DIAMOND OFFSHORE DRILLING INC, 10-K405, 2000-03-07

DIAMOND OFFSHORE DRILLING INC
10-K405, 2000-03-07
DRILLING OIL & GAS WELLS

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<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)

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

For the fiscal year ended December 31, 1999

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

For the transition period from ................. to ...................

Commission file number 1-13926

DIAMOND OFFSHORE DRILLING, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 76-0321760
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

15415 KATY FREEWAY
HOUSTON, TEXAS 77094
(Address and zip code of principal executive offices)

(281) 492-5300
(Registrant's telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ------------------------
Common Stock, $0.01 par value per share New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

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

State the aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant.

<TABLE>
<S> <C>
As of February 29, 2000 $2,076,941,522
</TABLE>

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.

<TABLE>
<S> <C> <C>
As of February 29, 2000 Common Stock, $0.01 par value per share 135,515,481 shares
</TABLE>

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement relating to the 2000 Annual
Meeting of Stockholders of Diamond Offshore Drilling, Inc., which will be filed
within 120 days of December 31, 1999, are incorporated by reference in Part III
of this form.
<PAGE> 2
DIAMOND OFFSHORE DRILLING, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
COVER PAGE...................................................................................................1

DOCUMENT TABLE OF CONTENTS...................................................................................2

PART I

ITEM 1. BUSINESS..........................................................................................3

ITEM 2. PROPERTIES.......................................................................................10

ITEM 3. LEGAL PROCEEDINGS................................................................................10

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............................................10

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS........................12

ITEM 6. SELECTED FINANCIAL DATA..........................................................................13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............14

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......................................24

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................................................25

Consolidated Financial Statements................................................................26
Notes to Consolidated Financial Statements.......................................................31

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.............45

PART III

Information called for by Part III has been omitted as the Registrant intends to file with the
Securities and Exchange Commission not later than 120 days after the close of its fiscal year
a definitive Proxy Statement pursuant to Regulation 14A.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..................................45

SIGNATURES..................................................................................................47
</TABLE>

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PART I

ITEM 1. BUSINESS.

GENERAL

Diamond Offshore Drilling, Inc., incorporated in Delaware in 1989, engages
principally in the contract drilling of offshore oil and gas wells. Unless the
context otherwise requires, references herein to the "Company" shall mean
Diamond Offshore Drilling, Inc. and its consolidated subsidiaries. The Company
is a leader in deep water drilling with a fleet of 45 offshore rigs. The fleet
consists of 30 semisubmersibles, 14 jack-ups and one drillship.

RECENT DEVELOPMENTS

Depending on market conditions, the Company may, from time to time,
purchase shares of its common stock in the open market. Through February 29,
2000, the Company has purchased 0.3 million shares of its common stock at an
aggregate cost of $8.5 million, or at an average cost of $27.49 per share.

In January 2000, the Company announced that it had been awarded a letter
of intent for its fourth-generation semisubmersible, the Ocean Alliance, for a
three-year term commitment with Petrobras in Brazil. The rig, currently working
in West Africa, is scheduled to begin mobilization for the program in the third
quarter of 2000, depending on the duration of its current commitments. The
contract, which will commence in direct continuation of current obligations, is
expected to generate revenues of approximately $131.0 million, with provisions
for additional revenue if the rig is utilized in waters deeper than the primary
contract obligation of 1,200 meters. Additionally, the commitment allows the
Company certain rights for participation in possible increases in the drilling
market during the third year of the agreement.

INDUSTRY CONDITIONS

The offshore contract drilling business is influenced by a number of
factors, including the current and anticipated prices of oil and natural gas,
the expenditures by oil and gas companies for exploration and development and
the availability of drilling rigs. In addition, demand for drilling services
remains dependent on a variety of political and economic factors beyond the
Company's control, including worldwide demand for oil and natural gas, the
ability of the Organization of Petroleum Exporting Countries ("OPEC") to set and
maintain production levels and pricing, the level of production of non-OPEC
countries and the policies of the various governments regarding exploration and
development of their oil and natural gas reserves.

Historically, the offshore contract drilling industry has been highly
competitive and cyclical, with periods of high demand, short rig supply and high
dayrates followed by periods of low demand, excess rig supply and low dayrates.
During 1999, product prices improved considerably as compared to those in late
1997 and throughout 1998 due to, among other things, OPEC production cuts and an
improved outlook on foreign economic recovery, particularly in Asia. Even with
these improvements, operators took a cautious approach to exploration and
development and the offshore contract drilling industry did not experience
comparable improvements in its market conditions. However, if the current
environment can be sustained, management believes the offshore contract drilling
industry could see improvements in utilization levels and dayrates during 2000.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Outlook" in Item 7 of this Report.

THE FLEET

The Company's large, diverse fleet, which includes some of the most
technologically advanced rigs in the world, enables it to offer a broad range of
services worldwide in various markets, including the deep water market, the
harsh environment market, the conventional semisubmersible market and the
jack-up market.

Semisubmersibles. The Company owns and operates 30 semisubmersibles.
Semisubmersible rigs consist of an upper working and living deck resting on
vertical columns connected to lower hull members. Such rigs operate in a
"semi-submerged" position, remaining afloat, off bottom, in a position in which
the lower hull is approximately 55 to 90 feet below the water line and the upper
deck protrudes well above the surface. The rig is typically anchored in position
and remains stable for drilling in the semi-submerged floating position due in
part to its wave transparency characteristics at the water line.

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The Company owns and operates seven high specification semisubmersibles,
including the Ocean Confidence. These semisubmersibles are larger than many
other semisubmersibles, are capable of working in deep water or harsh
environments and have other advanced features. Currently, the Ocean Victory, the
Ocean Star, the Ocean Valiant, and the Ocean Quest are working in deep water
areas of the Gulf of Mexico; the Ocean America is working offshore Trinidad in
South America; and the Ocean Alliance is working offshore West Africa.

The conversion of the Ocean Confidence, a semisubmersible accommodation
vessel with Class III dynamic-positioning system ("DPS") capabilities purchased
in 1997, to a drilling unit with fifth-generation capabilities, including harsh
environment and ultra-deep water capabilities up to 7,500 feet, is ongoing. This
conversion is anticipated to be completed in the second quarter of 2000. Upon
completion of the conversion and acceptance, the rig is scheduled to begin a
five-year drilling program in the Gulf of Mexico, which is expected to generate
approximately $320.0 million of revenues. The drilling contract contains a
provision allowing the customer to cancel the contract should the unit not be
delivered by July 1, 2000. Although the Company believes the project will be
completed by July 1, 2000, it is possible that delays or unforeseen
circumstances could push delivery beyond this date, which could allow the
customer to cancel the term contract. Should the Company be required to remarket
the unit, it is likely that an initial term would be shorter than the currently
contracted five-year period, and the rate would be dependent upon market
conditions at such time as the Ocean Confidence might be offered for contract.
In such case, future revenues generated by the rig could be less than the
current contracted amount of approximately $320.0 million. See "-- Fleet
Enhancements" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Capital Resources" in Item 7 of this Report.

In addition, the Company owns and operates 23 other semisubmersibles which
operate in maximum water depths up to 3,500 feet. The diverse capabilities of
many of these semisubmersibles enable them to provide both shallow and deep
water service in the U.S. and in other markets outside the U.S. Currently, 12 of
these semisubmersibles are located in the Gulf of Mexico; four are located
offshore Brazil; three are located in the North Sea; two are located offshore
Australia; one is located offshore New Zealand; and one is located offshore West
Africa.

Jack-ups. The Company owns 14 jack-ups. Jack-up rigs are mobile,
self-elevating drilling platforms equipped with legs that are lowered to the
ocean floor until a foundation is established to support the drilling platform.
The rig hull includes the drilling rig, jacking system, crew quarters, loading
and unloading facilities, storage areas for bulk and liquid materials, heliport
and other related equipment. Jack-ups are used extensively for drilling in water
depths from 20 feet to 450 feet. The water depth limit of a particular rig is
principally determined by the length of the rig's legs. A jack-up rig is towed
by tugboats to the drillsite with its hull riding in the sea, as a vessel, with
its legs retracted. Once over a drillsite, the legs are lowered until they rest
on the seabed and jacking continues until the hull is elevated above the surface
of the water. After completion of drilling operations, the hull is lowered until
it rests in the water and then the legs are retracted for relocation to another
drillsite.

The principal market for the Company's jack-up rigs is currently the Gulf
of Mexico, where 12 of the Company's jack-up rigs are located. Of the Company's
jack-up rigs in the Gulf of Mexico, seven are independent-leg cantilevered rigs,
two are mat-supported cantilevered rigs, two are independent-leg slot rigs, and
one is a mat-supported slot rig. Both of the Company's internationally based
jack-ups are independent-leg cantilevered rigs.

Drillship. Drillships, which are typically self-propelled, are positioned
over a drillsite through the use of either an anchoring system or a
computer-controlled thruster (dynamic-positioning) system similar to those used
on certain semisubmersible rigs. Deep water drillships compete in many of the
same markets as do fourth-generation semisubmersible rigs. During 1999, the
Company replaced the blow-out preventer control system and performed additional
upgrades on its drillship, the Ocean Clipper. See "--Fleet Enhancements."
Subsequently, the Ocean Clipper successfully drilled the world's deepest water
depth turnkey well in the Gulf of Mexico in August 1999. The drillship then
mobilized to offshore Brazil in late December 1999 and is currently operating
under a three-year contract.

Fleet Enhancements. The Company's strategy is to maximize dayrates and
utilization by adapting to trends in its markets, including enhancing its fleet
to meet customer demand for diverse drilling capabilities. The average age of
the Company's fleet of offshore drilling rigs (calculated as of December 31,
1999 and measured from the year built) is 21.7 years. The Company has spent
approximately $1.1 billion on capital expenditures since 1996 for upgrades and
enhancements such as top-drive drilling systems, additional water depth
capability, mud pump additions and increases in deckload capacity. The Company
believes it will be feasible to continue to upgrade its rigs notwithstanding the
average age of its fleet. However, there can be no assurance whether or to what
extent upgrades will continue to be made to rigs in the Company's fleet. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources" in Item 7 of this Report.

An extensive power system upgrade on the Company's jack-up, the Ocean
King, was completed in 1999. The upgrade and enhancement replaced the engines
and electrical system; upgraded the existing mud pumps and installed a third,
1,600-

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horsepower mud pump; refurbished the top-drive system; added a third motor to
the drawworks and upgraded its cooling system; refurbished the blow-out
preventer stack and associated equipment; repaired the pre-load tanks, spud
cans, shaker house, and mud pits; upgraded 48 jacking motors to 600 volts;
repainted the rig's hull bottom; and refurbished all four lifeboats.

A variable deckload upgrade was performed and completed on the Ocean
General, a semisubmersible currently located offshore Australia, during 1999. A
large variable deckload enables operators to carry more consumables and drilling
equipment to the drill site, eliminating some of the expense of supply boats.
Four additional columns were installed at the corners of the rig, as well as
inner and outer lower-hull sponsons, increasing the variable deckload capacity
to 3,000 tons. The upgrade also enhanced the rig's drilling capabilities by
nearly doubling its mud-storage capacity, adding a third mud pump, increasing
the riser tension, and installing two new cranes. Electric power distribution
was enhanced by the addition of electrical equipment for the new mud pump and
the installation of a larger emergency generator. The rig also was prepared for
a future increase in water-depth capability with the installation of a
larger-bore rotary table and diverter, as well as additional riser and podline
tensioners.

The semisubmersible Ocean Concord was also upgraded in 1999, enhancing its
marketability in deeper water. Two pencil columns were installed to expand
variable deckload capacity to 2,850 tons. New "wing" decks on the port and
starboard sides were added to provide additional work and storage space. The
upgrade also included the addition of an elevated platform for third-party
equipment, three new cranes, and the repair of corrosion damage in the decks,
houses and hull.

The Ocean Clipper's current contract with Petrobras requires, among other
things, that the drillship meet the requirements of Class II DPS vessels. These
requirements include the ability to automatically maintain position and heading
against severe environmental conditions - even with the loss of one component,
such as a thruster, engine, or electrical switchgear. To meet these
requirements, the Company split and segregated the power-distribution system to
create two remote and independent systems. Likewise, the generator auxiliaries
were split for redundancy. The dynamic-positioning system was reconfigured and
reprogrammed to manage these enhanced capabilities. An additional
positioning-reference capability (long-base-line acoustic positioning) was added
for remote operations.

The Company also initiated programs in 1999 for replacement or upgrade of
certain other equipment on its fleet of drilling rigs. For example, the Company
began the replacement of all hook-roller-style mechanical cranes with king-post
cranes. To date, new cranes have been installed on the Ocean Concord, the Ocean
Lexington, and the Ocean Saratoga (three cranes each); the Ocean Yorktown, the
Ocean Rover, and the Ocean General (two cranes each); and the Ocean Quest and
the Ocean Voyager (one crane each). New cranes also have been or are being
installed for maintenance or operational reasons on the Ocean Nomad, the Ocean
Ambassador, and the Ocean Summit.

A program to replace worn riser, standardizing it across the fleet to
simplify maintenance and reduce spare equipment costs, also began in 1999. In
the past, each rig required its own spare riser for use during routine riser
inspections. In the new system, all shallow water rigs will use a standard riser
design, as will all deepwater rigs. Spare riser, common to all rigs of that
type, will be stored in warehouse space rather than on each rig. In 1999, riser
was replaced on five rigs. The program will continue in 2000 and eventually will
replace the riser on all the rigs in the Company's fleet.

The Company's commitment to maintain its rigs according to best industry
practices also resulted in the purchase of 154,300 feet (29.22 miles) of mooring
chain, weighing more than 6,945 tons, in 1999. These purchases replaced the
mooring chains and wires on four semisubmersibles and additional rigs will
receive new chains and wires as needed in 2000 and beyond. In addition, mooring
system upgrades were performed on the Ocean America and the Ocean Valiant to
enable the rigs to more effectively work at their rated water depth capacities.
Four column sponsons were added "behind" the fairleaders to correct abrasion of
the anchor bolsters from the angle of the mooring lines on each rig.

In 1998, the Company began the upgrade of the Ocean Confidence from an
accommodation vessel with Class III DPS capabilities to a semisubmersible
drilling unit capable of operating in harsh environments and ultra-deep waters,
including enhancements such as increased capability for operations in up to
7,500 foot water depths, approximately 6,000 tons variable deckload, a 15,000
psi blow-out prevention system, and four mud pumps. The upgrade is anticipated
to be completed during the second quarter of 2000, when the rig is expected to
commence a five-year contract in the Gulf of Mexico. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Capital Resources" in Item 7 of this Report.

The design of the Company's Victory-class semisubmersible rigs, including
their cruciform hull configurations, long fatigue-life and advantageous stress
characteristics, makes this class of rig particularly well-suited for
significant upgrade projects. While no such upgrades are currently in progress,
the Company has previously upgraded six of its nine Victory-class rigs with
enhancements such as increased efficiency in the handling of subsea completion
equipment, stability enhancements that

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allow increased variable deckload, and increased water depth capabilities.
Currently, the Company's Victory-class rigs are rated for service in maximum
water depths of 1,200 to 5,000 feet.

More detailed information concerning the Company's fleet of mobile
offshore drilling rigs, as of January 31, 2000, is set forth in the table below.

<TABLE>
<CAPTION>
WATER YEAR
DEPTH BUILT/LATEST CURRENT
TYPE AND NAME RATING (FT.) ATTRIBUTES ENHANCEMENT (a) LOCATION CUSTOMER (b)
------------- ------------ ---------- --------------- -------- ------------
<S> <C> <C> <C> <C> <C>
HIGH SPECIFICATION FLOATERS
SEMISUBMERSIBLES (7):
Ocean Confidence (c) 7,500 TDS; DP; 15K; 4M 2000 Gulf of Mexico BP-Amoco
Ocean Alliance 5,000 TDS; DP; 15K; 3M 1988/1999 Angola Chevron
Ocean America 5,000 TDS; SP; 15K; 3M 1988/1999 Trinidad BP-Amoco
Ocean Valiant 5,000 TDS; SP; 15K; 3M 1988/1999 Gulf of Mexico Amerada Hess
Ocean Victory 5,000 TDS; VC; 15K; 3M 1972/1997 Gulf of Mexico Vastar
Ocean Star 4,500 TDS; VC; 15K; 3M 1974/1999 Gulf of Mexico Texaco
Ocean Quest 3,500 TDS; VC; 15K; 3M 1973/1996 Gulf of Mexico Chevron
DRILLSHIP (1):
Ocean Clipper 7,500 TDS; DP; 15K; 3M 1976/1999 Brazil Petrobras

OTHER
SEMISUBMERSIBLES (23):
Ocean Winner 3,500 TDS; 3M 1977/1996 Brazil Petrobras
Ocean Worker 3,500 TDS; 3M 1982/1992 Gulf of Mexico Shell
Ocean Yatzy 3,300 TDS; DP; 15K 1989/1998 Brazil Petrobras
Ocean Voyager 3,200 TDS; VC 1973/1995 Gulf of Mexico Stacked

Ocean Yorktown 2,850 TDS 1976/1996 Brazil Petrobras
Ocean Concord 2,200 TDS; 3M 1975/1999 Gulf of Mexico Murphy
Ocean Lexington 2,200 TDS; 3M 1976/1995 Gulf of Mexico Committed
Ocean Saratoga 2,200 TDS; 3M 1976/1995 Gulf of Mexico El Paso Energy
Ocean Endeavor 2,000 TDS; VC 1975/1994 Gulf of Mexico British-Borneo
Ocean Rover 2,000 TDS; VC; 15K 1973/1992 Gulf of Mexico Pogo (d)
Ocean Prospector 1,700 VC 1971/1981 Gulf of Mexico Cold Stacked
Ocean Bounty 1,500 TDS; VC; 3M 1977/1992 Australia Shell
Ocean Guardian 1,500 TDS; SP; 3M 1985 North Sea Stacked
Ocean New Era 1,500 TDS 1974/1990 Gulf of Mexico Stacked
Ocean Princess 1,500 TDS; 15K; 3M 1977/1998 North Sea ExxonMobil
Ocean Whittington 1,500 TDS; 3M 1974/1995 Brazil Petrobras
Ocean Epoch 1,200 TDS 1977/1990 Enroute to New Zealand Oil
New Zealand & Gas
Ocean General 1,200 TDS; 3M 1976/1999 Australia Coastal
Ocean Nomad 1,200 TDS; 3M 1975/1998 North Sea Shell
Ocean Baroness 1,200 TDS; VC 1973/1995 Gulf of Mexico Cold Stacked
Ocean Ambassador 1,100 TDS; 3M 1975/1995 Gulf of Mexico Mariner
Ocean Century 800 1973 Gulf of Mexico Cold Stacked
Ocean Liberator 600 TDS 1974/1998 Ghana Dana

JACK-UPS (14):
Ocean Titan 350 TDS; IS; 15K; 3M 1974/1989 Gulf of Mexico Vastar
Ocean Tower 350 TDS; IS; 3M 1972/1998 Gulf of Mexico Cold Stacked
Ocean King 300 TDS; IC; 3M 1973/1999 Gulf of Mexico BP-Amoco
Ocean Nugget 300 TDS; IC 1976/1995 Gulf of Mexico Newfield
Ocean Summit 300 SDS; IC 1972/1991 Gulf of Mexico Committed
Ocean Warwick 300 TDS; IC 1971/1998 Gulf of Mexico Vastar
Ocean Champion 250 MS 1975/1985 Gulf of Mexico Cold Stacked
Ocean Columbia 250 TDS; IC 1978/1990 Gulf of Mexico Vastar
Ocean Heritage 250 TDS; IC 1981/1995 Indonesia Maxus
Ocean Sovereign 250 TDS; IC 1981/1994 Indonesia Maxus
Ocean Spartan 250 TDS; IC 1980/1994 Gulf of Mexico Vastar
Ocean Spur 250 TDS; IC 1981/1994 Gulf of Mexico Nippon
Ocean Crusader 200 TDS; MC 1982/1992 Gulf of Mexico Basin
Ocean Drake 200 TDS; MC 1983/1986 Gulf of Mexico Chevron
</TABLE>

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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ATTRIBUTES
----------
<S> <C> <C>
DP = Dynamically-Positioned/Self-Propelled MS = Mat-Supported Slot Rig TDS = Top-Drive Drilling System
IC = Independent-Leg Cantilevered Rig SDS= Side-Drive Drilling System 3M = Three Mud Pumps
IS = Independent-Leg Slot Rig VC = Victory-Class 4M = Four Mud Pumps
MC = Mat-Supported Cantilevered Rig SP =Self-Propelled 15K = 15,000 psi Blow-Out Preventer
</TABLE>
- --------------------------------------------------------------------------------
- ----------
(a) Such enhancements include the installation of top-drive drilling systems,
water depth upgrades, mud pump additions and increases in deckload
capacity.
(b) For ease of presentation in this table, customer names have been shortened
or abbreviated.
(c) In shipyard preparing for a five-year term contract with BP-Amoco in the
Gulf of Mexico upon conversion to a drilling unit.
(d) Turnkey contract with Diamond Offshore Team Solutions, Inc.

MARKETS

The Company's principal markets for its offshore contract drilling
services are the Gulf of Mexico, Europe, including principally the U.K. sector
of the North Sea, South America, Africa, and Australia/Southeast Asia. The
Company actively markets its rigs worldwide. In the past, rigs in the Company's
fleet have also operated in various other markets throughout the world. See Note
13 to the Company's Consolidated Financial Statements in Item 8 of this Report.

The Company believes its presence in multiple markets is valuable in many
respects. For example, the Company believes that its experience with safety and
other regulatory matters in the U.K. has been beneficial in Australia and in the
Gulf of Mexico while production experience gained through Brazilian and North
Sea operations has potential application worldwide. Additionally, the Company
believes its performance for a customer in one market segment or area enables it
to better understand that customer's needs and better serve that customer in
different market segments or other geographic locations.

OFFSHORE CONTRACT DRILLING SERVICES

The Company's contracts to provide offshore drilling services vary in
their terms and provisions. The Company often obtains its contracts through
competitive bidding, although it is not unusual for the Company to be awarded
drilling contracts without competitive bidding. Drilling contracts generally
provide for a basic drilling rate on a fixed dayrate basis regardless of whether
such drilling results in a productive well. Drilling contracts may also provide
for lower rates during periods when the rig is being moved or when drilling
operations are interrupted or restricted by equipment breakdowns, adverse
weather or water conditions or other conditions beyond the control of the
Company. Under dayrate contracts, the Company generally pays the operating
expenses of the rig, including wages and the cost of incidental supplies.
Dayrate contracts have historically accounted for a substantial portion of the
Company's revenues. In addition, the Company has worked some of its rigs under
dayrate contracts pursuant to which the customer also agrees to pay an incentive
bonus based upon performance.

A dayrate drilling contract generally extends over a period of time
covering either the drilling of a single well, or a group of wells (a
"well-to-well contract") or a stated term (a "term contract") and may be
terminated by the customer in the event the drilling unit is destroyed or lost
or if drilling operations are suspended for a period of time as a result of a
breakdown of equipment or, in some cases, due to other events beyond the control
of either party. In addition, certain of the Company's contracts permit the
customer to terminate the contract early by giving notice and in some
circumstances may require the payment of an early termination fee by the
customer. The contract term in many instances may be extended by the customer
exercising options for the drilling of additional wells at fixed or mutually
agreed terms, including dayrates.

In August 1999, a customer terminated a contract for use of one of the
Company's drilling rigs located offshore Australia. The termination was not the
result of performance failures by the Company or its equipment. The Company
believes the contract required the customer to pay approximately $16.5 million
in remaining revenue through the end of the contract period, which was
previously scheduled to end in early January 2000. However, the customer
believes that there was no further obligation under the contract and has refused
to pay the $16.5 million early termination fee. The Company filed suit in
Australia in August 1999 requesting reconstruction of the contract and a
declaratory judgment requiring the customer to pay such early termination fee.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Outlook" in Item 7 of this Report.

The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategies of the offshore drilling
contractor and its customers. In periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts that allow contractors to
profit from increasing dayrates. In contrast, during these periods customers
with reasonably definite drilling programs typically prefer longer term
contracts to maintain dayrate prices at the

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lowest level possible. Conversely, in periods of decreasing demand for offshore
rigs, contractors generally prefer longer term contracts to preserve dayrates at
existing levels and ensure utilization, while customers prefer well-to-well
contracts that allow them to obtain the benefit of lower dayrates. In general,
the Company seeks to have a foundation of long-term contracts with a reasonable
balance of single-well, well-to-well and short-term contracts to minimize the
downside impact of a decline in the market while still participating in the
benefit of increasing dayrates in a rising market.

The Company, through its wholly owned subsidiary, Diamond Offshore Team
Solutions, Inc. ("DOTS"), offers a portfolio of drilling services to complement
the Company's offshore contract drilling business. These services include
overall project management, extended well tests, and drilling and completion
operations. From time to time, DOTS also selectively engages in drilling
services pursuant to turnkey or modified-turnkey contracts under which DOTS
agrees to drill a well to a specified depth for a fixed price. In such cases,
DOTS generally is not entitled to payment unless the well is drilled to the
specified depth and profitability of the contract depends upon its ability to
keep expenses within the estimates used by DOTS in determining the contract
price. Drilling a well under a turnkey contract therefore typically requires a
greater cash commitment by the Company and exposes the Company to risks of
potential financial losses that generally are substantially greater than those
that would ordinarily exist when drilling under a conventional dayrate contract.
During 1999, DOTS drilled four turnkey wells, in addition to providing project
management services on a dayrate basis, and contributed operating income of $0.3
million to the Company's consolidated results of operations. During 1998, DOTS
primarily provided project management services on a dayrate basis and
contributed operating income of $0.4 million to the Company's consolidated
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations" and "--Integrated
Services" in Item 7 of this Report.

DISPOSITION OF ASSETS

In January 2000, the Company sold its jack-up drilling rig, the Ocean
Scotian, for $32.0 million in cash resulting in an after-tax gain of $9.0
million. The rig had been cold stacked offshore Netherlands prior to the sale.
Certain other assets, including drilling rigs, have been sold in previous years.
These assets have generally been inactive or did not fit the overall strategic
direction of the Company. Although the Company does not, as of the date hereof,
have any commitment with respect to a material disposition of assets, it could
enter into such an agreement in the future.

CUSTOMERS

The Company provides offshore drilling services to a customer base that
includes major and independent oil and gas companies and government-owned oil
companies. Occasionally, several customers have accounted for 10.0 percent or
more of the Company's annual consolidated revenues, although the specific
customers may vary from year to year. During 1999, the Company performed
services for approximately 40 different customers with Petrobras and Shell
companies (including domestic and foreign affiliates) ("Shell") accounting for
15.5 percent and 14.5 percent of the Company's annual total consolidated
revenues, respectively. During 1998, the Company performed services for
approximately 40 different customers with Shell accounting for 17.4 percent of
the Company's annual total consolidated revenues. During 1997, the Company
performed services for approximately 50 different customers with Shell
accounting for 14.3 percent of the Company's annual total consolidated revenues.
During periods of low demand for offshore drilling rigs, the loss of a single
significant customer could have a material adverse effect on the Company's
results of operations.

The Company's services in North and South America are marketed principally
through its Houston office, with support for U.S. Gulf of Mexico activities
coming from its regional office in New Orleans, Louisiana. The Company's
services in other geographic locations are marketed principally from its
regional offices in Aberdeen, Scotland and Perth, Western Australia. Technical
and administrative support functions for the Company's operations are provided
by its Houston office.

COMPETITION

The contract drilling industry is highly competitive. Customers often
award contracts on a competitive bid basis, and although a customer selecting a
rig may consider, among other things, a contractor's safety record, crew
quality, rig location, and quality of service and equipment, the historical
oversupply of rigs has created an intensely competitive market in which price is
the primary factor in determining the selection of a drilling contractor. In
periods of escalated drilling activity, rig availability has, in some cases,
also become a consideration, particularly with respect to technologically
advanced units. The Company believes competition for drilling contracts will
continue to be intense in the foreseeable future. Contractors are also able to
adjust localized supply and demand imbalances by moving rigs from areas of low
utilization and dayrates to areas of greater activity and relatively higher
dayrates. Such movements, reactivations or a decrease in drilling activity in
any major market could depress dayrates and could adversely affect utilization
of the Company's rigs. See "--Offshore Contract Drilling Services."

8
<PAGE> 9

In addition, rig construction and enhancement programs by offshore drilling
contractors, which began in late 1997 and 1998, have resulted in an increase in
the supply of technologically advanced rigs capable of drilling in deep water.
The marginal oversupply of such equipment has, in turn, adversely affected the
utilization level and average operating dayrates available for the Company's
rigs, particularly its higher specification semisubmersible units.

GOVERNMENTAL REGULATION

The Company's operations are subject to numerous federal, state and local
laws and regulations that relate directly or indirectly to its operations,
including certain regulations controlling the discharge of materials into the
environment, requiring removal and clean-up under certain circumstances, or
otherwise relating to the protection of the environment. For example, the
Company may be liable for damages and costs incurred in connection with oil
spills for which it is held responsible. Laws and regulations protecting the
environment have become increasingly stringent in recent years and may in
certain circumstances impose "strict liability" rendering a company liable for
environmental damage without regard to negligence or fault on the part of such
company. Liability under such laws and regulations may result from either
governmental or citizen prosecution. Such laws and regulations may expose the
Company to liability for the conduct of or conditions caused by others, or for
acts of the Company that were in compliance with all applicable laws at the time
such acts were performed. The application of these requirements or the adoption
of new requirements could have a material adverse effect on the Company.

The United States Oil Pollution Act of 1990 ("OPA '90") and similar
legislation enacted in Texas, Louisiana and other coastal states address oil
spill prevention and control and significantly expand liability exposure across
all segments of the oil and gas industry. OPA '90, such similar legislation and
related regulations impose a variety of obligations on the Company related to
the prevention of oil spills and liability for damages resulting from such
spills. OPA '90 imposes strict and, with limited exceptions, joint and several
liability upon each responsible party for oil removal costs and a variety of
public and private damages.

INDEMNIFICATION AND INSURANCE

The Company's operations are subject to hazards inherent in the drilling
of oil and gas wells such as blowouts, reservoir damage, loss of production,
loss of well control, cratering or fires, the occurrence of which could result
in the suspension of drilling operations, injury to or death of rig and other
personnel and damage to or destruction of the Company's, the Company's
customer's or a third party's property or equipment. Damage to the environment
could also result from the Company's operations, particularly through oil
spillage or uncontrolled fires. In addition, offshore drilling operations are
subject to perils peculiar to marine operations, including capsizing, grounding,
collision and loss or damage from severe weather. The Company has insurance
coverage and contractual indemnification for certain risks, but there can be no
assurance that such coverage or indemnification will adequately cover the
Company's loss or liability in many circumstances or that the Company will
continue to carry such insurance or receive such indemnification.

OPERATIONS OUTSIDE THE UNITED STATES

Operations outside the United States accounted for approximately 48.8
percent, 42.7 percent, and 36.3 percent of the Company's total consolidated
revenues for the years ended December 31, 1999, 1998, and 1997, respectively.
The Company's non-U.S. operations are subject to certain political, economic and
other uncertainties not encountered in U.S. operations, including risks of war
and civil disturbances (or other risks that may limit or disrupt markets),
expropriation and the general hazards associated with the assertion of national
sovereignty over certain areas in which operations are conducted. No prediction
can be made as to what governmental regulations may be enacted in the future
that could adversely affect the international drilling industry. The Company's
operations outside the United States may also face the additional risk of
fluctuating currency values, hard currency shortages, controls of currency
exchange and repatriation of income or capital. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Outlook" and "--
Other -- Currency Risk" in Item 7 of this Report and Note 13 to the Company's
Consolidated Financial Statements in Item 8 of this Report.

EMPLOYEES

As of December 31, 1999, the Company had approximately 4,600 employees
(including international crews furnished through labor contractors),
approximately 34 of whom were union members. The Company has experienced
satisfactory labor relations and provides comprehensive benefit plans for its
employees. The Company does not currently consider the possibility of a shortage
of qualified personnel to be a material factor in its business.

9
<PAGE> 10

ITEM 2. PROPERTIES.

The Company owns an eight-story office building containing approximately
182,000 net rentable square feet on approximately 6.2 acres of land located in
Houston, Texas, where the Company has its corporate headquarters, an 18,000
square foot building and 20 acres of land in New Iberia, Louisiana for its
offshore drilling warehouse and storage facility, and a 13,000 square foot
building and five acres of land in Aberdeen, Scotland for its North Sea
operations. Additionally, the Company currently leases various office, warehouse
and storage facilities in Louisiana, West Africa, Australia, Brazil, Indonesia,
Scotland, Singapore, and Trinidad to support its offshore drilling operations.

ITEM 3. LEGAL PROCEEDINGS.

Brown Services, Inc. and KOS Industries, Inc. v. Michael D. Brown, BSI
International, Inc., Robert Brown, Robert Furlough, Power House International,
Inc., Zapata Off-Shore Company and Zapata Corporation; No. 92-05691 in the 334th
Judicial District Court of Harris County, Texas, filed February 7, 1992.
Plaintiffs sued Zapata Off-Shore Company and Zapata Corporation (the "Zapata
Defendants") for tortious interference with contract and conspiracy to
tortiously interfere with contract seeking $14.0 million in actual damages and
unspecified punitive damages, plus costs of court, interest and attorneys' fees.
A former subsidiary of Arethusa (Off-Shore) Limited ("Arethusa"), which is now a
subsidiary of the Company, defended and indemnified the Zapata Defendants
pursuant to a contractual defense and indemnification agreement. In November
1997, the jury awarded a take nothing judgment in favor of the Zapata
Defendants. The plaintiffs appealed the judgment and the appellate court ordered
the parties to mediation. The case went to mediation in July 1998 with no
resolution. In May 1999, the case went before the Texas First Court of Appeals,
Houston, which affirmed the jury verdict. The plaintiffs filed a petition for
review with the Supreme Court of Texas in November 1999 which was subsequently
denied in January 2000. The Company had not established a provision for any
liability for this case.

The Company and its subsidiaries are named defendants in certain other
lawsuits and are involved from time to time as parties to governmental
proceedings, all arising in the ordinary course of business. Although the
outcome of lawsuits or other proceedings involving the Company and its
subsidiaries cannot be predicted with certainty and the amount of any liability
that could arise with respect to such lawsuits or other proceedings cannot be
predicted accurately, management does not expect these matters to have a
material adverse effect on the financial position, results of operations, or
cash flows of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of 1999.

EXECUTIVE OFFICERS OF THE REGISTRANT

In reliance on General Instruction G (3) to Form 10-K, information on
executive officers of the Registrant is included in this Part I. The executive
officers of the Company are elected annually by the Board of Directors to serve
until the next annual meeting of the Board of Directors, or until their
successors are duly elected and qualified, or until their earlier death,
resignation, disqualification or removal from office. Information with respect
to the executive officers of the Company is set forth below.

<TABLE>
<CAPTION>
AGE AS OF
NAME JANUARY 31, 2000 POSITION
---- ---------------- --------
<S> <C> <C>
James S. Tisch 47 Chairman of the Board of Directors and Chief Executive Officer
Lawrence R. Dickerson 47 President, Chief Operating Officer and Director
David W. Williams 42 Executive Vice President
Rodney W. Eads 48 Senior Vice President - Worldwide Operations
John L. Gabriel, Jr. 46 Senior Vice President - Contracts & Marketing
Denis J. Graham 50 Senior Vice President - Technical Services
Gary T. Krenek 41 Vice President and Chief Financial Officer
William C. Long 33 General Counsel & Secretary
</TABLE>

James S. Tisch has served as Chief Executive Officer of the Company since
March 1998. Mr. Tisch has served as Chairman of the Board since 1995 and as a
director of the Company since June 1989. Mr. Tisch has served as Chief Executive
Officer of Loews Corporation ("Loews"), a diversified holding company and the
Company's controlling stockholder, since November 1998 and, prior thereto, as
President and Chief Operating Officer of Loews from 1994. Mr. Tisch, a director
of Loews since 1986, also serves as a director of CNA Financial Corporation, an
86.5 percent owned subsidiary of Loews, and serves as a director of Vail
Resorts, Inc.

10
<PAGE> 11

Lawrence R. Dickerson has served as President, Chief Operating Officer and
Director of the Company since March 1998. Previously, Mr. Dickerson served as
Senior Vice President from April 1993 and Chief Financial Officer of the Company
from June 1989.

David W. Williams has served as Executive Vice President of the Company
since March 1998. Previously, Mr. Williams served as Senior Vice President of
the Company from December 1994.

Rodney W. Eads has served as Senior Vice President of the Company since
May 1997. Mr. Eads was employed by Exxon Company, International from August 1994
through May 1997 as Field Drilling Manager.

John L. Gabriel, Jr. has served as Senior Vice President of the Company
since November 1999. Previously, Mr. Gabriel served as a Marketing Vice
President of the Company from April 1993.

Denis J. Graham has served as Senior Vice President of the Company since
July 1997. Previously, Mr. Graham served as Vice President of the Company from
September 1993.

Gary T. Krenek has served as Vice President and Chief Financial Officer of
the Company since March 1998. Previously, Mr. Krenek served as Controller of the
Company from February 1992.

William C. Long has served as General Counsel and Secretary of the Company
since March 1999. Previously, Mr. Long served as acting General Counsel and
Secretary for the Company from June 1998 and as a Staff Attorney from January
1997 through May 1998. Mr. Long was in private practice as an attorney from May
1996 through December 1996. From January 1995 through December 1996, Mr. Long
served first as a law clerk and subsequently was of Counsel to Kuffner and
Associates, P.C.

11
<PAGE> 12

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

PRICE RANGE OF COMMON STOCK

The Company's common stock is listed on the New York Stock Exchange
("NYSE") under the symbol "DO." The following table sets forth, for the calendar
quarters indicated, the high and low closing prices of common stock as reported
by the NYSE.

<TABLE>
<CAPTION>
COMMON STOCK
----------------------------
HIGH LOW
---------- ----------
<S> <C> <C>
1999
First Quarter .................................... $ 33 3/8 $ 20 1/2
Second Quarter ................................... 34 1/16 25 15/16
Third Quarter .................................... 40 7/16 27 3/4
Fourth Quarter ................................... 36 1/16 27 7/16

1998
First Quarter .................................... $ 48 15/16 $ 39
Second Quarter ................................... 54 5/8 39 5/16
Third Quarter .................................... 40 15/16 20 7/8
Fourth Quarter ................................... 32 15/16 20 11/16
</TABLE>

On February 29, 2000, the closing price of the common stock, as reported
by the NYSE, was $31 3/4 per share. As of February 29, 2000, there were
approximately 573 holders of record of common stock. This number does not
include the stockholders for whom shares are held in a "nominee" or "street"
name.

DIVIDEND POLICY

In 1999, the Company paid cash dividends of $0.125 per share on March 1,
1999, June 1, 1999, September 1, 1999 and December 1, 1999 and has declared a
dividend of $0.125 per share payable March 1, 2000 to stockholders of record on
February 1, 2000. In 1998, the Company paid cash dividends of $0.125 per share
on March 2, 1998, June 1, 1998, September 1, 1998 and December 1, 1998. In 1997,
the Company paid cash dividends of $0.07 per share on August 7, 1997 and
December 1, 1997. Any future determination as to payment of dividends will be
made at the discretion of the Board of Directors of the Company and will depend
upon the Company's operating results, financial condition, capital requirements,
general business conditions and such other factors that the Board of Directors
deems relevant.

12
<PAGE> 13

ITEM 6. SELECTED FINANCIAL DATA.

The following table sets forth certain historical consolidated financial
data relating to the Company. The selected consolidated financial data are
derived from the financial statements of the Company as of and for the periods
presented. The selected consolidated financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7 and the Company's Consolidated Financial
Statements (including the Notes thereto) in Item 8 of this Report.

<TABLE>
<CAPTION>
-------------------------------------------------------------------
1999 1998 1997 1996(1) 1995
------------ ------------ ------------ ------------ -----------
(in thousands, except per share and ratio data)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Total revenues .............................. $ 821,024 $ 1,208,801 $ 956,093 $ 611,430 $ 336,584
Operating income ............................ 223,892 568,999 419,873 213,491 11,651
Net income (loss) ........................... 156,071 383,659 278,605 146,388 (7,026)
Net income per share (2):
Basic ..................................... 1.15 2.78 2.01 1.18 --
Diluted ................................... 1.11 2.66 1.93 1.18 --
Pro forma net income per share (2) (3) ...... -- -- -- -- 0.10

BALANCE SHEET DATA:
Drilling and other property and
equipment, net ............................ 1,737,905 1,551,820 1,451,741 1,198,160 502,278
Total assets ................................ 2,681,029 2,609,716 2,298,561 1,574,500 618,052
Long-term debt .............................. 400,000 400,000 400,000 63,000 --

OTHER FINANCIAL DATA:
Capital expenditures (4) .................... 324,133 224,474 281,572 267,000 66,646
Cash dividends declared per share (5) ....... 0.50 0.50 0.14 -- --

Ratio of earnings to fixed charges (6) ...... 15.64x 37.57x 28.94x 31.56x --
</TABLE>

- ----------
(1) The Company acquired all of the common stock of Arethusa in consideration
of 35.8 million shares of common stock on April 29, 1996.
(2) All per share amounts give retroactive effect to the Company's July 1997
two-for-one stock split in the form of a stock dividend.
(3) Pro forma net income per share gives effect to the Company's initial public
offering in October 1995 and the after-tax effects of a reduction in
interest expense. Assuming the offering had occurred at January 1, 1995,
the Company would have recognized net income of $10.0 million, or $0.10 per
share of common stock, after adjusting for the after-tax effects of a
reduction in interest expense.
(4) In addition to these capital expenditures, the Company expended $81.0
million for rig acquisitions during the year ended December 31, 1997.
(5) In connection with the Company's initial public offering in October 1995,
the Company paid a special dividend of $2.1 million to Loews with a portion
of the proceeds.
(6) The deficiency in the Company's earnings available for fixed charges for
the year ended December 31, 1995 was approximately $13.8 million. Fixed
charges for the year December 31, 1995 consisted primarily of interest
expense on notes payable to Loews. For all periods presented, the ratio of
earnings to fixed charges has been computed on a total enterprise basis.
Earnings represent income (loss) from continuing operations plus income
taxes and fixed charges. Fixed charges include (i) interest, whether
expensed or capitalized, (ii) amortization of debt issuance costs, whether
expensed or capitalized, and (iii) one-third of rent expense, which the
Company believes represents the interest factor attributable to rent.

13
<PAGE> 14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) in Item 8 of
this Report.

RESULTS OF OPERATIONS

RECENT DEVELOPMENTS

GENERAL

Revenues. The Company's revenues vary based upon demand, which affects the
number of days the fleet is utilized and the dayrates earned. Revenues can also
increase or decrease as a result of the acquisition or disposal of rigs. In
order to improve utilization or realize higher dayrates, the Company may
mobilize its rigs from one market to another. During periods of mobilization,
revenues may be adversely affected. In response to changes in demand, the
Company may withdraw a rig from the market by stacking it or may reactivate a
rig previously stacked, which may decrease or increase revenues, respectively.

Revenues from dayrate drilling contracts are recognized currently. The
Company may receive lump-sum payments in connection with specific contracts.
Such payments are recognized as revenues over the term of the related drilling
contract. Mobilization revenues, less costs incurred to mobilize an offshore rig
from one market to another, are recognized over the term of the related drilling
contract.

Revenues from offshore turnkey drilling contracts are accrued to the
extent of costs until the specified turnkey depth and other contract
requirements are met. Income is recognized on the completed contract method.
Provisions for future losses on turnkey contracts are recognized when it becomes
apparent that expenses to be incurred on a specific contract will exceed the
revenue from that contract.

Operating Income. Operating income is primarily affected by revenue
factors, but is also a function of varying levels of operating expenses.
Operating expenses are not affected by changes in dayrates, nor are they
necessarily significantly affected by fluctuations in utilization. For instance,
if a rig is to be idle for a short period of time, the Company realizes few
decreases in operating expenses since the rig is typically maintained in a
prepared state with a full crew. In addition, when a rig is idle, the Company is
responsible for certain operating expenses such as rig fuel and supply boat
costs, which are typically charged to the operator under drilling contracts.
However, if the rig is to be idle for an extended period of time, the Company
may reduce the size of a rig's crew and take steps to "cold stack" the rig,
which lowers expenses and partially offsets the impact on operating income. The
Company recognizes as operating expenses activities such as painting,
inspections and routine overhauls that maintain rather than upgrade its rigs.
These expenses vary from period to period. Costs of rig enhancements are
capitalized and depreciated over the expected useful lives of the enhancements.
Increased depreciation expense decreases operating income in periods subsequent
to capital upgrades. From time to time, the Company sells assets in the ordinary
course of its business and gains or losses associated with such sales are
included in operating income.

14
<PAGE> 15
YEARS ENDED DECEMBER 31, 1999 AND 1998

Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below (eliminations offset (i) dayrate revenues
earned when the Company's rigs are utilized in its integrated services and (ii)
intercompany expenses charged to rig operations). Certain amounts applicable to
the prior periods have been reclassified to conform to the classifications
currently followed. Such reclassifications do not affect earnings.

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------- INCREASE/
1999 1998 (DECREASE)
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
REVENUES
High Specification Floaters ............... $ 262,571 $ 286,875 $ (24,304)
Other Semisubmersibles .................... 463,168 707,227 (244,059)
Jack-ups .................................. 74,484 209,134 (134,650)
Integrated Services ....................... 32,769 26,876 5,893
Eliminations .............................. (11,968) (21,311) 9,343
------------ ------------ ------------
Total Revenues .................... $ 821,024 $ 1,208,801 $ (387,777)
============ ============ ============
CONTRACT DRILLING EXPENSE
High Specification Floaters ............... $ 100,003 $ 88,293 $ 11,710
Other Semisubmersibles .................... 223,084 276,633 (53,549)
Jack-ups .................................. 84,830 104,490 (19,660)
Integrated Services ....................... 32,486 26,472 6,014
Other ..................................... 3,088 10,048 (6,960)
Eliminations .............................. (11,968) (21,311) 9,343
------------ ------------ ------------
Total Contract Drilling Expense ... $ 431,523 $ 484,625 $ (53,102)
============ ============ ============
OPERATING INCOME
High Specification Floaters ............... $ 162,568 $ 198,582 $ (36,014)
Other Semisubmersibles .................... 240,084 430,594 (190,510)
Jack-ups .................................. (10,346) 104,644 (114,990)
Integrated Services ....................... 283 404 (121)
Other ..................................... (3,088) (10,048) 6,960
Depreciation and Amortization Expense ..... (142,963) (130,271) (12,692)
General and Administrative Expense ........ (22,877) (25,324) 2,447
Gain on Sale of Assets .................... 231 418 (187)
------------ ------------ ------------
Total Operating Income ............ $ 223,892 $ 568,999 $ (345,107)
============ ============ ============
</TABLE>

High Specification Floaters.

Revenues. Revenues from high specification floaters during the year ended
December 31, 1999 decreased $24.3 million from 1998. This decrease resulted
primarily from a $13.4 million decrease in revenues from the Ocean Valiant due
to decreased utilization while the rig was in the shipyard for stability
enhancements and other repairs performed during 1999 and a $14.9 million
decrease due to rig downtime associated with the upgrade of and repairs
performed on the Ocean Clipper. Revenues were also reduced by approximately
$10.9 million due to a decrease in operating dayrates as compared to 1998 and
reduced by $6.8 million due to rig downtime associated with the mandatory
inspection and repairs of the Ocean America. The average operating dayrate for
high specification floaters was $123,100 per day during 1999, as compared to
$133,700 per day during 1998. These decreases were partially offset by an
increase in revenues of approximately $14.2 million from the Ocean Victory,
which was in the shipyard during part of 1998 for repairs required as a result
of the February 1998 engine room fire. The decrease in revenue was also
partially offset by an increase of approximately $4.6 million from mobilization
revenues for the Ocean Alliance to locations offshore West Africa during 1999
and $2.0 million from mobilization revenues for the Ocean Clipper from the Gulf
of Mexico to Brazil.

Contract Drilling Expense. Contract drilling expense for high
specification floaters during the year ended December 31, 1999 increased $11.7
million from 1998. This increase resulted in part from an increase of $5.3
million for repairs performed on the Ocean Valiant, which was in the shipyard
for part of 1999. Also contributing to this increase was $3.0 million

15
<PAGE> 16

associated with costs for the 1999 mandatory inspection and repairs of the Ocean
America and $3.1 million due to the capitalization of costs associated with 1998
shipyard repairs on the Ocean Victory.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles during the year ended
December 31, 1999 decreased $244.1 million from 1998. Revenues decreased $124.3
million from a decline in utilization compared to 1998 and $39.3 million due to
rigs removed from service in late 1998 and 1999. In addition, revenues were
reduced by $37.0 million due to rig downtime during 1999 for mandatory
inspections and repairs of the Ocean New Era, the Ocean Yatzy, the Ocean
Concord, the Ocean Winner, and the Ocean Guardian. Also contributing to the
decrease in revenues was a $73.8 million decline from lower operating dayrates
compared to 1998. The average operating dayrate for other semisubmersibles was
$82,700 per day in 1999, compared to $93,900 per day in 1998. These decreases
were partially offset by increases in revenues of approximately $29.1 million
from nine other rigs which were undergoing mandatory inspections during 1998.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the year ended December 31, 1999 decreased $53.5 million
from 1998. This decrease resulted primarily from expense reductions of
approximately $38.7 million due to a decline in utilization and from rigs that
were idle for all or part of 1999. Contract drilling expense also decreased by
approximately $19.9 million due to fewer mandatory inspections and repairs
performed during 1999 as compared to 1998. Partially offsetting these decreases
was an increase in costs of $3.2 million associated with the mobilization of the
Ocean Winner from the Gulf of Mexico to Brazil during the first half of 1999.

Jack-Ups.

Revenues. Revenues from jack-ups during the year ended December 31, 1999
decreased $134.7 million from 1998. This decrease was primarily due to
reductions in revenues of $81.8 million from decreased operating dayrates and
$52.9 million from decreased utilization and the removal of rigs from service in
late 1998 and the first quarter of 1999. The average operating dayrate for
jack-ups was $21,900 per day during 1999 compared to $46,700 per day in 1998.

Contract Drilling Expense. Contract drilling expense for jack-ups during
the twelve months ended December 31, 1999 decreased $19.7 million from the same
period in 1998. This decrease resulted primarily from expense reductions for
rigs that were removed from service in late 1998 and the first quarter of 1999.

Integrated Services.

Revenues and contract drilling expense for integrated services increased
primarily due to four turnkey wells completed during 1999. In 1998, the Company
performed primarily project management services on a dayrate basis.

Other.

Other contract drilling expense of $3.1 million during 1999 decreased $7.0
million from $10.1 million during 1998. This decrease resulted primarily from
higher expenditures during 1998 for crew training programs and various other
non-recurring charges.

Depreciation and Amortization Expense.

Depreciation and amortization expense of $143.0 million for the year ended
December 31, 1999 increased $12.7 million from $130.3 million for the year ended
December 31, 1998. This increase resulted primarily from depreciation expense
associated with expenditures for the Company's continuing rig enhancement
program. Partially offsetting this increase was a $1.2 million decline in
amortization expense as compared to 1998. See Note 4 to the Company's
Consolidated Financial Statements in Item 8 of this Report.

General and Administrative Expense.

General and administrative expense of $22.9 million for the year ended
December 31, 1999 decreased $2.4 million from $25.3 million for the year ended
December 31, 1998 primarily due to a decrease in legal and personnel costs.

16
<PAGE> 17

Interest Income.

Interest income of $35.0 million for the year ended December 31, 1999
increased $4.4 million from $30.6 million for the year ended December 31, 1998.
This increase resulted primarily from an increase in average cash invested
throughout 1999. See "-- Liquidity."

Interest Expense.

Interest expense of $9.2 million for the year ended December 31, 1999
decreased $5.3 million from $14.5 million for 1998. Interest expense for 1999
consisted of $15.5 million interest associated with the Company's convertible
subordinated notes, partially offset by $6.3 million of interest capitalized for
the conversion of the Ocean Confidence. The decrease of $5.3 million resulted
primarily from an increase in capitalized interest cost based on the average
amount of accumulated expenditures for the Ocean Confidence. See "-- Capital
Resources."

Other Expense.

Other expense of $9.3 million for the year ended December 31, 1999
increased $14.5 million from other income of $5.2 million for the year ended
December 31, 1998. This increase resulted primarily from an impairment loss
recorded as the result of the decline in fair market value, judged to be other
than temporary, in the Company's investment in an equity security. See Note 2 to
the Company's Consolidated Financial Statements in Item 8 of this Report.

Income Tax Expense.

Income tax expense for the year ended December 31, 1999 was $84.3 million
as compared to $206.6 million for 1998. This change resulted primarily from a
decrease of $349.9 million in the Company's income before income tax expense.

17
<PAGE> 18

YEARS ENDED DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------ INCREASE/
1998 1997 (DECREASE)
------------ ------------ ------------
(in thousands)
<S> <C> <C> <C>
REVENUES
High Specification Floaters .................. $ 286,875 $ 206,708 $ 80,167
Other Semisubmersibles ....................... 707,227 545,701 161,526
Jack-ups ..................................... 209,134 192,169 16,965
Integrated Services .......................... 26,876 36,342 (9,466)
Other ........................................ -- 3,257 (3,257)
Eliminations ................................. (21,311) (28,084) 6,773
------------ ------------ ------------
Total Revenues ....................... $ 1,208,801 $ 956,093 $ 252,708
============ ============ ============
CONTRACT DRILLING EXPENSE
High Specification Floaters .................. $ 88,293 $ 64,314 $ 23,979
Other Semisubmersibles ....................... 276,633 234,578 42,055
Jack-ups ..................................... 104,490 96,246 8,244
Integrated Services .......................... 26,472 34,464 (7,992)
Other ........................................ 10,048 6,119 3,929
Eliminations ................................. (21,311) (29,378) 8,067
------------ ------------ ------------
Total Contract Drilling Expense ...... $ 484,625 $ 406,343 $ 78,282
============ ============ ============
OPERATING INCOME
High Specification Floaters .................. $ 198,582 $ 142,394 $ 56,188
Other Semisubmersibles ....................... 430,594 311,123 119,471
Jack-ups ..................................... 104,644 95,923 8,721
Integrated Services .......................... 404 1,878 (1,474)
Other ........................................ (10,048) (2,862) (7,186)
Eliminations ................................. -- 1,294 (1,294)
Depreciation and Amortization Expense ........ (130,271) (108,335) (21,936)
General and Administrative Expense ........... (25,324) (22,556) (2,768)
Gain on Sale of Assets ....................... 418 1,014 (596)
------------ ------------ ------------
Total Operating Income ............... $ 568,999 $ 419,873 $ 149,126
============ ============ ============
</TABLE>

High Specification Floaters.

Revenues. Revenues from high specification floaters during the year ended
December 31, 1998 increased $80.2 million from 1997. This increase resulted
primarily from a $51.2 million increase in revenues generated by the Ocean
Victory, the Ocean Clipper, and the Ocean Star, which completed their upgrade
projects in November 1997, July 1997, and March 1997, respectively, and $37.0
million of additional revenues generated by increased operating dayrates in the
Gulf of Mexico and West Africa. These increases were partially offset by
reductions in revenues of approximately $7.6 million for the Ocean Valiant and
the Ocean Alliance from rig downtime for mandatory inspections completed in June
1998 and November 1998, respectively.

Contract Drilling Expense. Contract drilling expense for high
specification floaters during the year ended December 31, 1998 increased $24.0
million from 1997. This increase resulted primarily from operating costs
generated by the Ocean Victory, the Ocean Clipper, and the Ocean Star upon
completion of their upgrades and from costs associated with the mandatory
inspections of the Ocean Valiant and the Ocean Alliance completed during 1998.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles during the year ended
December 31, 1998 increased $161.5 million from 1997. This increase resulted
primarily from $194.5 million of additional revenues generated by increased
operating dayrates. The average operating dayrate for other semisubmersibles was
$93,900 per day in 1998, as compared to $67,400 per

18
<PAGE> 19

day in 1997. Also contributing to the increase in revenues was $9.7 million in
revenues from the Ocean Century, which was employed in the Gulf of Mexico
through July 1998 after reactivation in the fourth quarter of 1997. These
increases were partially offset by reductions in revenues of approximately $43.2
million from rig downtime for mandatory inspections and repairs of nine of the
Company's semisubmersibles performed during 1998 and from the 1997 sale of the
Ocean Zephyr.

Contract Drilling Expense. Contract drilling expense for the year ended
December 31, 1998 increased $42.1 million from 1997. This increase was primarily
due to mandatory inspections and associated repairs performed in 1998,
additional costs associated with the Ocean Whittington while in the shipyard in
early 1998 for repairs and preparation for mobilization from the Gulf of Mexico
to Brazil, and an overall increase in operating costs, including labor and
drilling supplies.

Jack-Ups.

Revenues. Revenues from jack-ups for the year ended December 31, 1998
increased $17.0 million from 1997. This increase resulted primarily from $37.1
million of additional revenues generated by increased operating dayrates. The
average operating dayrate for jack-ups was $46,700 per day in 1998 as compared
to $37,000 per day in 1997. Also contributing to this increase in revenues was
$11.1 million in revenues generated by the Ocean Warwick, which returned to work
in the Gulf of Mexico in March 1998 upon completion of its cantilever conversion
upgrade. These increases were partially offset by reductions in revenues of
approximately $15.5 million due to the relinquishment of the Miss Kitty (a
bareboat chartered rig) to the owner in late 1997 and from the Ocean Tower,
which was in the shipyard for upgrades and repairs through May 1998. In
addition, decreased utilization in the shallow waters of the Gulf of Mexico
during 1998 reduced revenues by approximately $15.7 million.

Contract Drilling Expense. Contract drilling expense for jack-ups for the
year ended December 31, 1998 increased $8.2 million from 1997. This increase
resulted primarily from operating costs for the Ocean Warwick upon returning to
service in March 1998, an overall increase in operating costs, including labor
and drilling supplies, and costs associated with the mandatory inspection and
repair of the Ocean Drake, which was completed in June 1998. However, the
relinquishment of the Miss Kitty in late 1997 and the capital upgrade of the
Ocean Tower through May 1998 partially offset these increases in contract
drilling expense in 1998.

Integrated Services.

Revenues and contract drilling expense for integrated services decreased
primarily due to fewer managed day work projects in 1998 as compared to 1997.

Other.

The $3.3 million in other revenue for 1997 was due to revenue generated by
the Ocean Confidence, which operated as an accommodation vessel, prior to the
start of its conversion to a drilling unit in 1998. See "-- Capital Resources."
Other contract drilling expense increased $3.9 million in 1998 primarily due to
additional expenses for maintenance and repairs to spare equipment and crew
training programs for new employees as compared to 1997.

Depreciation and Amortization Expense.

Depreciation and amortization expense of $130.3 million for the year ended
December 31, 1998 increased primarily due to (i) capital expenditures associated
with the Company's continuing rig enhancement program, (ii) rig upgrades
completed in 1998 for the Ocean Warwick and the Ocean Tower, and (iii)
additional depreciation expense for the Ocean Victory, the Ocean Clipper, and
the Ocean Star, which completed their upgrades in November 1997, July 1997, and
March 1997, respectively.

General and Administrative Expense.

General and administrative expense of $25.3 million for the year ended
December 31, 1998 increased from $22.6 million for the year ended December 31,
1997 primarily due to accruals for the Company's bonus and retention plan, costs
associated with ongoing litigation, and additional personnel. Also, general and
administrative costs capitalized to upgrade projects decreased in 1998 as
compared to 1997.

Gain on Sale of Assets.

Gain on sale of assets of $0.4 million for the year ended December 31,
1998 decreased from $1.0 million for the year ended December 31, 1997 primarily
due to the 1997 sale of the Ocean Zephyr, a semisubmersible drilling rig which
was located offshore Brazil.

19
<PAGE> 20

Interest Income.

Interest income of $30.6 million for the year ended December 31, 1998
increased $11.2 million from $19.4 million for the year ended December 31, 1997.
This increase resulted primarily from the investment of additional excess cash
in 1998. See "-- Liquidity."

Interest Expense.

Interest expense of $14.5 million for the year ended December 31, 1998
increased $4.2 million from $10.3 million for 1997. Interest expense for 1998
consisted of $15.5 million interest associated with the Company's convertible
subordinated notes that were issued in February 1997, partially offset by $1.0
million of interest capitalized for the conversion of the Ocean Confidence. The
increase of $4.2 million resulted primarily from the reduction of interest
capitalized for upgrade projects in 1998.

Other Income.

Other income of $5.2 million for the year ended December 31, 1998
increased $4.1 million from $1.1 million for 1997. This increase resulted
primarily from realized gains on sales of marketable debt securities in 1998.

Income Tax Expense.

Income tax expense for the year ended December 31, 1998 was $206.6 million
as compared to $151.5 million for 1997. This change resulted primarily from the
increase of $160.2 million in the Company's income before income tax expense.

OUTLOOK

During 1999, operators took a cautious approach on spending for
exploration and development due to fluctuating product price levels. In
response, the Company removed as many as eight rigs from service during all or
part of 1999 and several of the Company's other rigs were idle in various
markets. In addition, rig construction and enhancement programs by offshore
drilling contractors, which began in late 1997 and 1998, resulted in a marginal
oversupply of technologically advanced rigs capable of drilling in deep water.
Such conditions adversely affected the utilization level and average operating
dayrates available for the Company's rigs, particularly its higher specification
semisubmersible units. The previously depressed conditions in the oil and gas
industry also increased the susceptibility of term contracts committed at
dayrates in excess of the current market rates to be terminated or renegotiated
by the customer. Although during 1999 the Company did not experience termination
of significant contracts or substantial renegotiations, other than as discussed
below, several term contracts were terminated during 1999 within the offshore
contract drilling industry for various reasons. Historically, the offshore
contract drilling industry has been highly competitive and cyclical, and the
Company cannot predict the extent to which current conditions may or may not
continue. However, with the continued improvements in product prices due to,
among other things, production cuts by the Organization of Petroleum Exporting
Countries and an improved outlook on foreign economic recovery, particularly in
Asia, there is new optimism in the offshore contract drilling industry that oil
and gas companies will increase their spending on exploration and development in
the long term resulting in increased utilization levels and dayrates for
offshore drilling rigs.

In August 1999, a customer terminated a contract for the use of one of the
Company's drilling rigs located offshore Australia. The termination was not the
result of performance failures by the Company or its equipment. The Company
believes the contract required the customer to pay approximately $16.5 million
in remaining revenue through the end of the contract period, which was
previously scheduled to end in early January 2000. However, the customer
believes that there was no further obligation under the contract and has refused
to pay the $16.5 million early termination fee. The Company filed suit in
Australia in August 1999 requesting reconstruction of the contract and a
declaratory judgment requiring the customer to pay such early termination fee.
The Company intends to vigorously pursue its claim. For financial statement
purposes, the $16.5 million early termination fee was not included in revenues
in the Company's results of operations for the year ended December 31, 1999.

The Company's results of operations have been adversely affected by the
loss of revenues and associated costs incurred during required regulatory
inspections of its drilling rigs. Six of these inspections were performed in
1999 and two are scheduled for completion in 2000. The Company may elect to
perform additional inspections or undertake modifications to take advantage of
rig downtime. The Company intends to focus on returning these rigs to operations
as soon as reasonably possible, in order to minimize inspection downtime and
associated loss of revenues, but the extent of such downtime cannot be
accurately predicted.

20
<PAGE> 21

LIQUIDITY

At December 31, 1999, cash and marketable securities totaled $641.4
million, up from $637.0 million at December 31, 1998. Cash provided by operating
activities for the year ended December 31, 1999 decreased by $149.1 million to
$398.1 million, as compared to $547.2 million for the prior year. This decrease
was primarily from a $227.6 million decrease in net income, a $71.1 million
decrease from changes in accounts payable and accrued liabilities, and a $22.9
million decrease in the deferred tax provision. These decreases were partially
offset by a $116.4 million increase in cash resulting from a decrease in
accounts receivable and a $14.4 million increase in cash resulting from changes
in rig inventory and other current assets.

Investing activities used $319.1 million in cash during the year ended
December 31, 1999, as compared to $391.3 million during the prior year. This
decrease resulted primarily from a $172.2 million decrease in cash from changes
in marketable securities, partially offset by a $99.7 million increase in
capital expenditures, primarily for the conversion of the Ocean Confidence. See
"-- Capital Resources."

Cash used in financing activities for the year ended December 31, 1999 of
$67.9 million resulted primarily from dividends paid to stockholders. Cash used
in financing activities for the year ended December 31, 1998 of $157.7 resulted
from the repurchase of shares of the Company's outstanding common stock and from
dividends paid to stockholders. Depending on market conditions the Company may,
from time to time, purchase shares of its common stock in the open market.
During the year ended December 31, 1998, the Company purchased 3.5 million
shares of its common stock at an aggregate cost of $88.7 million. The Company
did not repurchase any of its common stock during 1999. Through February 29,
2000, the Company has purchased 0.3 million shares of its common stock at an
aggregate cost of $8.5 million, or at an average cost of $27.49 per share. See
Note 1 to the Company's Consolidated Financial Statements in Item 8 of this
Report.

In April 1999, the Company entered into a $20.0 million short-term
revolving credit agreement with a U.S. bank. The agreement provides for
borrowings at various interest rates and varying commitment fees dependent upon
public credit ratings. The Company intends to use the facility primarily for
letters of credit that the Company must post, from time to time, for bid and
performance guarantees required in certain parts of the world. The agreement
contains certain financial and other covenants and provisions that must be
maintained by the Company for compliance. As of December 31, 1999, there were no
outstanding borrowings under this agreement and the Company was in compliance
with each of the covenants and provisions.

The Company has the ability to issue an aggregate of approximately $117.5
million in debt, equity and other securities under a shelf registration
statement. In addition, the Company may issue, from time to time, up to eight
million shares of common stock, which shares are registered under an acquisition
shelf registration statement (upon effectiveness of an amendment thereto
reflecting the effect of the two-for-one stock split declared in July 1997), in
connection with one or more acquisitions by the Company of securities or assets
of other businesses.

The Company believes it has the financial resources needed to meet its
business requirements in the foreseeable future, including capital expenditures
for rig upgrades and continuing rig enhancements, and working capital
requirements.

CAPITAL RESOURCES

Cash required to meet the Company's capital commitments is determined by
evaluating rig upgrades to meet specific customer requirements and by evaluating
the Company's continuing rig enhancement program, including water depth and
drilling capability upgrades. It is management's opinion that operating cash
flows and the Company's cash reserves will be sufficient to meet these capital
commitments; however, periodic assessments will be made based on industry
conditions. In addition, the Company may, from time to time, issue debt or
equity securities, or a combination thereof, to finance capital expenditures,
the acquisition of assets and businesses, or for general corporate purposes. The
Company's ability to effect any such issuance will be dependent on the Company's
results of operations, its current financial condition, current market
conditions, and other factors beyond its control.

During the year ended December 31, 1999, the Company expended $208.8
million, including capitalized interest expense, for rig upgrades, primarily for
the conversion of the Ocean Confidence from an accommodation vessel to a
semisubmersible drilling unit capable of operating in harsh environments and
ultra-deep waters. Also during 1999, the Company expended $21.8 million to
upgrade the dynamic-positioning system of the Ocean Clipper, $12.9 million to
increase the variable deckload and other drilling capabilities on the Ocean
General, $11.2 million to expand the variable deckload, work and storage space
on the Ocean Concord, and $4.9 million to complete the power system upgrade on
the Ocean King. The Company has budgeted $87.2 million for rig upgrade capital
expenditures during 2000, which does not include currently anticipated cost
overruns associated with the conversion of the Ocean Confidence. Included in
this amount is approximately $17.0 million for variable deckload and

21
<PAGE> 22

water depth capability upgrades on the Ocean Epoch, and $25.2 million for other
possible upgrades depending on market conditions.

The conversion of the Ocean Confidence includes the following
enhancements: capability for operation in 7,500 foot water depths; approximately
6,000 tons variable deckload; a 15,000 psi blow-out prevention system; and four
mud pumps to complement the existing Class III dynamic-positioning system. The
Company estimates its net cost of conversion for this rig at approximately
$340.0 million. Upon completion of the conversion and acceptance, the rig is
scheduled to begin a five-year drilling program in the Gulf of Mexico, which is
expected to generate approximately $320.0 million of revenues. The drilling
contract contains a provision allowing the customer to cancel the contract
should the unit not be delivered by July 1, 2000. Although the Company believes
the project will be completed by July 1, 2000, it is possible that delays or
unforeseen circumstances could push delivery beyond this date, which could allow
the customer to cancel the term contract. Should the Company be required to
remarket the unit, it is likely that an initial term would be shorter than the
currently contracted five-year period, and the dayrate would be dependent upon
market conditions at such time as the Ocean Confidence might be offered for
contract. In such case, future revenues generated by the rig could be less than
the current contracted amount of approximately $320.0 million.

During the year ended December 31, 1999, the Company expended $115.3
million in association with its continuing rig enhancement program and to meet
other corporate requirements. These expenditures included purchases of anchor
chain, drill pipe, riser, and other drilling equipment. The Company has budgeted
$70.8 million for 2000 capital expenditures associated with its continuing rig
enhancement program and other corporate requirements.

The Company continues to consider transactions which include, but are not
limited to, the purchase of existing rigs, construction of new rigs and the
acquisition of other companies engaged in contract drilling or related
businesses. Certain of these potential transactions reviewed by the Company
would, if completed, result in its entering new lines of business. In general,
however, these opportunities have been related in some manner to the Company's
existing operations. Although the Company does not, as of the date hereof, have
any commitment with respect to a material acquisition, it could enter into such
an agreement in the future and such acquisition could result in a material
expansion of its existing operations or result in its entering a new line of
business. Some of the potential acquisitions considered by the Company could, if
completed, result in the expenditure of a material amount of funds or the
issuance of a material amount of debt or equity securities.

INTEGRATED SERVICES

The Company's wholly owned subsidiary, DOTS, from time to time,
selectively engages in drilling services pursuant to turnkey or modified-turnkey
contracts under which DOTS agrees to drill a well to a specified depth for a
fixed price. In such cases, DOTS generally is not entitled to payment unless the
well is drilled to the specified depth and profitability of the contract depends
upon its ability to keep expenses within the estimates used by DOTS in
determining the contract price. Drilling a well under a turnkey contract
therefore typically requires a greater cash commitment by the Company and
exposes the Company to risks of potential financial losses that generally are
substantially greater than those that would ordinarily exist when drilling under
a conventional dayrate contract. DOTS also offers a portfolio of drilling
services including overall project management, extended well tests, and
completion operations. During 1999, DOTS completed four turnkey wells in the
Gulf of Mexico and contributed operating income of $0.3 million to the Company's
consolidated results of operations.

YEAR 2000 ISSUES UPDATE

The Company began to address Year 2000 ("Y2K") compliance issues in 1997
when it formed a committee (the "Y2K Committee") to develop the Company's Y2K
compliance initiative. The Y2K Committee focused its efforts on both information
technology systems (e.g., computer software and hardware) and non-information
technology systems (e.g., embedded technology such as micro-controllers) in the
Company's domestic and international onshore locations, aboard the Company's
drilling rigs and among its key suppliers. The Y2K Committee particularly
focused its attention on critical safety, production, and operational systems
on-board the Company's fleet of drilling rigs.

The Company did not experience any serious Y2K problems as the calendar
year changed to 2000, and no disruption of normal business activities or
operations occurred which could have had a material adverse effect on the
Company's results of operations, liquidity or financial condition. However, the
Company is continuing to monitor, on an ongoing basis, any future uncertainties
arising from the Y2K problem. The Company does not believe that any future
problems, primarily in the nature of computer system problems, could have a
material adverse effect on its results of operations.

22
<PAGE> 23

The total cost associated with required modifications to become Y2K
compliant was not material to the Company's financial position primarily because
the Company utilized existing personnel resources to assist in the
implementation of its Y2K compliance initiative. The Company implemented certain
business and financial systems apart from the Y2K compliance initiative.
However, because the replaced systems were not Y2K compliant, the Y2K initiative
also benefited from their replacement. The cost for these systems does not
include the Company's internal costs incurred as these costs were not separately
tracked. Such internal costs were principally the related payroll costs for its
information systems group. The total amount of outside costs expended through
December 31, 1999 was approximately $5.7 million, of which approximately $3.3
million was incurred and capitalized prior to 1999.

OTHER

Currency Risk. Certain of the Company's subsidiaries use the local
currency in the country where they conduct operations as their functional
currency. Currency environments in which the Company has material business
operations include the U.K., Australia, Brazil, Indonesia and Africa. The
Company generally attempts to minimize its currency exchange risk by seeking
international contracts payable in local currency in amounts equal to the
Company's estimated operating costs payable in local currency and in U.S.
dollars for the balance of the contract. Because of this strategy, the Company
has minimized its unhedged net asset or liability positions denominated in local
currencies and has not experienced significant gains or losses associated with
changes in currency exchange rates. At present, both contracts covering the
Company's rigs currently operating in the U.K. sector of the North Sea are
payable in U.S. dollars. The Company has not hedged its exposure to changes in
the exchange rate between U.S. dollars and pounds sterling for operating costs
payable in pounds sterling, although it may seek to do so in the future.

Currency translation adjustments are accumulated in a separate section of
stockholders' equity. When the Company ceases its operations in a currency
environment, the accumulated adjustments are recognized currently in results of
operations. Additionally, translation gains and losses for the Company's
operations in areas which have experienced cumulative inflation of approximately
100 percent or more over a three-year period are recognized currently. The
effect on results of operations from these translation gains and losses has not
been material and they are not expected to have a significant effect in the
future.

FORWARD-LOOKING STATEMENTS

Certain written and oral statements made or incorporated by reference from
time to time by the Company or its representatives are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include, without limitation, any statement
that may project, indicate or imply future results, performance or achievements,
and may contain the words "expect," "intend," "plan," "anticipate," "estimate,"
"believe," "will be," "will continue," "will likely result," and similar
expressions. Statements by the Company in this Report that contain
forward-looking statements include, but are not limited to, discussions
regarding future market conditions and the effect of such conditions on the
Company's future results of operations (see "-- Outlook"), future uses of and
requirements for financial resources, including but not limited to, expenditures
related to the conversion of the Ocean Confidence (see "-- Liquidity" and "--
Capital Resources"), and the impact of currency risk to the Company's future
results of operations (see "-- Other"). Such statements inherently are subject
to a variety of risks and uncertainties that could cause actual results to
differ materially from those projected. Such risks and uncertainties include,
among others, general economic and business conditions, casualty losses,
industry fleet capacity, changes in foreign and domestic oil and gas exploration
and production activity, competition, changes in foreign, political, social and
economic conditions, regulatory initiatives and compliance with governmental
regulations, customer preferences and various other matters, many of which are
beyond the Company's control. The risks included here are not exhaustive. Other
sections of this Report and the Company's other filings with the Securities and
Exchange Commission include additional factors that could adversely impact the
Company's business and financial performance. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statement to
reflect any change in the Company's expectations with regard thereto or any
change in events, conditions or circumstances on which any forward-looking
statement is based.

23
<PAGE> 24

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information included in this Item 7A is considered to constitute
"forward looking statements" for purposes of the statutory safe harbor provided
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements" in Item 7 of this Report.

The Company's financial instruments include the Company's convertible
subordinated notes and investments in debt securities, including U.S. Treasury
securities and collateralized mortgage obligations ("CMO's"). The Company's
convertible subordinated notes, which are due February 15, 2007, have a stated
interest rate of 3.75 percent and an effective interest rate of 3.93 percent. At
December 31, 1999, the fair value of these notes, based on quoted market prices,
was approximately $403.9 million, as compared to a carrying amount of $400.0
million. At December 31, 1999, the fair market value of the Company's investment
in debt securities issued by the U.S. Treasury was approximately $380.7 million,
which includes an unrealized holding loss of $3.3 million. These securities bear
interest rates ranging from 4.00 percent to 5.00 percent. These securities are
U.S. government-backed and generally short-term and readily marketable. The fair
value of the Company's investment in CMO's at December 31, 1999 was
approximately $146.9 million, which includes an unrealized holding loss of $6.1
million. The CMO's are also short-term and readily marketable with an implied
AAA rating backed by U.S. government guaranteed mortgages.

The Company believes the declines in the fair value of its investments in
debt securities due to interest rate sensitivity are temporary in nature. This
determination was based on the marketability of the instruments, the Company's
ability to retain its investment in the instruments, past market movements and
reasonably possible, near-term market movements. Therefore, the Company does not
believe that potential, near-term losses in future earnings, fair values, or
cash flows are likely to be material.

At December 31, 1999, the fair value of the Company's investment in an
equity security was approximately $1.4 million, which includes an unrealized
holding loss of $10.7 million. Because this decline in value was judged to be
other than temporary, the cost of the security was written down for financial
statement purposes from $12.1 million to $1.4 million at December 31, 1999 and a
corresponding after-tax impairment loss of $6.9 million was charged against net
income for the year ended December 31, 1999.

Other than trade accounts receivable and trade accounts payable, the
Company does not currently have financial instruments that are sensitive to
foreign currency exchange rates.

24
<PAGE> 25

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Diamond Offshore Drilling, Inc. and subsidiaries
Houston, Texas

We have audited the accompanying consolidated balance sheets of Diamond
Offshore Drilling, Inc. and subsidiaries (the "Company") as of December 31, 1999
and 1998, and the related consolidated statements of income, stockholders'
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Diamond Offshore Drilling, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.

Deloitte & Touche LLP
Houston, Texas

January 25, 2000

25
<PAGE> 26

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 112,316 $ 101,198
Marketable securities ................................................... 529,042 535,774
Accounts receivable ..................................................... 143,569 233,719
Rig inventory and supplies .............................................. 38,760 35,794
Prepaid expenses and other .............................................. 36,605 31,939
------------ ------------
Total current assets ............................................ 860,292 938,424
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION ................................................ 1,737,905 1,551,820
GOODWILL, NET OF ACCUMULATED AMORTIZATION ................................. 73,174 109,825
OTHER ASSETS .............................................................. 9,658 9,647
------------ ------------
Total assets .................................................... $ 2,681,029 $ 2,609,716
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................ $ 72,630 $ 93,938
Accrued liabilities ..................................................... 44,051 53,283
Taxes payable ........................................................... 18,720 13,180
------------ ------------
Total current liabilities ....................................... 135,401 160,401
LONG-TERM DEBT ............................................................ 400,000 400,000
DEFERRED TAX LIABILITY .................................................... 291,213 263,797
OTHER LIABILITIES ......................................................... 12,193 30,260
------------ ------------
Total liabilities ............................................... 838,807 854,458
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock (par value $0.01, 25,000,000 shares authorized,
none issued and outstanding)............................................. -- --
Common stock (par value $0.01, 500,000,000 shares authorized,
139,342,381 issued, 135,824,281 outstanding at December 31, 1999
and 139,333,635 shares issued and 135,815,535 outstanding at
December 31, 1998)..................................................... 1,393 1,393
Additional paid-in capital .............................................. 1,302,841 1,302,806
Retained earnings ....................................................... 635,943 547,783
Accumulated other comprehensive losses .................................. (9,229) (7,998)
Treasury stock, at cost (3,518,100 shares) .............................. (88,726) (88,726)
------------ ------------
Total stockholders' equity ...................................... 1,842,222 1,755,258
------------ ------------
Total liabilities and stockholders' equity ...................... $ 2,681,029 $ 2,609,716
============ ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.

26
<PAGE> 27

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES ............................................................. $ 821,024 $ 1,208,801 $ 956,093

OPERATING EXPENSES:
Contract drilling .................................................. 431,523 484,625 406,343
Depreciation and amortization ...................................... 142,963 130,271 108,335
General and administrative ......................................... 22,877 25,324 22,556
Gain on sale of assets ............................................. (231) (418) (1,014)
------------ ------------ ------------
Total operating expenses ........................................ 597,132 639,802 536,220
------------ ------------ ------------
OPERATING INCOME 223,892 568,999 419,873
OTHER INCOME (EXPENSE):
Interest income .................................................... 34,985 30,565 19,379
Interest expense ................................................... (9,212) (14,487) (10,270)
Other, net ......................................................... (9,302) 5,154 1,079
------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE ..................................... 240,363 590,231 430,061
INCOME TAX EXPENSE ................................................... (84,292) (206,572) (151,456)
------------ ------------ ------------
NET INCOME ........................................................... $ 156,071 $ 383,659 $ 278,605
============ ============ ============

NET INCOME PER SHARE:
Basic .............................................................. $ 1.15 $ 2.78 $ 2.01
============ ============ ============
Diluted ............................................................ $ 1.11 $ 2.66 $ 1.93
============ ============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Shares of common stock ............................................. 135,822 138,020 138,560
Dilutive potential shares of common stock .......................... 9,876 9,876 8,929
------------ ------------ ------------
Total weighted average shares of common stock outstanding ....... 145,698 147,896 147,489
============ ============ ============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.

27
<PAGE> 28

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)

RETAINED ACCUMULATED
COMMON STOCK ADDITIONAL EARNINGS OTHER TREASURY STOCK TOTAL
-------------------- PAID-IN (ACCUMULATED COMPREHENSIVE ------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT) GAINS (LOSSES) SHARES AMOUNT EQUITY
----------- ------ ---------- ------------ ------------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996 ............ 68,353,409 $ 684 $1,220,032 $ (25,056) $ (928) -- -- $ 1,194,732
Net income ................... -- -- -- 278,605 -- -- -- 278,605
Issuance of common stock ..... 1,250,000 12 82,270 -- -- -- -- 82,282
Two-for-one stock split ...... 69,649,474 696 -- (696) -- -- -- --
Dividends to stockholders .... -- -- -- (19,503) -- -- -- (19,503)
Stock options exercised ...... 57,065 1 410 -- -- -- -- 411
Exchange rate changes, net ... -- -- -- -- (894) -- -- (894)
Loss on investments, net ..... -- -- -- -- (106) -- -- (106)
----------- ------ ---------- ------------ ------------- --------- --------- -------------
DECEMBER 31, 1997 ............ 139,309,948 1,393 1,302,712 233,350 (1,928) -- -- 1,535,527
----------- ------ ---------- ------------ ------------- --------- --------- -------------
Net income ................... -- -- -- 383,659 -- -- -- 383,659
Treasury stock purchases ..... -- -- -- -- -- 3,518,100 (88,726) (88,726)
Dividends to stockholders .... -- -- -- (69,226) -- -- -- (69,226)
Stock options exercised ...... 23,687 -- 94 -- -- -- -- 94
Exchange rate changes, net ... -- -- -- -- (291) -- -- (291)
Loss on investments, net ..... -- -- -- -- (5,779) -- -- (5,779)
----------- ------ ---------- ------------ ------------- --------- --------- -------------
DECEMBER 31, 1998 ............ 139,333,635 1,393 1,302,806 547,783 (7,998) 3,518,100 $ (88,726) 1,755,258
----------- ------ ---------- ------------ ------------- --------- --------- -------------
Net income ................... -- -- -- 156,071 -- -- -- 156,071
Dividends to stockholders .... -- -- -- (67,911) -- -- -- (67,911)
Stock options exercised ...... 8,746 -- 35 -- -- -- -- 35
Exchange rate changes, net ... -- -- -- -- (983) -- -- (983)
Loss on investments, net ..... -- -- -- -- (248) -- -- (248)
----------- ------ ---------- ------------ ------------- --------- --------- -------------
DECEMBER 31, 1999 ............ 139,342,381 $ 1,393 $1,302,841 $ 635,943 $ (9,229) 3,518,100 $ (88,726) $ 1,842,222
=========== ======= ========== ============ ============= ========= ========= =============
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.

28
<PAGE> 29
DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
NET INCOME ...................................................... $ 156,071 $ 383,659 $ 278,605

OTHER COMPREHENSIVE GAINS (LOSSES), NET OF TAX:
Foreign currency translation loss ............................. (983) (291) (894)
Unrealized holding loss on investments ........................ (5,903) (5,797) (106)
Reclassification adjustment for losses included in net
income ..................................................... 5,655 18 --
---------- ---------- ----------
Total other comprehensive loss ............................. (1,231) (6,070) (1,000)
---------- ---------- ----------
COMPREHENSIVE INCOME ............................................ $ 154,840 $ 377,589 $ 277,605
========== ========== ==========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.

29
<PAGE> 30

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income .................................................... $ 156,071 $ 383,659 $ 278,605
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .............................. 142,963 130,271 108,335
Gain on sale of assets ..................................... (231) (418) (1,014)
(Gain) loss on sale of investment securities ............... 522 (1,116) (1,529)
Impairment write-down of investment securities ............. 10,671 -- --
Deferred tax provision ..................................... 38,529 61,403 34,650
Accretion of discount on investment securities ............. (9,316) (14,568) (10,505)
Amortization of debt issuance costs ........................ 541 521 456
Changes in operating assets and liabilities:
Accounts receivable ........................................ 90,279 (26,153) (32,959)
Rig inventory and supplies and other current assets ........ (7,527) (21,911) (3,319)
Other assets, non-current .................................. (2,639) (705) 949
Accounts payable and accrued liabilities ................... (30,540) 40,534 15,256
Taxes payable .............................................. 11,193 (3,867) 3,893
Other liabilities, non-current ............................. (881) 835 3,885
Other, net .................................................... (1,513) (1,301) (335)
----------- ----------- -----------
Net cash provided by operating activities ................ 398,122 547,184 396,368
----------- ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures .......................................... (324,133) (224,474) (281,572)
Acquisition of drilling rigs and related equipment ............ -- -- (80,990)
Proceeds from sale of assets .................................. 662 1,011 8,277
Net change in marketable securities ........................... 4,343 (167,818) (351,682)
----------- ----------- -----------
Net cash used in investing activities .................... (319,128) (391,281) (705,967)
----------- ----------- -----------
FINANCING ACTIVITIES:
Reacquisition of common stock ................................. -- (88,726) --
Payment of dividends .......................................... (67,911) (69,226) (19,503)
Issuance of common stock ...................................... -- -- 82,282
Debt repayments, net .......................................... -- -- (73,000)
Issuance of convertible subordinated notes .................... -- -- 400,000
Debt issuance costs ........................................... -- -- (6,062)
Proceeds from stock options exercised ......................... 35 289 660
----------- ----------- -----------
Net cash (used in) provided by financing activities ...... (67,876) (157,663) 384,377
----------- ----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS ......................... 11,118 (1,760) 74,778
Cash and cash equivalents, beginning of year .................. 101,198 102,958 28,180
----------- ----------- -----------
Cash and cash equivalents, end of year ........................ $ 112,316 $ 101,198 $ 102,958
=========== =========== ===========
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS.

30
<PAGE> 31

DIAMOND OFFSHORE DRILLING, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Diamond Offshore Drilling, Inc. (the "Company") was incorporated in
Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation
of which the Company had been a wholly owned subsidiary prior to the initial
public offering in October 1995 (the "Common Stock Offering"), owns 51.7 percent
of the outstanding common stock of the Company.

The Company, through wholly owned subsidiaries, engages in the worldwide
contract drilling of offshore oil and gas wells and is a leader in deep water
drilling. Currently, the fleet is comprised of 30 semisubmersible rigs, 14
jack-up rigs, and one drillship.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
after elimination of significant intercompany transactions and balances.

Cash and Cash Equivalents

Short-term, highly liquid investments that have an original maturity of
three months or less which are considered part of the Company's cash management
activities, rather than part of its investing activities, are considered cash
equivalents.

Marketable Securities

The Company's investments are classified as available for sale and stated
at fair value under the terms of Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Accordingly, any unrealized gains and losses, net of taxes, are
reported in the Consolidated Balance Sheets in "Accumulated other comprehensive
losses" until realized. The cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity and such adjustments are
included in the Consolidated Statements of Income in "Interest income." The cost
of debt securities sold is based on the specific identification method and the
cost of equity securities sold is based on the average cost method. Realized
gains or losses and declines in value, if any, judged to be other than temporary
are reported in the Consolidated Statements of Income in "Other income
(expense)."

Supplementary Cash Flow Information

Cash payments made for interest on long-term debt, including commitment
fees, were $15.0 million during each of the years ended December 31, 1999 and
1998 and $8.7 million during the year ended December 31, 1997. Cash payments
made for income taxes, net of refunds, during the years ended December 31, 1999,
1998, and 1997 were $35.0 million, $151.3 million, and $112.1 million,
respectively.

Rig Inventory and Supplies

Inventories primarily consist of replacement parts and supplies held for
use in the operations of the Company. Inventories are stated at the lower of
cost or estimated value.

Drilling and Other Property and Equipment

Drilling and other property and equipment is carried at cost. Maintenance
and repairs are charged to income currently while replacements and betterments
are capitalized. Costs incurred for major rig upgrades are accumulated in
construction work in progress, with no depreciation recorded on the additions,
until the month the upgrade is completed and the rig is placed in service. Upon
retirement or other disposal of fixed assets, the cost and

31
<PAGE> 32
related accumulated depreciation are removed from the respective accounts and
any gains or losses are included in the results of operations. Depreciation is
provided on the straight-line method over the remaining estimated useful lives
from the date the asset is placed in service.

Capitalized Interest

Interest cost for construction and upgrade of qualifying assets is
capitalized. The Company incurred interest cost, including amortization of debt
issuance costs, of $15.5 million during each of the years ended December 31,
1999 and 1998, and $14.7 million during the year ended December 31, 1997.
Interest cost capitalized during the years ended December 31, 1999, 1998, and
1997 was $6.3 million, $1.0 million, and $4.4 million, respectively.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable.

Goodwill

Goodwill from the merger with Arethusa (Off-Shore) Limited ("Arethusa") is
amortized on a straight-line basis over 20 years. Amortization charged to
operating expense during the years ended December 31, 1999, 1998, and 1997
totaled $5.3 million, $6.5 million, and $6.6 million, respectively.

Debt Issuance Costs

Debt issuance costs are included in the Consolidated Balance Sheets in
"Other assets" and are amortized over the term of the related debt.

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company's non-U.S.
income tax liabilities are based upon the results of operations of the various
subsidiaries and foreign branches in those jurisdictions in which they are
subject to taxation.

Treasury Stock

In July 1998, the Board of Directors authorized the purchase of shares
of the Company's common stock in the open market, from time to time, depending
on market conditions. The purchase of treasury stock is accounted for using the
cost method which reports the cost of the shares acquired in "Treasury stock" as
a deduction from stockholders' equity in the Consolidated Balance Sheets. During
the year ended December 31, 1998, the Company purchased 3.5 million shares of
its common stock at an aggregate cost of $88.7 million, or at an average cost of
$25.22 per share. Basic and diluted net income per share for the year ended
December 31, 1998 increased $0.03 and $0.02, respectively, as a result of the
purchase of treasury stock. The Company did not repurchase any of its common
stock during the year ended December 31, 1999. See "--Subsequent Events."

Revenue Recognition

Income from dayrate drilling contracts is recognized currently. In
connection with such drilling contracts, the Company may receive lump-sum fees
for the mobilization of equipment and personnel. The net of mobilization fees
received and costs incurred to mobilize an offshore rig from one market to
another is recognized over the term of the related drilling contract. Absent a
contract, mobilization costs are recognized currently. Lump-sum payments
received from customers relating to specific contracts are deferred and
amortized to income over the term of the drilling contract.

Income from offshore turnkey drilling contracts is recognized on the
completed contract method, with revenues accrued to the extent of costs until
the specified turnkey depth and other contract requirements are met. Provisions
for future losses on turnkey drilling contracts are recognized when it becomes
apparent that expenses to be incurred on a specific contract will exceed the
revenue from that contract.

32
<PAGE> 33

Currency Translation

The Company's primary functional currency is the U.S. dollar. Certain of
the Company's subsidiaries use the local currency in the country where they
conduct operations as their functional currency. These subsidiaries translate
assets and liabilities at year-end exchange rates while income and expense
accounts are translated at average exchange rates. Translation adjustments are
reflected in the Consolidated Balance Sheets in "Accumulated other comprehensive
losses." Currency transaction gains and losses are included in the Consolidated
Statements of Income in "Other income (expense)." Additionally, translation
gains and losses of subsidiaries operating in hyperinflationary economies are
included in operating results currently.

Earnings Per Share

Basic earnings per share excludes dilution and is computed by dividing net
income by the weighted average number of shares of common stock outstanding for
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted earnings per share was
calculated by dividing net income, adjusted to eliminate the after-tax effect of
interest expense, by the weighted average number of shares of common stock
outstanding and the weighted average number of shares of common stock issuable
assuming full conversion of the convertible subordinated notes as of the
beginning of the periods presented.

Because the Company does not maintain an ongoing plan for the issuance of
stock options, the options to originally purchase up to 1.0 million shares of
common stock assumed in the merger with Arethusa (the "Arethusa Options") have
not been included as dilutive potential shares. The effect on the computation of
per share earnings, had the Arethusa Options been included, was not material. At
December 31, 1999, 1998 and 1997, there were Arethusa Options outstanding for
the purchase of approximately 39,000, 48,000 and 100,000 shares of common stock,
respectively.

Weighted average shares outstanding and all per share amounts included
herein for all periods presented have been restated to include the retroactive
effect of the July 1997 two-for-one stock split in the form of a stock dividend.

Comprehensive Income

In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." Comprehensive income is the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. Comprehensive income includes net income, foreign
currency translation gains and losses, and unrealized holding gains and losses
on investments.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.

Reclassifications

Certain amounts applicable to the prior periods have been reclassified to
conform to the classifications currently followed. Such reclassifications do not
affect earnings.

33
<PAGE> 34

2. MARKETABLE SECURITIES

Investments classified as available for sale are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
-------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury
Due within one year ....................... $259,090 $(1,123) $257,967
Due after one year through five years ..... 124,935 (2,180) 122,755
Collateralized mortgage obligations ............ 153,004 (6,130) 146,874
Equity securities .............................. 1,446 -- 1,446
-------- ------- --------
Total ..................................... $538,475 $(9,433) $529,042
======== ======= ========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
-------- ----------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Debt securities issued by the U.S. Treasury
Due within one year ....................... $304,224 $ (21) $304,203
Due after one year through five years ..... 24,982 91 25,073
Collateralized mortgage obligations ............ 203,504 (452) 203,052
Equity securities .............................. 12,117 (8,671) 3,446
-------- ------- --------
Total ..................................... $544,827 $(9,053) $535,774
======== ======= ========
</TABLE>

All of the Company's investments are included as current assets in the
Consolidated Balance Sheets in "Marketable securities," representing the
investment of cash available for current operations.

At December 31, 1999, the market value of the Company's investment in an
equity security was $1.4 million, which included an unrealized loss of $10.7
million. Because this decline in value was judged to be other than temporary,
the cost of the security was written down from $12.1 million to $1.4 million at
December 31, 1999 and a corresponding after-tax impairment loss of $6.9 million
was charged against net income for the year ended December 31, 1999.

During the year ended December 31, 1999, certain debt securities due
within one year were sold or matured for proceeds of $640.9 million, resulting
in after-tax realized gains that were immaterial. Certain debt securities due
after one year were sold for proceeds of $99.8 million during the year ended
December 31, 1999, with a resulting after-tax realized loss of $0.3 million.

During the year ended December 31, 1998, certain equity and debt
securities due within one year were sold for proceeds of $2.4 million and
$1,262.0 million, respectively. The resulting after-tax realized gains for
equity and debt securities were $0.1 million and $0.7 million, respectively.
Certain debt securities due after one year were sold for proceeds of $501.9
million during the year ended December 31, 1998, with a resulting after-tax
realized gain of $1.3 million. Also during the year ended December 31, 1998,
investments through repurchase agreements with third parties were sold for their
contracted amounts totaling $350.0 million.

34
<PAGE> 35
3. DRILLING AND OTHER PROPERTY AND EQUIPMENT

Cost and accumulated depreciation of drilling and other property and
equipment are summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(IN THOUSANDS)
<S> <C> <C>

Drilling rigs and equipment ................................ $ 2,095,613 $ 1,929,540
Construction work in progress .............................. 241,102 88,266
Land and buildings ......................................... 13,992 13,874
Office equipment and other ................................. 17,552 14,100
----------- -----------
Cost ............................................. 2,368,259 2,045,780
Less accumulated depreciation .............................. (630,354) (493,960)
----------- -----------
Drilling and other property and equipment, net ... $ 1,737,905 $ 1,551,820
=========== ===========
</TABLE>

4. GOODWILL

The merger with Arethusa generated an excess of the purchase price over
the estimated fair value of the net assets acquired. Cost and accumulated
amortization of such goodwill is summarized as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
-------- ---------
(IN THOUSANDS)

<S> <C> <C>
Goodwill ........................ $ 96,112 $ 127,418
Less accumulated amortization ... (22,938) (17,593)
-------- ---------
Total ................. $ 73,174 $ 109,825
======== =========
</TABLE>

During the years ended December 31, 1999 and 1998, adjustments of $31.3
million and $2.3 million, respectively, were recorded to reduce goodwill before
accumulated amortization. The adjustments represent tax benefits not previously
recognized for the excess of tax deductible goodwill over the book goodwill
amount.

5. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Personal injury and other claims ... $18,219 $20,676
Payroll and benefits ............... 16,281 18,701
Interest payable ................... 5,667 5,667
Other .............................. 3,884 8,239
------- -------
Total .................... $44,051 $53,283
======= =======
</TABLE>

6. LONG-TERM DEBT

Convertible Subordinated Notes

In February 1997, the Company issued $400.0 million of convertible
subordinated notes (the "Notes") due February 15, 2007. The Notes are
convertible into shares of the Company's common stock, at a conversion price of
$40.50 per share, subject to adjustment in certain circumstances. The Notes have
a stated interest rate of 3.75 percent and an effective interest rate of 3.93
percent. Interest is payable semi-annually on each February 15 and August 15.

The Notes are redeemable, in whole or, from time to time, in part, at the
option of the Company, at any time on or after February 22, 2001, at specified
redemption prices, plus accrued and unpaid interest to the date of redemption.
The Notes are general unsecured obligations of the Company, subordinated in
right of payment to the prior payment in full

35
<PAGE> 36

of the principal and premium, if any, and interest on all indebtedness of the
Company for borrowed money, other than the Notes, with certain exceptions, and
effectively subordinated in right of payment to the prior payment in full of all
indebtedness of the Company's subsidiaries. The Notes do not restrict the
Company's ability to incur other indebtedness or additional indebtedness of the
Company's subsidiaries.

Credit Agreement

7. COMPREHENSIVE INCOME

The income tax effects allocated to the components of other comprehensive
income are as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
------------------------------------
BEFORE TAX TAX EFFECT NET-OF-TAX
---------- ---------- ----------
(IN THOUSANDS)

<S> <C> <C> <C>
Foreign currency translation gain (loss) ... $(1,512) $ 529 $ (983)
Unrealized gain (loss) on investments:
Gain (loss) arising during 1999 ......... (9,081) 3,178 (5,903)
Reclassification adjustment ............. 8,700 (3,045) 5,655
------- ------- -------
Net unrealized gain (loss) .............. (381) 133 (248)

------- ------- -------
Other comprehensive income (loss) .......... $(1,893) $ 662 $(1,231)
======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------
BEFORE TAX TAX EFFECT NET-OF-TAX
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>

Foreign currency translation gain (loss) ........... $ (1,430) $ 1,139 $ (291)
Unrealized gain (loss) on investments:
Gain (loss) arising during 1998 ................. (8,918) 3,121 (5,797)
Reclassification adjustment ..................... 28 (10) 18
-------- ------- -------
Net unrealized gain (loss) ...................... (8,890) 3,111 (5,779)

-------- ------- -------
Other comprehensive income (loss) .................. $(10,320) $ 4,250 $(6,070)
======== ======= =======
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------
BEFORE TAX TAX EFFECT NET-OF-TAX
---------- ---------- ----------
(IN THOUSANDS)

<S> <C> <C> <C>
Foreign currency translation loss ........ $ (894) $-- $ (894)
Unrealized gain (loss) on investments:
Gain (loss) arising during 1997 ....... (163) 57 (106)

------- --- -------
Other comprehensive income (loss) ........ $(1,057) $57 $(1,000)
======= === =======
</TABLE>

36
<PAGE> 37

8. COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under operating leases, which expire
through the year 2002. Total rent expense amounted to $1.4 million, $1.8
million, and $1.8 million for the years ended December 31, 1999, 1998, and 1997,
respectively. Minimum future rental payments under leases are approximately $0.6
million, $0.4 million, and $0.1 million for the years 2000 to 2002,
respectively. There are no minimum future rental payments under leases after the
year 2002.

The Company is contingently liable as of December 31, 1999 in the amount
of $29.1 million under certain performance, bid, customs and export bonds. On
the Company's behalf, banks have issued letters of credit securing certain of
these bonds.

A former subsidiary of Arethusa, which is now a subsidiary of the Company,
defended and indemnified Zapata Off-Shore Company and Zapata Corporation (the
"Zapata Defendants"), pursuant to a contractual defense and indemnification
agreement, in a suit for tortious interference with contract and conspiracy to
tortiously interfere with contract. The plaintiffs sought $14.0 million in
actual damages and unspecified punitive damages, plus costs of court, interest
and attorneys' fees. In November 1997, the jury awarded a take nothing judgment
in favor of the Zapata Defendants. The plaintiffs appealed the judgment and the
appellate court ordered the parties to mediation. The case went to mediation in
July 1998 with no resolution. In May 1999, the case went before the Texas First
Court of Appeals, Houston, which affirmed the jury verdict. The plaintiffs filed
a petition for review with the Supreme Court of Texas in November 1999 which was
subsequently denied in January 2000. No provision for any liability had been
made in the financial statements.

In August 1999, a customer terminated a contract for use of one of the
Company's drilling rigs located offshore Australia. The termination was not the
result of performance failures by the Company or its equipment. The Company
believes the contract required the customer to pay approximately $16.5 million
in remaining revenue through the end of the contract period, which was
previously scheduled to end in early January 2000. However, the customer
believes that there was no further obligation under the contract and has refused
to pay the $16.5 million early termination fee. The Company filed suit in
Australia in August 1999 requesting reconstruction of the contract and a
declaratory judgment requiring the customer to pay such early termination fee.
The Company intends to vigorously pursue its claim. For financial statement
purposes, the $16.5 million early termination fee was not included in revenues
in the Company's results of operations for the year ended December 31, 1999.

Various other claims have been filed against the Company in the ordinary
course of business, particularly claims alleging personal injuries. Management
believes that the Company has established adequate reserves for any liabilities
that may reasonably be expected to result from these claims. In the opinion of
management, no pending or threatened claims, actions or proceedings against the
Company are expected to have a material adverse effect on the Company's
consolidated financial position, results of operations, or cash flows.

9. FINANCIAL INSTRUMENTS

Concentrations of Credit and Market Risk

Financial instruments which potentially subject the Company to significant
concentrations of credit or market risk consist primarily of periodic temporary
investments of excess cash and trade accounts receivable, and investments in
debt and equity securities, including collateralized mortgage obligations
("CMO's"). The Company places its temporary excess cash investments in high
quality short-term money market instruments through several financial
institutions. At times, such investments may be in excess of the insurable
limit. The Company's periodic evaluations of the relative credit standing of
these financial institutions are considered in the Company's investment
strategy.

Concentrations of credit risk with respect to trade accounts receivable
are limited primarily due to the entities comprising the Company's customer
base. Since the market for the Company's services is the offshore oil and gas
industry, this customer base consists primarily of major oil companies and
independent oil and gas producers. The Company provides allowances for potential
credit losses when necessary. No such allowances were deemed necessary for the
years presented and, historically, the Company has not experienced significant
losses on trade receivables. The Company's investments in debt securities, which
are primarily U.S. government securities, do not impose a significant market
risk on the Company as they are generally short-term with ready marketability.

37
<PAGE> 38
Investments in CMO's, by the Company, are not considered high-risk as they are
also short-term and readily marketable with an implied AAA rating backed by U.S.
government guaranteed mortgages.

Fair Values

The amounts reported in the Consolidated Balance Sheets for cash and cash
equivalents, marketable securities, accounts receivable, and accounts payable
approximate fair value. At December 31, 1999 and 1998, the fair value of the
Notes was approximately $403.9 million and $371.2 million, respectively, as
compared to a carrying amount of $400.0 million.

The estimated fair value amounts have been determined by the Company using
appropriate valuation methodologies and information available to management as
of December 31, 1999 and 1998. Considerable judgment is required in developing
these estimates, and accordingly, no assurance can be given that the estimated
values are indicative of the amounts that would be realized in a free market
exchange. The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it was practicable to
estimate that value:

Cash and cash equivalents -- The carrying amounts approximate fair value
because of the short maturity of these instruments.

Marketable securities -- The fair values of the debt and equity
securities, including CMO's, available for sale were based on quoted market
prices as of December 31, 1999 and 1998.

Accounts receivable and accounts payable -- The carrying amounts
approximate fair value based on the nature of the instruments.

Long-term debt -- The fair value was based on the quoted market price from
brokers of the Notes.

10. RELATED PARTY TRANSACTIONS

The Company and Loews have entered into a services agreement which was
effective upon consummation of the Common Stock Offering (the "Services
Agreement") pursuant to which Loews agreed to continue to perform certain
administrative and technical services on behalf of the Company. Such services
include personnel, telecommunications, purchasing, internal auditing,
accounting, data processing and cash management services, in addition to advice
and assistance with respect to preparation of tax returns and obtaining
insurance. Under the Services Agreement, the Company is required to reimburse
Loews for (i) allocated personnel costs (such as salaries, employee benefits and
payroll taxes) of the Loews personnel actually providing such services and (ii)
all out-of-pocket expenses related to the provision of such services. The
Services Agreement may be terminated at the Company's option upon 30 days'
notice to Loews and at the option of Loews upon six months' notice to the
Company. In addition, the Company has agreed to indemnify Loews for all claims
and damages arising from the provision of services by Loews under the Services
Agreement, unless due to the gross negligence or willful misconduct of Loews.
The Company was charged $0.3 million, $0.4 million, and $0.3 million by Loews
for these support functions during the years ended December 31, 1999, 1998, and
1997, respectively.

11. INCOME TAXES

An analysis of the Company's income tax expense is as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>

U.S. - current .......................................... $15,830 $110,379 $ 99,001
U.S. - deferred ......................................... 38,529 61,403 34,650
Non-U.S. - current ...................................... 29,933 34,790 17,300
State and other ......................................... -- -- 505
------- -------- --------
Total ......................................... $84,292 $206,572 $151,456
======= ======== ========
</TABLE>

38
<PAGE> 39

Significant components of the Company's deferred income tax assets and
liabilities are as follows:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1999 1998
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards .................. $ 12,061 $ 12,236
Worker's compensation accruals (1) ................ 2,978 4,960
Foreign tax credits ............................... 24,121 15,181
Other ............................................. 14,849 10,909
--------- ---------
Total deferred tax assets ...................... 54,009 43,286
--------- ---------

Deferred tax liabilities:
Depreciation and amortization ..................... (284,264) (252,141)
Undistributed earnings of non-U.S. subsidiaries ... (32,546) (23,858)
Non-U.S. deferred taxes ........................... (15,402) (15,402)
Other ............................................. (10,032) (10,722)
--------- ---------
Total deferred tax liabilities ................. (342,244) (302,123)
--------- ---------
Net deferred tax liability .................... $(288,235) $(258,837)
========= =========
</TABLE>

- ---------

(1) Reflected in "Prepaid expenses and other" in the Company's Consolidated
Balance Sheets.

Except for selective dividends, the Company's practice prior to 1997 was to
reinvest the unremitted earnings of its non-U.S. subsidiaries and postpone their
remittance indefinitely. Thus, no additional U.S. taxes were provided on such
earnings. Undistributed earnings of non-U.S. subsidiaries generated prior to
1997 for which no U.S. deferred income tax provision has been made for possible
future remittances totaled approximately $48.0 million at December 31, 1999. In
addition, the Company has negative undistributed earnings of non-U.S.
subsidiaries generated prior to 1997 of $66.8 million at December 31, 1999 for
which no deferred tax benefit has been recognized. It is not practicable to
estimate the amount of unrecognized U.S. deferred taxes, if any, that might be
payable on the actual or deemed remittance of such earnings. On actual
remittance, certain countries impose withholding taxes that, subject to certain
limitations, are then available for use as tax credits against a U.S. tax
liability, if any.

The Company believes it is probable that its deferred tax assets of $54.0
million will be realized on future tax returns, primarily from the generation of
future taxable income through both profitable operations and future reversals of
existing taxable temporary differences. However, if the Company is unable to
generate sufficient taxable income in the future through operating results, a
valuation allowance will be required as a charge to expense.

Deferred income taxes are not recorded on differences between financial
reporting and tax bases of investments in stock of the Company's subsidiaries,
unless realization of the effect is probable in the foreseeable future. The
Company also has certain income tax loss carryforwards in non-U.S. tax
jurisdictions to which it has assigned no value because of the uncertainty of
utilization of these carryforwards.

39
<PAGE> 40

In connection with the merger with Arethusa, the Company acquired net
operating loss ("NOL") carryforwards available to offset future taxable income.
The utilization of these NOL carryforwards is limited pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"). For the year ended
December 31, 1999, the Company utilized $5.9 million of such carryforwards and
has previously recorded a deferred tax asset for the benefit of the remaining
NOL carryforwards available to be carried forward to future years. Such
carryforwards expire as follows:

<TABLE>
<CAPTION>
TAX BENEFIT OF
NET OPERATING
YEAR LOSSES
------ -------------
(IN THOUSANDS)

<S> <C>
2006 $ 1,890
2007 2,286
2008 2,217
2009 4,056
2010 1,612
----------
Total $ 12,061
==========
</TABLE>

The difference between actual income tax expense and the tax provision
computed by applying the statutory federal income tax rate to income before
taxes is attributable to the following:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1999 1998 1997
--------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income tax expense:
U.S ................................... $ 212,331 $ 532,378 $373,319
Non-U.S ............................... 28,032 57,853 56,742
--------- --------- --------
Worldwide ............................. $ 240,363 $ 590,231 $430,061
========= ========= ========

Expected income tax expense at federal
statutory rate ........................ $ 84,127 $ 206,581 $150,521
Adjustment to prior year return .......... (4) -- --
Other .................................... 169 (9) 935
--------- --------- --------
Income tax expense ............. $ 84,292 $ 206,572 $151,456
========= ========= ========
</TABLE>

12. EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

The Company maintains defined contribution retirement plans for its U.S.,
U.K. and third country national ("TCN") employees. The plan for U.S. employees
(the "401k Plan") is designed to qualify under Section 401k of the Code. Under
the 401k Plan, each participant may elect to defer taxation on a portion of his
or her eligible earnings, as defined by the 401k Plan, by directing the Company
to withhold a percentage of such earnings. A participating employee may also
elect to make after-tax contributions to the 401k Plan. The Company contributes
3.75 percent of a participant's defined compensation and matches 25 percent of
the first 6 percent of each employee's compensation contributed. Participants
are fully vested immediately upon enrollment in the plan. For the years ended
December 31, 1999, 1998, and 1997, the Company's provision for contributions was
$6.4 million, $5.7 million, and $4.1 million, respectively.

The plan for U.K. employees provides that the Company contribute amounts
equivalent to the employee's contributions generally up to a maximum of 5.25
percent of the employee's defined compensation per year. The Company's provision
for contributions was $0.5 million for each of the years ended December 31, 1999
and 1998, and $0.3 million for the year ended December 31, 1997.

The plan for the Company's TCN employees was effective April 1, 1998 and
is similar to the 401k Plan. The Company contributes 3.75 percent of a
participant's defined compensation and matches 25 percent of the first 6 percent
of each employee's compensation contributed. For the years ended December 31,
1999 and 1998, the Company's provision for contributions was $0.6 million and
$0.3 million, respectively.

40
<PAGE> 41

Deferred Compensation and Supplemental Executive Retirement Plan

The Company established its Deferred Compensation and Supplemental
Executive Retirement Plan in December 1996. The Company contributes any portion
of the 3.75 percent of the base salary contribution and the matching
contribution to the 401k Plan that cannot be contributed because of the
limitations within the Code and because of elective deferrals that the
participant makes under the plan. Additionally, the plan provides that
participants may defer up to 10 percent of base compensation and/or up to 100
percent of any performance bonus. Participants in this plan are a select group
of management or highly compensated employees of the Company and are fully
vested in all amounts paid into the plan. The Company's provision for
contributions for the years ended December 31, 1999, 1998, and 1997 was not
material.

Pension Plan

The defined benefit pension plan, established by Arethusa effective
October 1, 1992, was frozen on April 30, 1996. At that date, all participants
were deemed fully vested in the plan, which covered substantially all U.S.
citizens and U.S. permanent residents who were employed by Arethusa. Benefits
are calculated and paid based on an employee's years of credited service and
average compensation at the date the plan was frozen using an excess benefit
formula integrated with social security covered compensation.

Pension costs are determined actuarially and funded as required by the
Code. The plan's assets are invested in cash and cash equivalents, equity
securities, government and corporate debt securities. As a result of freezing
the plan, no service cost has been accrued for the years presented.

The data and significant actuarial assumptions as of the plan's year end
set forth in the following tables are presented in accordance with SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits," which
the Company has retroactively adopted for all periods presented.

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1999 1998
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year ............ $ 10,597 $ 9,365
Interest cost ...................................... 705 668
Actuarial gain ..................................... 1,068 877
Benefits paid ...................................... (347) (313)
-------- --------
Benefit obligation at end of year .................. 12,023 10,597
-------- --------

Change in plan assets:
Fair value of plan assets at beginning of year ..... 12,571 12,971
Actual return on plan assets ....................... 2,203 (87)
Benefits paid ...................................... (347) (313)
-------- --------
Fair value of plan assets at end of year ........... 14,427 12,571
-------- --------

Funded status ...................................... 2,404 1,974
Unrecognized loss(gain) ............................ 215 (394)
-------- --------
Prepaid benefit cost ............................... $ 2,619 $ 1,580
======== ========
</TABLE>

<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Weighted-average assumptions:
Discount rate ...................................... 7.50% 6.75%
Expected long-term rate ............................ 9.00% 9.00%
</TABLE>

41
<PAGE> 42

<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Components of net periodic benefit cost:
Interest cost ........................... $ (705) $ (668)
Expected return on plan assets .......... 1,118 1,154
Amortization of gain .................... -- 63
------- -------
Net periodic pension benefit income ..... $ 413 $ 549
======= =======
</TABLE>

13. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS

The Company manages its business on the basis of one reportable
segment, contract drilling of offshore oil and gas wells. Although the Company
provides contract drilling services from different types of offshore drilling
rigs and provides such services in many geographic locations, these operations
have been aggregated into one reportable segment based on the similarity of
economic characteristics among all divisions and locations, including the nature
of services provided and the type of customers of such services. The data below
is presented in accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which the Company has retroactively adopted
for all periods presented.

Similar Services

Revenues from external customers for contract drilling and similar
services by equipment-type are listed below (eliminations offset dayrate
revenues earned when the Company's rigs are utilized in its integrated
services):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
High specification floaters ... $ 262,571 $ 286,875 $ 206,708
Other semisubmersibles ........ 463,168 707,227 545,701
Jack-ups ...................... 74,484 209,134 192,169
Integrated services ........... 32,769 26,876 36,342
Other ......................... -- -- 3,257
Eliminations .................. (11,968) (21,311) (28,084)
--------- ----------- ---------
Total revenues ........ $ 821,024 $ 1,208,801 $ 956,093
========= =========== =========
</TABLE>

Geographic Areas

At December 31, 1999, the Company had drilling rigs located offshore
seven countries outside of the United States. As a result, the Company is
exposed to the risk of changes in social, political and economic conditions
inherent in foreign operations and the Company's results of operations and the
value of its foreign assets are affected by fluctuations in foreign currency
exchange rates. Revenues by geographic area are presented by attributing
revenues to the individual country where the services were performed.

42
<PAGE> 43
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
--------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues from unaffiliated customers:
United States ..................... $ 420,123 $ 692,648 $ 609,470

Foreign:
Europe/Africa .................. 178,254 292,579 201,893
South America .................. 133,528 84,518 50,767
Australia/Southeast Asia ....... 89,119 139,056 93,963
--------- ----------- ---------
400,901 516,153 346,623

Interarea revenues from affiliates:
United States ..................... 114,393 169,322 74,096
South America ..................... -- -- 971
Other ............................. -- 7,284 14,658
--------- ----------- ---------
114,393 176,606 89,725

Eliminations ........................ (114,393) (176,606) (89,725)

--------- ----------- ---------
Total ..................... $ 821,024 $ 1,208,801 $ 956,093
========= =========== =========
</TABLE>

An individual foreign country may, from time to time, contribute a
material percentage of the Company's total revenues from unaffiliated customers.
For the years ended December 31, 1999, 1998, and 1997, individual countries that
contributed five percent or more of the Company's total revenues from
unaffiliated customers are listed below.

YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
------------ ------------ -------------

<S> <C> <C> <C>
Brazil.......................... 15.5% 7.0% 5.3%
United Kingdom.................. 10.0% 11.0% 11.1%
Angola.......................... 7.5% 2.8% 0.9%
Australia....................... 5.7% 5.3% 4.7%
</TABLE>

Long-lived tangible assets located in the United States and all foreign
countries in which the Company holds assets as of December 31, 1999, 1998, and
1997 are listed below. A substantial portion of the Company's assets are mobile,
therefore asset locations at the end of the period are not necessarily
indicative of the geographic distribution of the earnings generated by such
assets during the periods.

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Drilling and other property and equipment, net:
United States ......................... $1,113,908 $1,073,862 $ 936,906

Foreign:
South America ....................... 399,471 186,432 143,141
Europe/Africa ....................... 154,378 233,753 313,536
Australia/Southeast Asia ............ 70,148 57,773 58,158
---------- ---------- ----------
623,997 477,958 514,835

---------- ---------- ----------
Total ......................... $1,737,905 $1,551,820 $1,451,741
========== ========== ==========
</TABLE>

Brazil is currently the only individual country with a material
concentration of the Company's assets. Approximately 20.2 percent, 12.0 percent,
and 9.9 percent of the Company's total drilling and other property and equipment
were located in or offshore Brazil as of December 31, 1999, 1998, and 1997,
respectively.

43
<PAGE> 44

Major Customers

The Company's customer base includes major and independent oil and gas
companies and government-owned oil companies. During the year ended December 31,
1999, two customers contributed 15.5 percent and 14.5 percent of total revenues.
During the year ended December 31, 1998, one customer contributed 17.4 percent
of total revenues. During the year ended December 31, 1997, one customer
contributed 14.3 percent of total revenues.

14. UNAUDITED QUARTERLY FINANCIAL DATA

Unaudited summarized financial data by quarter for the years ended
December 31, 1999 and 1998 is shown below.

<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>

1999
Revenues.............................. $228,037 $215,337 $206,740 $170,910
Operating income...................... 75,786 74,928 50,206 22,972
Income before income tax expense...... 79,712 81,863 58,213 20,575
Net income............................ 51,818 53,227 37,846 13,180
Net income per share:
Basic.............................. 0.38 0.39 0.28 0.10
Diluted............................ 0.37 0.37 0.27 0.10

1998
Revenues.............................. $286,069 $323,517 $315,786 $283,429
Operating income...................... 122,043 168,452 160,249 118,255
Income before income tax expense...... 124,648 172,430 167,220 125,933
Net income............................ 80,722 111,665 108,702 82,570
Net income per share:
Basic.............................. 0.58 0.80 0.79 0.61
Diluted............................ 0.56 0.76 0.75 0.58
</TABLE>

15. SUBSEQUENT EVENTS

44
<PAGE> 45
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

ITEM 11. EXECUTIVE COMPENSATION.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Reference is made to the information responsive to the Items comprising
this Part III that is contained in the Company's definitive proxy statement for
its 2000 Annual Meeting of Stockholders, which is incorporated herein by
reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) Index to Financial Statements, Financial Statement Schedules and
Exhibits

(1) Financial Statements

<TABLE>
<CAPTION>
PAGE
----

<S> <C>
Independent Auditors' Report....................... 25
Consolidated Balance Sheets........................ 26
Consolidated Statements of Income.................. 27
Consolidated Statements of Stockholders' Equity.... 28
Consolidated Statements of Comprehensive Income.... 29
Consolidated Statements of Cash Flows.............. 30
Notes to Consolidated Financial Statements......... 31
</TABLE>

(2) Financial Statement Schedules

No schedules have been included herein because the information
required to be submitted has been included in the Company's
Consolidated Financial Statements or the notes thereto, or the required
information is inapplicable.

(3) Index of Exhibits............................... 46

See Index of Exhibits for a list of those exhibits filed
herewith, which index also includes and identifies management contracts
or compensatory plans or arrangements required to be filed as exhibits
to this Form 10-K by Item 601(b)(10)(iii) of Regulation S-K.

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter ended
December 31, 1999.

45
<PAGE> 46
(c) Index of Exhibits

EXHIBIT
NUMBER DESCRIPTION

3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998).

3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 of the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998).

4.1 Indenture, dated as of February 4, 1997, between the Company and
The Chase Manhattan Bank, as Trustee (incorporated by reference
to Exhibit 4.1 of the Company's Current Report on Form 8-K filed
February 11, 1997).

4.2 Supplemental Indenture, dated as of February 4, 1997, between the
Company and The Chase Manhattan Bank, as Trustee (incorporated by
reference to Exhibit 4.2 of the Company's Current Report on Form
8-K filed February 11, 1997).

10.1 Registration Rights Agreement (the "Registration Rights
Agreement") dated October 16, 1995 between Loews and the Company
(incorporated by reference to Exhibit 10.2 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1995).

10.2 Amendment to the Registration Rights Agreement, dated September
16, 1997, between Loews and the Company (incorporated by
reference to Exhibit 10.2 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997).

10.3 Services Agreement dated October 16, 1995 between Loews and the
Company (incorporated by reference to Exhibit 10.3 of the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995).

10.4+ Diamond Offshore Management Bonus Program, as amended and
restated, and dated as of December 31, 1997 (incorporated by
reference to Exhibit 10.6 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1997).

10.5+ Diamond Offshore Deferred Compensation and Supplemental Executive
Retirement Plan effective December 17, 1996 (incorporated by
reference to Exhibit 10.10 of the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996).

10.6+ First Amendment to Diamond Offshore Deferred Compensation and
Supplemental Executive Retirement Plan dated March 18, 1998
(incorporated by reference to Exhibit 10.8 of the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1997).

11.1* Statement re Computation of Per Share Earnings.

12.1* Statement re Computation of Ratios.

21.1* List of Subsidiaries of the Company.

23.1* Consent of Deloitte & Touche LLP.

24.1* Powers of Attorney.

27.1* Financial Data Schedule.

----------

* Filed herewith.

+ Management contracts or compensatory plans or arrangements.

46
<PAGE> 47

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 7, 2000.

DIAMOND OFFSHORE DRILLING, INC.

By: /s/ GARY T. KRENEK*
------------------------------------------
Gary T. Krenek
Vice President and Chief Financial Officer

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

SIGNATURE TITLE DATE
--------- ----- ----

<S> <C> <C>
/s/ JAMES S. TISCH* Chairman of the Board and March 7, 2000
- --------------------------- Chief Executive Officer
James S. Tisch

/s/ LAWRENCE R. DICKERSON* President, Chief Operating Officer and Director March 7, 2000
- ---------------------------
Lawrence R. Dickerson

/s/ GARY T. KRENEK* Vice President and Chief Financial Officer March 7, 2000
- --------------------------- (Principal Financial Officer)
Gary T. Krenek

/s/ ALAN R. BATKIN* Director March 7, 2000
- ---------------------------
Alan R. Batkin

/s/ HERBERT C. HOFMANN* Director March 7, 2000
- ---------------------------
Herbert C. Hofmann

/s/ ARTHUR L. REBELL* Director March 7, 2000
- ---------------------------
Arthur L. Rebell

/s/ MICHAEL H. STEINHARDT* Director March 7, 2000
- ---------------------------
Michael H. Steinhardt

/s/ RAYMOND S. TROUBH* Director March 7, 2000
- ---------------------------
Raymond S. Troubh

*By: /s/ WILLIAM C. LONG
----------------------
William C. Long
Attorney-in-Fact
</TABLE>

47
<PAGE> 48
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------

<S> <C>
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998).

3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 of the Company's Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1998).

11.1* Statement re Computation of Per Share Earnings.

12.1* Statement re Computation of Ratios.

21.1* List of Subsidiaries of the Company.

23.1* Consent of Deloitte & Touche LLP.

24.1* Powers of Attorney.

27.1* Financial Data Schedule.
</TABLE>

<PAGE> 1
EXHIBIT 11.1

DIAMOND OFFSHORE DRILLING, INC.
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1999 1998
------------------------------------- -------------------------------------

WEIGHTED WEIGHTED
AVERAGE AVERAGE
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Net income .............. $156,071 135,822 $1.15 $383,659 138,020 $2.78

EFFECT OF DILUTIVE
POTENTIAL SHARES (2)
Convertible notes
issued 2/4/97 (3) ... 5,988 9,876 9,419 9,876

DILUTED EPS
-------- ------- ----- -------- ------- -----
Net income + assumed
conversions ......... $162,059 145,698 $1.11 $393,078 147,896 $2.66
======== ======= ===== ======== ======= =====

FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1997
-------------------------------------
WEIGHTED (1)
AVERAGE
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------

BASIC EPS $278,605 138,560 $2.01
Net income ..............

EFFECT OF DILUTIVE
POTENTIAL SHARES (2)
Convertible notes 6,583 8,929
issued 2/4/97 (3) ...

DILUTED EPS -------- ------- -----

Net income + assumed $285,188 147,489 $1.93
conversions ......... ======== ======= =====
</TABLE>

(1) Weighted average shares outstanding have been restated to include
the retroactive effect of the July 1997 two-for-one stock split in
the form of a stock dividend.

(2) Because the Company does not maintain an ongoing plan for the
issuance of stock options, the options to originally purchase up to
1.0 million shares of common stock assumed in the merger with
Arethusa (the "Arethusa Options") have not been included as dilutive
potential shares. The effect on the computation of per share
earnings, had the Arethusa options been included, was not material.
At December 31, 1999, 1998 and 1997, there were Arethusa options
outstanding for the purchase of approximately 39,000, 48,000 and
100,000 shares of common stock, respectively.

(3) On February 4, 1997, the Company issued $400.0 million of 3.75
percent convertible subordinated notes due February 15, 2007. The
notes are convertible into approximately 9.8 million shares of the
Company's common stock at any time prior to February 15, 2007 at a
conversion price of $40.50 per share. The number of shares
outstanding for the years ended December 31, 1999, 1998 and 1997 was
increased to include the weighted average number of shares issuable
assuming full conversion of the notes on February 4, 1997 and net
income was adjusted to eliminate the after-tax effect of interest
expense on these notes.

<PAGE> 1
EXHIBIT 12.1

DIAMOND OFFSHORE DRILLING, INC.
STATEMENT RE COMPUTATION OF RATIOS
(THOUSANDS OF DOLLARS)

RATIO OF EARNINGS TO FIXED CHARGES:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C>
COMPUTATION OF EARNINGS:

Pretax income (loss) from continuing operations .............. $ 240,363 $ 590,231 $ 430,061 $ 212,705 $(13,803)
Less: Interest capitalized during the period and actual
preferred dividend requirements of majority-owned
subsidiaries and 50%-owned persons included in
fixed charges but not deducted from pretax income
from above ............................................ (6,329) (1,031) (4,382) (3,973) --
Add: Previously capitalized interest amortized during the
period ................................................ 334 334 192 -- --
--------- --------- --------- --------- --------
Total earnings, before fixed charge addition ................. 234,368 589,534 425,871 208,732 (13,803)
--------- --------- --------- --------- --------

COMPUTATION OF FIXED CHARGES:

Interest, including interest capitalized ..................... 16,009 16,121 15,241 6,831 27,052
--------- --------- --------- --------- --------
Total fixed charges .......................................... 16,009 16,121 15,241 6,831 27,052
--------- --------- --------- --------- --------

TOTAL EARNINGS AND FIXED CHARGES ............................. $ 250,377 $ 605,655 $ 441,112 $ 215,563 $ 13,249
--------- --------- --------- --------- --------
RATIO OF EARNINGS TO FIXED CHARGES (1) ....................... 15.64 37.57 28.94 31.56 --
========= ========= ========= ========= ========
</TABLE>

(1) The deficiency in the Company's earnings available for fixed charges for the
year ended December 31, 1995 was approximately $13.8 million.

<PAGE> 1

EXHIBIT 21.1

SUBSIDIARIES

<TABLE>
<CAPTION>
Subsidiary Jurisdiction of Incorporation
---------- -----------------------------
<S> <C>
Diamond Offshore Company Delaware
Diamond Offshore (USA) Inc. Delaware
Diamond Offshore Team Solutions, Inc. Delaware
Diamond Offshore General Company Delaware
Diamond Offshore Drilling (Overseas), Inc. Delaware
Arethusa Off-Shore Company Delaware
Diamond Offshore Guardian Company Delaware
Diamond Offshore Finance Company Delaware
Yorktown Drilling Limited Delaware
Scotian Drilling Limited Delaware
Heritage Drilling Limited Delaware
(d/b/a Diamond Offshore Heritage Drilling Limited in Texas)
Sovereign Drilling Limited Delaware
Neptune Drilling Limited Delaware
Whittington Drilling Limited Delaware
Yatzy Drilling Limited Delaware
Diamond Offshore Management Company Delaware
Diamond Offshore Development Company Delaware
Brasdril-Sociedade de Perfuracoes Ltda. Brazil
Diamond Offshore Atlantic Inc. Delaware
Diamond Offshore (Mexico) Company Delaware
Diamond Offshore Drilling Services Inc. Delaware
Diamond Offshore International Corporation Delaware
Ensenada Internacional S.A. Panama
Diamond Offshore Enterprises Inc. Delaware
Cumberland Maritime Corporation Delaware
Diamond Offshore Limited England
Diamond Offshore Drilling (UK) Limited England
Diamond Offshore (Trinidad) L.L.C. Delaware
</TABLE>

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

We consent to the incorporation by reference in Registration Statement No.
333--19987 of Diamond Offshore Drilling, Inc. (the "Company") on Form S--3 of
our report dated January 25, 2000, appearing in this Annual Report on Form 10--K
of the Company for the year ended December 31, 1999.

DELOITTE & TOUCHE LLP

Houston, Texas
March 7, 2000

<PAGE> 1

EXHIBIT 24.1

POWER OF ATTORNEY

James S. Tisch hereby designates and appoints William C. Long and Gary
T. Krenek and each of them (with full power to each of them to act alone) as his
attorney-in-fact, with full power of substitution and re-substitution (the
"Attorneys-in-Fact"), for him and in his name, place and stead, in any and all
capacities, to execute the Annual report on Form 10-K (the "Annual Report") to
be filed by Diamond Offshore Drilling, Inc. with the Securities and Exchange
Commission and any amendment(s) to the Annual Report, which amendment(s) may
make such changes in the Annual Report as either Attorney-in-Fact deems
appropriate, and to file the Annual Report and each such amendment to the Annual
Report together with all exhibits thereto and any and all documents in
connection therewith.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----

<S> <C> <C>
/s/ JAMES S. TISCH Chief Executive Officer February 18, 2000
- ------------------- & Chairman of the Board
James S. Tisch
</TABLE>

<PAGE> 2

EXHIBIT 24.1

POWER OF ATTORNEY

Lawrence R. Dickerson hereby designates and appoints William C. Long
and Gary T. Krenek and each of them (with full power to each of them to act
alone) as his attorney-in-fact, with full power of substitution and
re-substitution (the "Attorneys-in-Fact"), for him and in his name, place and
stead, in any and all capacities, to execute the Annual report on Form 10-K (the
"Annual Report") to be filed by Diamond Offshore Drilling, Inc. with the
Securities and Exchange Commission and any amendment(s) to the Annual Report,
which amendment(s) may make such changes in the Annual Report as either
Attorney-in-Fact deems appropriate, and to file the Annual Report and each such
amendment to the Annual Report together with all exhibits thereto and any and
all documents in connection therewith.