• transfer of a portion of subsea services from the Middle East to West Africa; and

• corporate interest income and expense no longer being allocated to the reportable segments.

The above organizational changes did not have an impact on equity, consolidated net income or consolidated cash flows.
Our results of operations are affected by the overall level of activity of the offshore construction industry within each worldwide region in which we operate. This overall level of offshore construction activity is principally determined by four factors: (1) the oil and gas industry's ability to economically justify placing discoveries of oil and gas reserves in production; (2) the oil and gas industry's need to maintain, repair, and replace existing pipelines and structures to extend the life of production; (3) the oil and gas industry's need to clear structures from the lease once the oil and gas reserves have been depleted; and (4) weather events such as major hurricanes. Our results of operations ultimately reflect our ability to secure jobs through competitive bidding and manage those jobs to successful completion. The competition and inherent operating risks vary between the worldwide regions in which we operate, and these challenges affect individual segment profitability.

Our results of operations are measured in terms of revenues, gross profit, and gross profit as a percentage of revenues ("margins") are principally driven by three factors: (1) our level of offshore construction and subsea activity ("activity"), (2) pricing, which can be affected by contract mix ("pricing"), and (3) operating efficiency on any particular construction project ("productivity").
Offshore Construction Services
The level of our offshore construction activity in any given period has a significant impact on our results of operations. The offshore construction business is capital and personnel intensive, and, as a practical matter, many of our costs, including the wages of skilled workers, are effectively fixed in the short run regardless of whether or not our vessels are being utilized in productive service. In general, as activity increases, a greater proportion of these fixed costs are recovered through operating revenues; and, consequently, gross profit and margins increase. Conversely, as activity decreases, our revenues decline, but our costs do not decline proportionally, thereby constricting our gross profit and margins. Our activity level can be affected by changes in demand due to economic or other conditions in the oil and gas exploration industry, seasonal conditions in certain geographical areas, and/or our ability to win the bidding for available jobs. Our results of operations depend heavily upon our ability to obtain, in a very competitive environment, a sufficient quantity of offshore construction contracts with sufficient gross profit margins to recover the fixed costs associated with our offshore construction business.
Most of our offshore construction revenues are obtained through international contracts which are generally larger, more complex, and of longer duration than our typical domestic contracts. Most of these international contracts require a significant amount of working capital, are generally bid on a lump-sum basis, and are secured by a letter of credit or performance bond. Operating cash flows may be negatively impacted during periods of escalating activity due to the substantial amounts of cash required to initiate these projects and the normal delays between cash expenditures by the Company and cash receipts from the customer. Additionally, lump-sum contracts for offshore construction services are inherently risky and are subject to many unforeseen circumstances and events that may affect productivity. When productivity decreases with no offsetting decrease in costs or increases in revenues, our contract margins erode compared to our bid margins. In general, we are required to bear a larger share of project related risks during periods of weak demand for our services and a smaller share of risk during periods of high demand for our services. Consequently, our revenues and margins from offshore construction services are subject to a high degree of variability, even as compared to other businesses in the offshore energy industry.
Claims and change orders are a significant aspect of any construction business and are particularly significant in the offshore construction industry. A claim is an amount in excess of the contract price which a construction contractor seeks to collect from customers or others due to delays, errors in specifications or design, unapproved change orders, or other causes of unanticipated costs caused by the customer or others. A change order is a request to alter the scope of work of a previously agreed upon construction contract. Change orders may include changes in specifications or design, method or manner of performance, facilities, equipment, site, or the period for completion of the work. Change orders are common in our business due to the nature of offshore construction contracts and sometimes add to the degree of project execution difficulty. A change order usually increases the scope of work but may also decrease the scope and, consequently, the amount of contract revenue and costs which are recognized. Either the customer or the Company may initiate a change order. At the time of initiation, a change order may be approved or unapproved by either party, priced or unpriced, or defined or undefined regarding detailed scope. Even when the scope of work is defined, the associated increase or decrease in contract revenue may be governed by contract terms or may be negotiated later, sometimes after the work is performed. Subsea Services
Most of our subsea revenues are the result of short-term work, involve numerous smaller contracts, and are usually based on a day-rate charge. Financial risks associated with these types of contracts are normally limited due to their short-term and non-lump sum nature. However, some subsea contracts, especially those that utilize DSVs, may involve longer-term commitments that extend from the

exploration, design and installation phases of a field throughout its useful life by providing IRM services. The financial risks associated with these commitments are low in comparison with our offshore construction activities due to the day-rate structure of the contracts. Revenues and margins from our subsea activities tend to be more consistent than those from our offshore construction activities.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

                                                2008                               2007
                                                          % of                              % of             % Change
                                      Thousands         Revenue         Thousands         Revenue          (Unfavorable)
Revenues                             $ 1,070,988           100.0 %      $  992,513           100.0 %                  7.9 %
Cost of operations                     1,084,581           101.3           719,768            72.5                  (50.7 )

Gross profit (loss)                      (13,593 )           1.3           272,745            27.5                 (105.0 )
Loss on asset impairments                  2,551               -               141               -                    n/m
Net gain on asset disposal                (1,695 )             -            (4,220 )           0.4                  (59.8 )
Selling, general and
administrative expenses                   95,364             8.9            81,275             8.2                  (17.3 )

Operating income (loss)                 (109,813 )          10.2           195,549            19.7                 (156.2 )

Interest income                           14,477             1.4            27,966             2.8                  (48.2 )
Interest expense                         (13,624 )           1.3           (13,439 )           1.4                   (1.4 )
Other income (expense), net                 (641 )             -             3,826             0.4                 (116.8 )

Income (loss) before income
taxes                                   (109,601 )          10.3           213,902            21.5                 (151.2 )
Income taxes                               7,760             0.7            53,942             5.4                   85.6

Net income (loss)                    $  (117,361 )          11.0 %      $  159,960            16.1 %               (173.4 )%

Revenues - Revenues increased by $78.5 million, or 7.9%, between 2008 and 2007 to $1.1 billion for 2008 primarily due to higher activity in the Middle East, Asia Pacific/India, and Latin America. Increased construction activity in the Middle East from the Berri and Qatif project and kickoff of the Camarupim project in Latin America were somewhat offset by lower demand for our services in North America and lower activity in West Africa. For a detailed discussion of revenues and income (loss) before taxes for each geographical area, please see "Segment Information" below.
Depreciation and Amortization in Cost of Operations. The amount of depreciation and amortization expense, including the amortization of dry-docking costs, included in our cost of operations for 2008 was $51.9 million, compared to $46.9 million included in 2007. This increase in depreciation and amortization expense was primarily caused by increased dry-dock amortization related to two major construction vessels and an increase in the amount of depreciation expense related to our major construction vessels with the addition of the Global Orion to the vessel fleet. Depreciation associated with our office expansion in the Middle East and Latin America also contributed to the increase in depreciation. Amortization of stock compensation decreased between the periods by $1.4 million. We expect amortization of our dry-dock costs to be material to our operations in 2009.
Gross Profit - Gross profit decreased by $286.3 million, or 105%, between 2008 and 2007 to a $13.6 million gross loss for 2008 compared to $272.7 million gross profit for 2007. The decrease primarily reflects the adverse effects of the losses incurred on the Berri and Qatif project in Saudi Arabia and the Camarupim project in Brazil. Cost overruns on the Berri and Qatif project and productivity and equipment delays on both projects resulted in substantial project deterioration during 2008. Results for 2008 include an estimate for losses through the projects' anticipated completion dates in 2009.
Loss on Asset Impairments. Loss on asset impairments increased $2.5 million in 2008, compared to 2007. During 2008, primarily due to high repair costs in excess of future benefit of certain vessels, we decided not to repair them and recorded an aggregate impairment loss of $2.6 million on the retirement of two DSVs. In 2007, we recorded an impairment loss of $0.1 million.

Gain on Asset Disposal. Net gains on the disposal of assets decreased $2.5 million from 2007 to 2008. Net gains on asset disposals totaled $1.7 million for 2008 primarily from the sale of a DSV. Net gains on asset disposals totaled $4.2 million during 2007, which primarily arose from sale of three DSVs, that were partially offset by losses on the disposal of ancillary dive support systems.
Selling, General and Administrative Expenses - Selling, general and administrative expenses increased by $14.1 million, or 17.3%, to $95.4 million for 2008, compared to $81.3 million during 2007. Increased labor costs in all areas except Asia Pacific/India were responsible for the majority of this increase, as well as increased professional fees, rent expense, and computer expense, all related to the Company's continued business expansion. Partially offsetting these increases was a reduction in amortization of stock compensation resulting from the recapture of stock expense related to performance shares and the net favorable impact related to the recapture of previously recognized stock expense resulting from the accelerated vesting of certain shares upon the resignation of the Company's CEO in October, 2008.
Interest Income - Interest income decreased by $13.5 million to $14.5 million during 2008, compared to $28.0 million for 2007. Lower interest rates and decreased cash balances in 2008 contributed to lower return on cash balances and short-term investments compared to 2007.
Interest Expense - Interest expense increased slightly to $13.6 million for 2008 compared to $13.4 million for 2007. Increased interest resulting from the issuance of $325.0 million of convertible debentures in July 2007 was partially offset by a reversal of $2.5 million previously accrued interest expense related to the 2008 settlement of a previous uncertain tax position. Other income (expense), net - Other income (expense), net decreased by $4.5 million from 2007 primarily resulting from losses on foreign currency exchange rate differences incurred in 2008 and the nonrecurrence of a $1.4 million recognized gain in 2007 related to the settlement of a claim for interrupted operations as a result of a 2006 oil spill in the Gulf of Mexico by a refinery adjacent to our property in Louisiana.
Income Taxes - The Company's effective tax rate was (7.1)% and 25.2%, respectively, for the twelve months ended December, 2008 and 2007. The tax rate in 2008 was adversely impacted by losses that could not be tax benefited and also taxes paid in tax jurisdictions with a deemed profit tax regime where tax is calculated as a percentage of revenue rather than being based upon net income. This resulted in an income tax expense being recognized despite the loss reported before taxes for the twelve months ended December 31, 2008. Segment Information - The following sections discuss the results of operations for each of our reportable segments during the twelve month periods ended December 31, 2008 and 2007.
Utilization of Major Construction Vessels Worldwide utilization for our major construction vessels was 49%, 45%, and 61% for the fiscal years ended December 31, 2008, 2007, and 2006, respectively. Utilization of our major construction vessels is calculated by dividing the total number of days major construction vessels are assigned to project-related work by the total number of calendar days for the period. Dive support vessels, cargo/launch barges, ancillary supply vessels and short-term chartered project-specific construction vessels are excluded from the utilization calculation. The Company frequently uses chartered anchor handling tugs, dive support vessels and, from time to time, construction vessels in the Company's operations. Also, most of the Company's international contracts (which are generally larger, more complex and of longer duration) are generally bid on a lump-sum or unit-rate (vs. day-rate) basis wherein the Company assumes the risk of performance and changes in utilization rarely impact revenues but can have an inverse relationship to changes in profitability. For these reasons, the Company considers utilization rates to have a relatively low direct correlation to changes in revenue and gross profit.
North America Offshore Construction Division

Revenues were $81.1 million in 2008 compared to $106.5 million in 2007. A decrease of $25.4 million, or 24%, between 2008 and 2007 was primarily due to:
(1) lower activity related to market conditions driven by decreased demand for services; (2) $11.2 million related to the extended dry docking of the Cherokee; and (3) non-compensated vessel standby costs during Hurricanes Gustav and Ike. Loss before taxes was $17.7 million for 2008 compared to income before taxes of $12.6 million for 2007. This decrease of $30.3 million was primarily attributable to lower revenues and lower margins on projects attributable to the continuing softening of market conditions in the Gulf of Mexico, lower profitability on derrick work impacted by operational issues, and non-recovered vessel costs resulting from lower vessel utilization for 2008. North America Subsea
Revenues were comparable between 2008 and 2007. Revenues generated in 2008 were $146.1 million compared to $150.4 million for 2007. However, project profitability declined between the two years with increased competition affecting pricing, coupled with higher operating costs incurred in 2008. Income before taxes was $7.4 million for 2008 compared to $59.8 million for 2007. This decrease of $52.4 million, or 88%, was attributable to lower margins resulting from increased competition affecting pricing as well as productivity issues affecting some of our projects. Idle and startup costs associated with the addition of the Global Orion and Olympic Challenger to the vessel fleet also negatively impacted the margins during 2008. In 2007, higher project margins were generated from the REM Commander which was subsequently transferred to the Latin American region in April 2008. In addition, we recorded a $1.0 million impairment on a DSV during 2008.
Latin America
Revenues were $267.0 million for 2008 compared to $227.0 million for 2007. An increase of $40.0 million, or 17.6%, in 2008 compared to 2007 was primarily due to additional revenue from expansion into Brazil, partially offset by lower activity in Mexico. Despite the increase in revenues, we reported a loss before taxes of $17.9 million during 2008 compared to income before taxes of $97.6 million in 2007. The decrease of $115.5 million was primarily due to the favorable finalization of project claims and change orders in 2007 and the recording of a loss position on the Camarupim project in Brazil in 2008. For 2008, the Camarupim project was estimated to complete at a significant loss due to lower than expected productivity and vessel standby delays from mechanical and weather downtime. Results for 2008 therefore include an estimate for losses on the Camarupim project through the project's estimated completion in 2009. This compares to high profit margins obtained from the favorable resolutions of change orders and claims on projects in Mexico in 2007. West Africa
Revenues were $152.9 million for 2008 compared to $184.7 million for 2007. This decrease of $31.8 million, or 17%, in 2008 compared to 2007 was primarily due to decreased activity in the region. In 2008, we performed two major construction projects in West Africa compared to three major construction projects in 2007. Loss before taxes was $42.0 million for 2008 compared to a loss before taxes of $15.0 million in 2007. In 2008, additional costs were incurred related to idle vessel costs from low utilization and project productivity issues related to a project in Nigeria. Also, we recorded a $1.6 million impairment on a DSV in 2008. Exchange losses of $3.7 million primarily related to naira cash balances also negatively impacted the loss before taxes; however, this loss was partially offset by a reversal of previously accrued interest expense related to a 2008 favorable settlement of an uncertain tax position. See also Note 9 of the Notes to Consolidated Financial Statements for a discussion of challenges related to conducting operations in Nigeria.
Middle East
Revenues were $237.5 million for 2008 compared to $186.3 million during 2007. This increase of $51.2 million, or 27%, for 2008 compared to 2007 was attributable to increased activity in the region.

During 2008, two major projects were in progress compared to a lower level of construction activity during much of 2007. However, loss before taxes of $81.6 million was reported during 2008 compared to income before taxes of $29.6 million for 2007 due primarily to the significant deterioration in the Berri and Qatif project in Saudi Arabia during 2008. The loss on the Berri and Qatif project is primarily due to exceptional losses in productivity and cost overruns. Results for 2008 therefore include an estimate for losses on the Berri and Qatif project through the estimated completion date in the 2009 third quarter.
Asia Pacific/India
Revenues were $223.5 million for 2008 compared to $181.2 million for 2007. This increase of $42.3 million, or 23%, for 2008 compared to 2007 was primarily attributable to higher activity during 2008. Income before taxes was $40.9 million for 2008 compared to $11.5 million for 2007. This increase in profitability of $29.4 million was primarily due to higher revenues, increased project margins, good project execution, and cost recoveries attributable to higher vessel utilization during 2008.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

                                                2007                              2006
                                                         % of                               % of             % Change
                                     Thousands         Revenue          Thousands         Revenue          (Unfavorable)
Revenues                             $  992,513           100.0 %      $ 1,234,849           100.0 %                (19.6 )%
Cost of operations                      719,768            72.5            887,003            71.8                   18.9

Gross profit (loss)                     272,745            27.5            347,846            28.2                  (21.6 )
Loss on asset impairments                   141               -              8,931             0.7                   98.4
Reduction in litigation
provision                                     -               -            (13,699 )           1.1                 (100.0 )
Net gain on asset disposal               (4,220 )           0.4             (6,395 )           0.5                  (34.0 )
Selling, general and
administrative expenses                  81,275             8.2             71,109             5.8                  (14.3 )

Operating income                        195,549            19.7            287,900            23.3                  (32.1 )

Interest income                          27,966             2.8              8,169              .7                  242.3
Interest expense                        (13,439 )           1.4            (10,787 )           0.9                  (24.6 )
Other income (expense), net               3,826             0.4                705               -                    n/m

Income before income taxes              213,902            21.5            285,987            23.2                  (25.2 )
Income taxes                             53,942             5.4             86,242             7.0                   37.5

Net income                           $  159,960            16.1 %      $   199,745            16.2 %                (19.9 )%

Revenues. Revenues decreased by 19.6% to $992.5 million between 2007 and 2006, primarily due to a decline in construction activity from the high levels experienced in Latin America and Gulf of Mexico during 2006. Two significant construction projects that were fully active in Latin America in 2006 were completed during the first half of 2007. Furthermore, the exceptionally high level of demand for hurricane related repair work in the Gulf of Mexico moderated during 2007. Worldwide utilization of our major construction vessels decreased to 45% in 2007, compared to 61% in 2006. The effects of lower construction activity in Latin America and the Gulf of Mexico experienced in 2007 were reduced by the positive impact of increased construction activity in the Middle East. For a detailed discussion of revenues and income before taxes for each geographical area, please see "Segment Information" below. Depreciation and Amortization in Cost of Operations. The amount of depreciation and amortization expense, including the amortization of dry-docking costs, included in our cost of operations for 2007 was $46.9 million, compared to the $51.4 million included in 2006. This decrease in depreciation and amortization expense was primarily caused by a reduction in the amount of major construction vessel depreciation, resulting from lower utilization. The amount of amortization related to stock-based compensation and dry-docking increased between the periods.

Gross Profit. Gross profit decreased by $75.1 million to $272.7 million in 2007, compared to 2006, primarily due to lower revenues, as described above, and lower margins from our West Africa segment, which were caused by incremental vessel costs that were predominately unrecovered project costs. As a percentage of revenues, our overall gross profit margin decreased from 28.2% in 2006 to 27.5% in 2007. This decline in gross profit margin was primarily the result of lower utilization of our major construction vessels and lower profitability on projects in West Africa.
Loss on Asset Impairments. Loss on asset impairments decreased $8.8 million in . . .