 123R, which replaces SFAS No. 123 and supercedes APB No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after December 31, 2005. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition methods include modified prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The modified prospective method requires that compensation expense be recorded for all unvested awards at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive methods would record compensation expense for all unvested awards beginning in the first period restated.

     We adopted SFAS No. 123R effective January 1, 2006 using the modified prospective application method where compensation cost will be recognized related to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for portion of awards for which the requisite service has not been rendered that are outstanding as of January 1, 2006 shall be recognized as if the requisite service is rendered on or after the required effective date. As of January 1, 2006, all of our stock option awards are fully vested. Under the modified prospective method, vested equity awards outstanding at the effective date create no additional compensation expense. Only new awards granted after January 1, 2006 would continue to be measured and charged to expense over remaining requisite service. Our employee stock purchase plan would be considered compensatory under SFAS No. 123R whereby it allows all of our U.S. employees and participating subsidiaries to acquire shares of common stock at 85% of the fair market value of the common stock under a qualified plan as defined by Section 423 of the Internal Revenue Service. The plan has a look-back option that establishes the purchase price as an amount based on the lesser of the stock’s market price at the grant date or its market price at the exercise date. The total value of the look-back option imbedded in the plan is calculated using the component approach where each award is computed as the sum of 15% of a share of non-vested stock, a call option on 85% of a share of non-vested stock, and a put option on 15% of a share of non-vested stock.

Forward-Looking Statements

     This Form 10-K, particularly the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” contains certain forward-looking statements and other statements that are not historical facts concerning, among other things, market conditions, the demand for marine support and transportation services and future capital expenditures. Such statements are subject to certain risks, uncertainties and assumptions, including, without limitation, operational risk, dependence on the oil and natural gas industry, delay or cost overruns on construction projects, ongoing capital expenditure requirements, uncertainties surrounding environmental and government regulation, risks relating to leverage, risks of foreign operations, risk of war, sabotage or terrorism, assumptions concerning competition, and risks of currency fluctuations and other matters. These statements are based on certain assumptions and analyses made by us in light of our experience and perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances. Such statements are subject to risks and uncertainties, including the risk factors discussed above, general economic and business conditions, the business opportunities that may be presented to and pursued by us, changes in law or regulations and other factors, many of which are beyond our control. There can be no assurance that we have accurately identified and properly weighed all of the factors which affect market conditions and demand for our vessels, that the information upon which we have relied is accurate or complete, that our analysis of the market and demand for our vessels is correct or that the strategy based on such analysis will be successful. Important factors that could cause actual results to differ materially from our expectations are disclosed within the sections entitled “Risk Factors”, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, “Business” and elsewhere in this Form 10-K.

ITEM 7A.		Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Sensitivity

     At December 31, 2005, we had financial instruments that are potentially sensitive to changes in interest rates including our 7.75% senior notes, which are due July 15, 2014. They have a stated interest rate of 7.75% and an effective interest rate of 7.8%. At December 31, 2005, the fair value of these notes, based on quoted market prices, was approximately $167.2 million, as compared to a carrying amount of $159.4 million.

Exchange Rate Sensitivity

     We operate in a number of international areas and are involved in transactions denominated in currencies other than U.S. dollars, which exposes us to foreign currency exchange risk. At various times we may utilize forward exchange contracts, local currency borrowings and the payment structure of customer contracts to selectively hedge exposure to exchange rate fluctuations in connection with monetary assets, liabilities and cash flows denominated in certain foreign currency. Other information required under Item 7A has been provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. Other than trade accounts receivable and trade accounts payable, we do not currently have financial instruments that are sensitive to foreign currency exchange rates.

ITEM 8.		Consolidated Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     To the Board of Directors and Stockholders of GulfMark Offshore, Inc and subsidiaries:

     We have audited the accompanying consolidated balance sheet of GulfMark Offshore, Inc. and subsidiaries as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity, comprehensive income, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

     We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (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 audit provides a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GulfMark Offshore, Inc. and subsidiaries as of December 31, 2005, and the consolidated 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.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of GulfMark Offshore, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 9, 2006 expressed an unqualified opinion on management’s assessment of internal control over financial reporting and an unqualified opinion on the effectiveness of internal control over financial reporting.

UHY Mann Frankfort Stein & Lipp CPAs, LLP

Houston, Texas

March 9, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     To the Board of Directors and Stockholders of GulfMark Offshore, Inc. and subsidiaries:

     We have audited the accompanying consolidated balance sheet of GulfMark Offshore, Inc. and subsidiaries as of December 31, 2004 and the related consolidated statements of operations, stockholders’ equity, comprehensive income, and cash flows for each of the two years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (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 GulfMark Offshore, Inc. and subsidiaries at December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.

     As discussed in Note 1 to the consolidated financial statements, in 2004 the Company changed its method of accounting for drydock expenditures.

Houston, Texas

March 31, 2005

GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		December 31,
		2005				2004
		(In thousands)
ASSETS
CURRENT ASSETS:
Cash		$	24,190			$	17,529
Trade accounts receivable, net of allowance for doubtful accounts of $57 in 2005 and $1,280 in 2004			38,039				34,627
Other accounts receivable			3,661				3,168
Prepaids and other			3,468				2,160
Total current assets			69,358				57,484
VESSELS AND EQUIPMENT, at cost, net of accumulated depreciation of $154,457 in 2005 and $139,457 in 2004			485,417				520,574
CONSTRUCTION IN PROGRESS			25,029				18,404
GOODWILL			27,628				30,218
FAIR VALUE HEDGE			1,085				—
DEFERRED COSTS AND OTHER ASSETS			5,398				6,038
TOTAL ASSETS		$	613,915			$	632,718
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt		$	2,113			$	19,494
Accounts payable			16,195				14,808
Accrued personnel costs			7,706				7,320
Accrued interest expense			6,539				5,981
Other accrued liabilities			1,864				1,933
Total current liabilities			34,417				49,536
LONG-TERM DEBT			247,685				258,022
DEFERRED TAX LIABILITIES			9,382				9,003
UNREALIZED LOSS ON FAIR VALUE HEDGE			1,085				—
OTHER LIABILITIES			1,250				—
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value; 2,000 shares authorized; no shares issued			—				—
Common stock, $0.01 par value; 30,000 shares authorized; 20,373 and 20,134 shares issued and outstanding, respectively			202				201
Additional paid-in capital			125,177				122,105
Retained earnings			153,004				114,614
Accumulated other comprehensive income			41,713				79,237
Treasury stock, at cost			(2,017	)			(1,344	)
Deferred compensation expense			2,017				1,344
Total stockholders’ equity			320,096				316,157
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	613,915			$	632,718

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

GULFMARK OFFSHORE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

		Year Ended December 31,
		2005				2004				2003
		(In thousands, except per share amounts)
REVENUES		$	204,042			$	139,312			$	129,900
COSTS AND EXPENSES:
Direct operating expenses			82,803				71,239				69,836
Drydock expense			9,192				8,966				—
Bareboat charter expense			3,864				1,410				6,505
General and administrative expenses			19,572				15,666				10,801
Depreciation and amortization			28,875				26,137				28,031
Total costs and expenses			144,306				123,418				115,173
OPERATING INCOME			59,736				15,894				14,727
OTHER INCOME (EXPENSE):
Interest expense			(19,017	)			(17,243	)			(12,988	)
Interest income			569				276				238
Debt refinancing cost			—				(6,524	)			—
Gain on sale of assets			—				2,282				16
Foreign currency gain (loss) and other			484				1,517				(1,267	)
Total other income (expense)			(17,964	)			(19,692	)			(14,001	)
Income (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle			41,772				(3,798	)			726
Income tax (provision) benefit			(3,382	)			6,476				(192	)
Income before cumulative effect of change in accounting principle			38,390				2,678				534
Cumulative effect on prior years of change in accounting principle — net of $773 related tax effect			—				(7,309	)			—
NET INCOME (LOSS)		$	38,390			$	(4,631	)		$	534
EARNINGS (LOSS) PER SHARE:
Basic — before cumulative effect of change in an accounting principle		$	1.92			$	0.13			$	0.03
Cumulative effect on prior years of change in accounting principle			—				(0.36	)			—
Net income (loss)		$	1.92			$	(0.23	)		$	0.03
Diluted — before cumulative effect of change in an accounting principle		$	1.86			$	0.13			$	0.03
Cumulative effect on prior years of change in accounting principle			—				(0.36	)			—
Net income (loss)		$	1.86			$	(0.23	)		$	0.03
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			20,031				19,938				19,919
Diluted			20,666				19,938				20,272