ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

Forward Looking Information and Cautionary Statement

In accordance with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the company notes that this Quarterly Report on Form 10-Q and the information incorporated herein by reference contain certain forward-looking statements which reflect the company’s current view with respect to future events and financial performance. Any such forward-looking statements are subject to risks and uncertainties and the company’s future results of operations could differ materially from its historical results or current expectations. Some of these risks are discussed in this report, and include, without limitation, fluctuations in worldwide energy demand and oil and gas prices; fleet additions by competitors and industry overcapacity; changes in capital spending by customers in the energy industry for offshore exploration, development and production; changing customer demands for different vessel specifications which may make some of our older vessels technologically obsolete for certain customer projects or in certain markets; instability of global financial markets and lack of available credit; acts of terrorism; significant weather conditions; unsettled political conditions, war, civil unrest and governmental actions, especially in higher risk countries of operations; foreign currency fluctuations; and enforcement of laws related to the environment, labor and foreign corrupt practices.

Forward-looking statements, which can generally be identified by the use of such terminology as “may,” “expect,” “anticipate,” “estimate,” “forecast,” “believe,” “think,” “could,” “continue,” “intend,” “seek,” “plan,” and similar expressions contained in this report, are predictions and not guarantees of future performance or events. Any forward-looking statements are based on current industry, financial and economic information, which the company has assessed but which by its nature is dynamic and subject to rapid and possibly abrupt changes. The company’s actual results could differ materially from those stated or implied by such forward-looking statements due to risks and uncertainties associated with our business. The forward-looking statements should be considered in the context of the risk factors listed above and discussed in Items 1, 1A, 2 and 7 included in the company’s Annual Report on Form 10-K for the year ended March 31, 2008, filed with the Securities and Exchange Commission (SEC) on May 30, 2008 and elsewhere in the Form 10-Q. Investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. Management disclaims any obligation to update or revise the forward-looking statements contained herein to reflect new information, future events or developments.

In addition, in certain places in this report, we refer to published reports of analysts that purport to describe trends or developments in energy production and drilling and exploration activity. The company does so for the convenience of our stockholders and in an effort to provide information available in the market that will assist the company’s investors in a better understanding of the market environment in which the company operates. However, the company specifically disclaims any responsibility for the accuracy and completeness of such information and undertakes no obligation to update such information.

Overview

The company provides services and equipment to the global offshore energy industry through the operation of a diversified fleet of marine service vessels. Revenues, net earnings and cash flows from operations are dependent upon the activity level of the vessel fleet and vessel day rates, which are, among other things, dependent upon oil and natural gas prices and ultimately the supply/demand relationship for crude oil and natural gas. The following information contained in this Form 10-Q should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in Item 1 of this Quarterly Report and related disclosures and the company’s Annual Report on Form 10-K for the year ended March 31, 2008, filed with the SEC on May 30, 2008.

General Market Conditions and Results of Operations

The current global financial crisis, which has contributed, among other things, to significant reductions in available capital and liquidity from banks and other providers of credit, has raised well-publicized concerns that the worldwide economy may enter into a prolonged recessionary period. The company is assessing the impact of various scenarios and sensitivities the financial crisis might have on the global economy, including

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the demand for crude oil and natural gas, and the resulting impact, if any, on plans of exploration and production companies, in order to determine how the crisis may affect the company and the demand for its vessels in the global offshore vessel industry. Among other things, the company is uncertain as to whether the current global financial crisis will adversely affect the ability of shipyards to meet their scheduled deliveries of new vessels or the ability of the company to renew its fleet through new vessel construction or acquisitions. Also unknown is the potential effect that the crisis may have on the company’s more highly-leveraged competitors, including such companies’ ability to continue to fund their construction commitments. At present, the financial and commodity markets are too volatile to assess the current situation with a high degree of confidence. The company operates in a highly competitive business environment that has many risks. Critical risk factors that affect, or may affect, the company and the offshore marine service industry include the absolute level and volatility of crude oil and natural gas prices, changes in the level of capital spending by the company’s customers, the number of available drilling rigs (as discussed below) and the potential overcapacity in the offshore vessel market. A full discussion on each of these risk factors (in addition to several other risk factors) is disclosed in Item 1A in the company’s Annual Report on Form 10-K for the year ended March 31, 2008, filed with the Securities and Exchange Commission on May 30, 2008. For the quarter and six-month period ended September 30, 2008, the company did not experience any significant negative effects from the current financial crisis and credit market tightening.

Given the foregoing uncertainties, the company is in the process of re-assessing its stated strategy and investment plans. All statements made herein of the previously stated plans or the “current” plan or expectation of such should be considered in the light of the potential effects discussed in the preceding paragraph. While the magnitude of any change in plans, including investment plans, cannot be predicted at this time, it is likely that some adjustments will be necessary due to an economic slowdown, changes in expectations in regard to commodity prices, or the lack of liquidity in financial markets.

The company’s offshore service vessels provide a diverse range of services and equipment to the energy industry. The company’s revenues and operating profit are primarily driven by the company’s fleet size, vessel utilization and day rates because a sizeable portion of the company’s operating costs (including depreciation) do not change proportionally with changes in revenue. Operating costs primarily consist of crew costs, repair and maintenance, insurance and loss reserves, fuel, lube oil and supplies and vessel operating lease expense. Fleet size, fleet composition, geographic areas of operation and the supply and demand for marine personnel are the major factors which affect overall crew costs. The timing and amount of repair and maintenance costs are influenced by customer demands, vessel age and drydockings to satisfy safety and inspection requirements mandated by regulatory agencies. A certain number of drydockings are required over a given period to meet regulatory requirements. Drydocking costs are incurred only if economically justified, taking into consideration the vessel’s age, physical condition and future marketability. If a required drydocking is not performed, the company will either stack or sell the vessel as it is not permitted to work without the proper certifications. When the company takes a productive vessel out of service for drydocking, the company not only incurs the drydocking cost but also continues to incur operating costs and depreciation on the vessel and loses revenue from that vessel during the drydock period. In any given period, downtime associated with drydockings and major repairs and maintenance can have a significant effect on the company’s revenues. In the current environment of record dayrates in international markets, drydockings have taken on an increasing importance to the company and its financial performance. Our older vessels, for which demand remains strong, require more frequent repair and drydockings, while some of the newer vessels built over the last eight years are now experiencing their first and second required regulatory drydockings. The combination of these factors has led to increased levels of expenditures for drydockings and incremental volatility in operating revenues, thus making period-to-period comparisons more difficult. Although the company attempts to efficiently manage its fleet drydocking schedule to minimize the disruptive effect, recent inflation in shipyard pricing and the heavy workloads at the shipyards are resulting in increased drydocking costs, increased days off hire at shipyards, and therefore, increased loss of revenue. The company does not see the shipyard situation improving in the foreseeable future and expects that the timing of drydockings in the future will result in continued quarterly volatility in repair and maintenance costs and loss in revenue. Fuel and lube costs can also fluctuate in any given period depending on the number of vessel mobilizations that occur in any given period.

The company also incurs vessel operating costs which are aggregated under the “other” vessel operating cost heading. These costs consist of brokers’ commissions, training costs and other type costs. Brokers’

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commission costs are primarily incurred in the company’s international operations where brokers assist in obtaining work for the company’s vessels. Brokers are paid a percentage of day rates and, accordingly, as revenues increase so do commissions paid to brokers. Other type costs include, but are not limited to, satellite communication fees, agent fees, port fees, canal transit fees, vessel certification fees and temporary vessel importation fees.

The following table compares revenues and operating expenses (excluding general and administrative expense, depreciation expense and gain on sales of assets) for the company’s vessel fleet and the related percentage of total revenue for the quarters and six-month periods ended September 30, 2008 and 2007 and for the quarter ended June 30, 2008. Vessel revenues and operating costs relate to vessels owned and operated by the company while other marine revenues relate to third-party activities of the company’s shipyards, brokered vessels and other miscellaneous marine-related activities.

As a result of the uncertainty of a certain customer to make timely payments on vessel charter hire, the company has deferred the recognition of approximately $6.0 million of billings as of September 30, 2008 ($5.7 million of billings as of March 31, 2008), which would otherwise have been recognized as revenue. The

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company will recognize the amounts as revenue as cash is collected or at such time as the uncertainty has been significantly reduced.

The company’s consolidated net earnings for the first half of fiscal 2009 increased approximately 4%, or $6.2 million, compared to the net earnings achieved during the first half of fiscal 2008 primarily due to higher average day rates. The company’s United States (U.S.) revenues decreased approximately 7%, or $6.2 million, during the first half of fiscal 2009, as compared to the same period in fiscal 2008, while the company’s international revenues increased $88.9 million, or approximately 18%, during the same comparative period. Domestic-based vessel operating costs decreased approximately 9%, or $4.5 million, during the first half of fiscal 2009, as compared to the same period in fiscal 2008, while the company’s international-based vessel operating costs increased approximately 33%, or $75.8 million, during the same comparative period. A significant portion of the company’s operations are conducted internationally. For the first half of fiscal 2009, revenues generated from international operations as a percentage of the company’s total revenues were 87%.

The company’s U.S.-based revenues for the first half of fiscal 2009 decreased as compared to the same period in fiscal 2008 primarily due to a decrease in the number of vessels operating in the U.S.-based portion of the Gulf of Mexico (GOM) and lower utilization on the U.S.-based vessels resulting from lower demand for the company’s vessels in the GOM offshore vessel market as compared to the first half of fiscal 2008, despite increases in average day rates. Demand for vessels in the shallow water GOM offshore vessel market diminished as repair work on the offshore energy infrastructure that was damaged by Hurricane Ivan in 2004 and Hurricanes Katrina and Rita in August and September 2005, respectively, was completed and numerous drilling rigs have relocated to international areas. During the quarter ended September 30, 2008, vessel day rates trended higher as the supply/demand fundamentals in the GOM offshore vessel market tightened due to an increase in exploration and production (E&P) drilling activity in the GOM resulting from high natural gas prices, which reached the $13.00 per Mcf range in July 2008 and which have since deflated to the $7.00 per Mcf range. In September 2008, Hurricanes Gustav and Ike hit the Louisiana and Texas coasts. The U.S. Minerals Management Service reported that the damage caused by the two storms to the energy industry infrastructure in the U.S. GOM and along the U.S. Gulf Coast was not as extensive as the damage caused by Hurricane’s Katrina and Rita in calendar year 2005 and indicated that the damage that was sustained would take several months to repair. The market for offshore support vessels was already tight prior to the two storms and drilling operators discovered a shortage in available-for-work offshore vessels currently in the U.S. GOM. The GOM supply boat market has a significant number of vessels stacked that could resume active status, but only after expenditures to drydock and re-certify the vessels. Prior to the storms, all of the company’s available-for-work U.S.-based vessels were working at relatively full utilization and, since the storms, two of the company’s stacked vessels are each undergoing a drydock and recertification in order to meet increased post-hurricane market demand.

While the repair work in the Gulf of Mexico is expected to keep U.S-based vessel demand high for the near term, the number of operating drilling rigs in the U.S. market is generally the primary driver of the company’s expected activity levels and future profitability in the U.S. market. At present, the offshore rig count in the GOM remains at historically low levels. The strength of the international drilling market has attracted offshore rigs from the U.S. market over the past few years. Over the longer term, the company’s U.S.-based fleet should be affected more by the active offshore rig count in the United States than by any other single outside influence. In addition, consolidation could result in the absorption of an oil and gas company with which the company has a strong commercial relationship into another company with which the company does not have such a relationship.

During the quarter ended September 30, 2008, both the current U.S. President and U.S. Congress allowed the moratorium on offshore drilling in federal waters along the U.S. Pacific and Atlantic coasts to expire effective October 1, 2008. Although the lifting of the moratorium will not result in immediate drilling, the prospects for the future of offshore drilling in the new regions of the U.S. could be promising; however, in January 2009, a new U.S. President will take office, and it is not known at this time how current energy policies in the U.S. will be affected by the new leadership and ultimately how current commodity prices and new energy policies, if any, will impact the offshore energy industry.

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The deepwater offshore energy market is a growing segment of the energy market. Worldwide rig construction continues as rig owners capitalize on the high worldwide demand for drilling. Reports published during the most recently completed quarter suggest that over the next four years, the worldwide moveable drilling rig count will increase as new-build rigs currently on order and under construction stand at approximately 190 rigs which will supplement the current approximate 725 movable rigs worldwide. In addition, investment is also being made in the floating production market where approximately 80 new floating production units are currently under construction and are expected to be delivered over the next five years to supplement the current approximate 300 floating production units worldwide.

Approximately 740 new-build vessels (platform supply vessels and anchor handlers only) are currently under construction and are expected to be delivered to the worldwide offshore vessel market over the next four years as reported by ODS-Petrodata. The current worldwide fleet of these classes of vessels approximates 2,000 vessels. An increase in vessel capacity could result in increased competition in the company’s industry which may have the effect of lowering charter rates. However, the worldwide offshore marine vessel industry has a large number of aging vessels that are nearing or exceeding original expectations of estimated economic lives. These older vessels could potentially retire from the market within the next few years if the cost of extending the vessels’ lives is not economically justifiable. Although the future attrition rate of these aging vessels cannot be accurately predicted, the company believes that the retirement of a portion of these aging vessels may offset, or at least in part, mitigate the potential effects of new-build vessels being delivered into the market. Additional vessel demand should be created with the addition of new drilling rigs and floating production units over the next few years, which should help minimize the effects of 740 new-build vessels (platform supply vessels and anchor handlers only) being added to the offshore support vessel fleet. It is unknown at this time how the global financial crisis will influence the ultimate delivery of new drilling rigs, floating production units and vessels currently under construction.

Commodity prices, and particularly the price of crude oil and natural gas, are critical factors in E&P companies’ decisions to retain their drilling rigs in the U.S. Gulf of Mexico market or mobilize the rigs to more profitable international markets. Crude oil and natural gas markets witnessed positive record breaking pricing in mid-July 2008. Even before the current financial crisis caused extreme uncertainty in the market, prices for these two commodities had fallen from their respective peaks earlier in the year due to a U.S. economic slowdown, which had begun to reduce demand for oil and gas. Inventory levels for natural gas have risen higher than expected during the summer injection season and are expected to approach full capacity at the end of the season as was the case during calendar years 2006 and 2007. Production shut-ins in the offshore drilling market caused by Hurricanes Gustav and Ike eased some of the production growth in natural gas but were insufficient to offset strong land-based natural gas drilling. High inventory levels for natural gas generally do not bode well for future increases in natural gas pricing. The company’s U.S. results of operations are primarily driven by natural gas exploration and production and, given the relative uncertainty of natural gas pricing, it is unknown how U.S.-based vessel demand will be affected after the post-hurricane offshore vessel demand surge wanes.

While all of these factors create uncertainty as to the immediate future activity level of the U.S. vessel market, the company’s assets are highly mobile. Should the U.S. market weaken, the company has the ability to redeploy some of its vessels to international markets where the vessels may benefit from stronger average day rates and statutory income tax rates that are typically lower than in the United States. The company will continue to assess the demand for vessels in the Gulf of Mexico and in the various international markets and consider relocating additional vessels to international areas. The cost of mobilizing vessels to a different market are sometimes for the account of the company and sometimes for the account of a contracting customer.

The strength in the company’s international-based revenues during the first half of fiscal 2009 can be attributed to higher average day rates and an increase in the number of vessels operating internationally. Average day rates for the total international-based fleet increased approximately 20% during the first half of fiscal 2009 as compared to the same period in fiscal 2008. The company’s international results of operations are primarily dependent on the supply and demand relationship of crude oil. Even before the financial crisis caused extreme uncertainty in the market, crude oil prices were retreating to the $90 per barrel and below range after reaching an all time closing high of approximately $147 per barrel in mid-July 2008. Falling oil prices prompted the Organization of Petroleum Exporting Countries (OPEC) to announce in September 2008 that it would cut oil production by one half million barrels per day in an attempt to stabilize oil prices. At

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present, it is unknown whether crude oil prices will stabilize at levels that will continue to support significant levels of exploration and production spending by oil and gas companies. In addition, even if price levels do support high levels of spending, it is uncertain if E&P companies will be able to increase their level of capital expenditures because of recent reductions in available capital and liquidity. Given the current level of uncertainty in the energy markets, it is unknown how international-based vessel demand will be affected.

Marine operating profit and other components of earnings before income taxes and its related percentage of total revenue for the quarters and six-month periods ended September 30, 2008 and 2007 and for the quarter ended June 30, 2008 consist of the following:

United States-based Operations

U.S.-based vessel revenues, for both the quarter and the six-month period ended September 30, 2008, decreased approximately 7%, or $3.2 million and $6.2 million, respectively, as compared to the same periods in fiscal year 2008, due primarily to lower utilization rates as a result of weakness in the GOM market during the comparative periods (despite increases in average day rates) and to fewer vessels operating in the GOM (due to the transfer of vessels to international markets).

Revenues on the active towing supply/supply class of vessels, the company’s major income producing vessel class in the domestic market, decreased approximately 14% and 22%, or $3.1 million and $10.3 million, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008. Revenues on the company’s deepwater class of vessels increased approximately 8% and 22%, or $1.3 million and $5.9 million, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008. The company’s crew/utility class of vessels experienced a decrease in revenues of approximately 21% and 14%, or $1.4 million and $1.7 million, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008.

Average day rates on the U.S-based towing supply/supply vessels increased approximately 9% and 3% during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal year 2008, while utilization rates on this same class of vessel decreased approximately 9 and 10 percentage points, respectively, during the same comparative periods. Average day rates on the company’s U.S.-based deepwater class of vessels increased approximately 8% and 6% during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal year 2008. Utilization rates on the deepwater class of vessels increased approximately 3 percentage points for both the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal year 2008. Utilization rates on the company’s U.S-based crew/utility class of vessels decreased approximately 13 and 12 percentage points during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal year 2008. Average day rates for

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the crew/utility class of vessels decreased approximately 4% and 2%, respectively, during the same comparative periods.

U.S.-based operating profit for the quarter ended September 30, 2008, increased approximately $1.2 million, or 12%, as compared to the same period in fiscal year 2008 primarily due to lower vessel operating costs and depreciation expense due to the transfer of vessels to international operating areas. U.S.-based operating profit, for the six-month period ended September 30, 2008, was comparable to the U.S.-based operating profit earned during fiscal year 2008.

Current quarter U.S.-based vessel revenue was comparable to the previous quarter as a result of higher day rates offset by fewer vessels operating in the GOM. Current quarter operating profit increased approximately 18%, or $1.7 million, due to lower vessel operating costs and depreciation expense.

International-based Operations

International-based vessel revenues increased approximately 20% and 18%, or $50.5 million and $88.9 million, for the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal year 2008, due primarily to higher average day rates on all vessel classes operating in international markets and to an increase in the number of vessels operating internationally.

Revenues on the company’s international deepwater class of vessels increased approximately 19% and 7%, or $10.8 million and $8.1 million, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008. Revenues on the international towing supply/supply class of vessels increased approximately 23% and 25%, or $36.2 million and $75.7 million, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008. The company’s crew/utility class of vessels also experienced an increase in revenues of approximately 4% and 3%, or $1.1 million and $1.5 million, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008. Revenues on the company’s offshore tug class of vessels increased approximately 11% and 8%, or $1.5 million and $2.3 million, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008.

Average day rates on the international deepwater class of vessels increased approximately 20% and 13%, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal year 2008, while utilization rates on this same class of vessel decreased approximately 6 and 9 percentage points during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal year 2008. Average day rates for the company’s international towing supply/supply class of vessels increased approximately 23%, during both the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal year 2008. Utilization rates on the international towing supply/supply class of vessels, decreased approximately 1 percentage point, during both the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008. Average day rates on the company’s international-based crew/utility class of vessels increased approximately 13% and 10%, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008. Utilization rates for the crew/utility class of vessels decreased approximately 9 and 5 percentage points during the same comparative periods, respectively. Average day rates on the international offshore tugs increased approximately 28% and 27%, during the quarter and the six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008. Utilization rates on the international offshore tugs increased approximately 1 percentage point during the quarter ended September 30, 2008 but decreased approximately 5 percentage points during the six-month period ended September 30, 2008, as compared to the same periods in fiscal 2008.

International-based vessel operating profit increased approximately 13% and 2%, or $12.3 million and $3.7 million, for the quarter and six-month period ended September 30, 2008, respectively, as compared to the same periods in fiscal 2008 primarily due to higher revenues. Higher international-based revenues earned during the current fiscal year periods were partially offset by increases in vessel operating costs (primarily crew costs due to basic inflationary increases in labor costs around the world, repair and maintenance costs,

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fuel, lube and supplies, and other type costs) and higher depreciation expense resulting from an increase in the number of vessels operating internationally, including newly-constructed vessels added to the international-based fleet over the past year.

While international-based vessel revenues improved during the first half of fiscal 2009, as compared to the same period during fiscal 2008, the revenue line was negatively impacted by an increased number of maintenance days on several of the company’s larger deepwater class of vessels during the six-month period ended September 30, 2008 resulting from a higher level of drydockings performed during the period. The increased number of maintenance days negatively impacted the utilization statistics and average day rates of the company’s deepwater class of vessels during the first half of fiscal 2009, as compared to the first half of fiscal 2008.

Current quarter international-based vessel revenues increased approximately 6%, or $16.4 million, as compared to the previous quarter, due to an increase in average day rates. International-based vessel operating profit for the current quarter increased approximately 23%, or $19.8 million, as compared to the previous quarter, primarily due to an increase in vessel revenues.

Other Items

Insurance and loss reserves, during the quarter and the six-month period ended September 30, 2008, increased approximately 24% and 5%, or $1.1 million and $0.5 million, respectively, as compared to the same periods in fiscal 2008, due to higher premiums and loss reserves recorded in the current fiscal year as compared to fiscal 2008.

Gain on sales of assets for the first half of fiscal 2009 increased approximately 80%, or $7.2 million, as compared to the same period in fiscal 2008, due to a higher number of vessels sold during fiscal 2009 as compared to fiscal 2008 and due to larger gains earned on the mix of vessels sold. Dispositions of vessels can vary from quarter to quarter; therefore, gains on sales of assets may fluctuate significantly from period to period.

Vessel Class Statistics

Vessel utilization is determined primarily by market conditions and to a lesser extent by drydocking requirements. Vessel day rates are primarily determined by vessel demand, primarily from offshore exploration, development and production companies and contract drillers, relative to the available supply of offshore service vessels. Suitability of equipment and quality of service provided also influence vessel day rates. Vessel utilization rates are calculated by dividing the number of vessel days worked during a reporting period by the number of vessel days available to work in the reporting period. Average day rates are calculated by dividing aggregate vessel revenue earned during a reporting period by the number of days the vessels worked in the reporting period. Vessel utilization and average day rates are calculated only on vessels in service and, as such, do not include vessels withdrawn from service or joint venture vessels. The following tables compare day-based utilization percentages and average day rates by vessel class and in total for the quarters and the six month periods ended September 30, 2008 and 2007 and the quarter ended June 30, 2008:

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