DIAMOND OFFSHORE DRILLING INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
------------------

OR

[ ] 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 of incorporation (I.R.S. Employer
or organization) Identification No.)

15415 Katy Freeway
Houston, Texas
77094
(Address of principal executive offices)
(Zip Code)
(281) 492-5300
(Registrant's telephone number, including area code)

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

As of October 31, 2002 Common stock, $0.01 par value per share
130,336,455 shares

DIAMOND OFFSHORE DRILLING, INC.

TABLE OF CONTENTS FOR FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2002

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

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

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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands, except per share data)

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

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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)

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

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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

The consolidated financial statements of Diamond Offshore Drilling, Inc.
and subsidiaries (the "Company") should be read in conjunction with the Annual
Report on Form 10-K for the year ended December 31, 2001 (File No. 1-13926).

Interim Financial Information

The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all
disclosures required by generally accepted accounting principles for complete
financial statements. The consolidated financial information has not been
audited but, in the opinion of management, includes all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
consolidated balance sheets, statements of income, and statements of cash flows
at the dates and for the periods indicated. Results of operations for interim
periods are not necessarily indicative of results of operations for the
respective full years.

Cash and Cash Equivalents and Marketable Securities

Short-term, highly liquid investments that have an original maturity of
three months or less and deposits in money market mutual funds that are readily
convertible into cash are considered cash equivalents. Cash equivalents at
December 31, 2001 included $199.1 million of invested cash deposits received in
connection with securities sold under repurchase agreements. There were no
securities sold under repurchase agreements at September 30, 2002. See
"Securities Sold Under Agreements to Repurchase."

The Company's investments are classified as available for sale and stated
at fair value. Accordingly, any unrealized gains and losses, net of taxes, are
reported in the Consolidated Balance Sheets in "Accumulated other comprehensive
loss" 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 sale
and purchase of securities are recorded on the date of the trade. 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)."

Securities Sold Under Agreements to Repurchase

The Company accounts for repurchase agreements in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
From time to time the Company may lend securities to unrelated parties,
primarily major brokerage firms. Borrowers of these securities must transfer to
the Company cash collateral equal to the securities transferred. Cash deposits
from these transactions are invested in short-term investments and are included
in the Consolidated Balance Sheets in "Cash and cash equivalents." A liability
is recognized for the obligation to return the cash collateral. The Company
continues to receive interest income on the loaned debt securities, as
beneficial owner, and accordingly, the loaned debt securities are included in
the Consolidated Balance Sheets in "Marketable securities." Interest expense
associated with the related liability is recorded as an offset to "Interest
income" in the Consolidated Statements of Income.

Derivative Financial Instruments

The Company accounts for derivative financial instruments in accordance
with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and its corresponding amendments under SFAS No. 138. Derivative
financial instruments of the Company include forward exchange contracts and a
contingent interest provision that is embedded in the 1.5% convertible senior
debentures due 2031 (the "1.5% Debentures") issued on April 11, 2001. See
Note 4.

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Supplementary Cash Flow Information

Cash payments made for interest on long-term debt, including commitment
fees, totaled $3.4 million for the nine months ended September 30, 2002 and $9.6
million for the nine months ended September 30, 2001. Cash payments for foreign
income taxes, net of foreign tax refunds, were $10.1 million during the nine
months ended September 30, 2002. A $14.5 million net cash refund of U.S. income
tax was received during the nine months ended September 30, 2002. Cash payments
for U.S. income taxes made during the nine months ended September 30, 2001
totaled $13.1 million. Cash payments for foreign income taxes, net of foreign
tax refunds, made during the nine months ended September 30, 2001 totaled $2.3
million.

Capitalized Interest

Interest cost for construction and upgrade of qualifying assets is
capitalized. A reconciliation of the Company's total interest cost to "Interest
expense" as reported in the Consolidated Statements of Income is as follows:

Goodwill

Prior to January 1, 2002, goodwill from the merger with Arethusa
(Off-Shore) Limited ("Arethusa") had been amortized on a straight-line basis
over 20 years. The Company adopted SFAS No. 142, "Goodwill and Other Intangible
Assets" on January 1, 2002 and, accordingly, has suspended amortization of
goodwill. On January 1, 2002, goodwill and accumulated amortization was $69.0
million and $30.7 million, respectively. Amortization charged to operating
expense during the quarter and nine months ended September 30, 2001 totaled $0.8
million and $2.5 million, respectively.

During each of the nine months ended September 30, 2002 and 2001, an
adjustment of $10.2 million was recorded to reduce goodwill. The adjustments
represent the tax benefits not previously recognized for the excess of tax
deductible goodwill over book goodwill. The Company will continue to reduce
goodwill in future periods as the tax benefits of excess tax goodwill over book
goodwill are recognized. Goodwill is expected to be reduced to zero during the
year 2004. See Note 6.

Debt Issuance Costs

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

Treasury Stock and Common Equity Put Options

Depending on market conditions, the Company may, from time to time,
purchase shares of its common stock or issue put options in the open market or
otherwise. 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 nine months ended September 30, 2002 the Company purchased
1,035,800 shares of its common stock at an aggregate cost of $30.6 million, or
at an average cost of $29.51 per share. This includes the Company's purchase of
500,000 shares of its common stock at an aggregate cost of $20.0 million, or at
an average cost of $40.00 per share, upon the exercise of put options sold in
February 2001. The Company reduced "Additional paid-in-capital" in the
Consolidated Balance Sheet by $3.1 million, the amount of the premium received
for the sale of

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these put options, and reported the net cost of the shares, $16.9 million, in
"Treasury stock." During the nine months ended September 30, 2001, the Company
purchased 1,363,900 shares of its common stock at an aggregate cost of $36.8
million, or at an average cost of $26.99 per share. In October 2002 the Company
purchased 680,900 shares of its common stock at an aggregate cost of $12.9
million, or at an average cost of $18.88 per share.

As of October 31, 2002, Loews Corporation ("Loews") owned 53.8% of the
outstanding common shares of the Company. The Company had been a wholly owned
subsidiary of Loews prior to its initial public offering in October 1995. The
increase of Loews ownership from 53.1% at December 31, 2001 to 53.8% at October
31, 2002 is a result of the Company's purchase of its common stock during 2002.

The Company settled put options which covered 1,000,000 shares of its
common stock during the first nine months of 2002 with cash payments totaling
$1.2 million and reduced "Additional paid-in-capital" in the Consolidated
Balance Sheet for amounts paid to settle these put options. The Company's
remaining put options sold in 2001, which covered 187,321 shares of the
Company's common stock, expired during the first nine months of 2002. There were
no common equity put options outstanding at September 30, 2002.

Comprehensive Income

Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances except
those transactions resulting from investments by owners and distributions to
owners. For the quarter and nine months ended September 30, 2002, comprehensive
income totaled $20.2 million and $54.9 million, respectively. For the quarter
and nine months ended September 30, 2001, comprehensive income totaled $66.0
million and $147.3 million, respectively. Comprehensive income includes net
income, foreign currency translation gains and losses, minimum pension liability
adjustments and unrealized holding gains and losses on marketable securities.

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 period-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
loss." 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.

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 excess of mobilization fees
received over costs incurred to mobilize an offshore rig from one market to
another is recognized in income over the primary 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 primary 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.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.

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Reclassifications

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

Recent Accounting Pronouncements

In July 2002 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 146, "Accounting for costs associated with exit or disposal activities."
SFAS No. 146 requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. SFAS No. 146 is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002.
The Company does not expect the adoption of SFAS No. 146 to have a material
impact on the Company's consolidated results of operations, financial position
or cash flows.

In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4 and 64 by SFAS No. 145 streamlines
the reporting of debt extinguishments and requires that only gains and losses
from extinguishments meeting the criteria in Accounting Principles Board ("APB")
Opinion 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" would be classified as extraordinary. Thus,
gains or losses arising from extinguishments that are part of a company's
recurring operations would not be reported as an extraordinary item. SFAS No.
145 is effective for fiscal years beginning after May 15, 2002 with earlier
adoption encouraged. The Company adopted SFAS No. 145 in April 2002 and,
accordingly, reclassified its April 2001 loss of $7.7 million, net-of-tax, from
early extinguishment of debt, as a result of the Company's redemption of its
outstanding 3.75% Convertible Subordinated Notes Due 2007. The pre-tax loss from
early extinguishment of debt of $11.9 million was reclassified to "Interest
expense" and the related tax benefit was reclassified to "Income tax expense" in
the Consolidated Statement of Income.

In October 2001 the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and provides updated guidance concerning the
recognition and measurement of an impairment loss for certain types of
long-lived assets. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001 with earlier application encouraged. The Company's adoption of
SFAS No. 144 in January 2002 has not had, nor is it expected to have, a material
impact on the Company's consolidated results of operations, financial position
or cash flows.

In August 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible, long-lived
assets and their associated asset retirement costs. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002 with early adoption encouraged.
Adoption of SFAS No. 143 in 2003 is not expected to have a material impact on
the Company's consolidated results of operations, financial position or cash
flows.

In June 2001 the FASB issued two new pronouncements, SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
by the purchase method and applies to all business combinations initiated after
June 30, 2001 and also applies to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001 or later.
There are also transition provisions that apply to business combinations
completed before July 1, 2001, that were accounted for by the purchase method.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 for
all goodwill and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were initially
recognized. The Company adopted SFAS No. 142 on January 1, 2002 and has
suspended amortization of goodwill. The adoption of SFAS No. 142 has not had,
nor is it expected to have, a material impact on the Company's consolidated
results of operations, financial position or cash flows. See Note 6.

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2. EARNINGS PER SHARE

A reconciliation of the numerators and the denominators of the basic and
diluted per-share computations follows:

The computation of diluted earnings per share ("EPS") for the quarter and
nine months ended September 30, 2002 excludes approximately 6.9 million
potentially dilutive shares issuable upon conversion of the Company's zero
coupon convertible debentures due 2020 ("Zero Coupon Debentures"), issued in
June 2000. The inclusion of such shares would be antidilutive.

Put options covering 1,687,321 shares of common stock at various stated
exercise prices per share were outstanding during part of the first nine months
of 2002 prior to their expiration or settlement. The computation of diluted EPS
for the quarter and nine months ended September 30, 2002 excluded put options
covering 1,687,321 shares and 1,648,931 shares of common stock, respectively,
because the options' exercise prices were less than the average market price of
the common stock.

The computation of diluted EPS for the quarters ended September 30, 2002
and 2001 did not include stock options representing 338,150 shares and 182,700
shares of common stock, respectively. The computation of diluted EPS for the
nine months ended September 30, 2002 did not include stock options representing
224,575 shares of common stock. Stock options included in the computation of
diluted EPS for the nine months ended September 30, 2001 were immaterial for
presentation purposes and did not include stock options representing 145,100
shares of common stock. Certain stock options were excluded because the options'
exercise prices were more than the average market price per share of the common
stock.

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3. MARKETABLE SECURITIES

Investments classified as available for sale are summarized as follows:

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.

Proceeds from sales of marketable securities and gross realized gains and
losses are summarized as follows:

4. DERIVATIVE FINANCIAL INSTRUMENTS

Forward Exchange Contracts

The Company operates internationally, resulting in exposure to foreign
exchange risk. This risk is primarily associated with costs payable in foreign
currencies for employee compensation and for purchases from foreign suppliers.
The Company's primary technique for minimizing its foreign exchange risk
involves structuring customer contracts to provide for payment in both the U. S.
dollar and the foreign currency whenever possible. The payment portion
denominated in the foreign currency is based on anticipated foreign currency
requirements over the contract term. In some instances, when customer contracts
cannot be structured to generate a sufficient amount of foreign currency for
operating purposes, a foreign exchange forward contract may be used to minimize
the forward exchange risk. A forward exchange contract obligates the Company to
exchange predetermined amounts of specified foreign currencies at specified
foreign exchange rates on specified dates.

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In June 2002 the Company entered into forward contracts to purchase
approximately 50.0 million Australian dollars, 4.2 million Australian dollars to
be purchased monthly from August 29, 2002 through June 26, 2003 and 3.8 million
to be purchased on July 31, 2003. In July 2001 the Company entered into twelve
forward contracts to purchase 3.5 million Australian dollars at each month
through July 31, 2002. These forward contracts are derivatives as defined by
SFAS No. 133. SFAS No. 133 requires that each derivative be stated in the
balance sheet at its fair value with gains and losses reflected in the income
statement except that, to the extent the derivative qualifies for hedge
accounting, the gains and losses are reflected in income in the same period as
offsetting losses and gains on the qualifying hedged positions. SFAS No. 133
further provides specific criteria necessary for a derivative to qualify for
hedge accounting. The forward contracts purchased by the Company in 2002 and
2001 do not qualify for hedge accounting. At September 30, 2002, a liability of
$0.7 million, reflecting the fair value of the forward contracts, was included
with "Accrued liabilities" in the Consolidated Balance Sheet. A pre-tax loss of
$0.8 million (comprised of a $0.1 million realized gain and a $0.9 million
unrealized loss) was recorded in the Consolidated Statements of Income for the
quarter ended September 30, 2002 in "Other income (expense)." A pre-tax gain of
$0.2 million (comprised of a $1.0 million realized gain and a $0.8 million
unrealized loss) was recorded in the Consolidated Statements of Income for the
nine months ended September 30, 2002 in "Other income (expense)." For the
quarter and nine months ended September 30, 2001 a pre-tax loss of $0.3 million
related to the forward contracts (a $0.1 million realized gain and a $0.4
million unrealized loss) was recorded in the Consolidated Statements of Income
in "Other income (expense)."

Contingent Interest

On April 11, 2001, the Company issued $460.0 million principal amount of
the 1.5% Debentures, which are due April 15, 2031 and contain a contingent
interest provision (see Note 8). The contingent interest component is an
embedded derivative as defined by SFAS No. 133 and accordingly must be split
from the host instrument and recorded at fair value on the balance sheet. The
contingent interest component had no value at issuance or at September 30, 2002.

5. DRILLING AND OTHER PROPERTY AND EQUIPMENT

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

Construction work-in-progress at September 30, 2002 included $102.0
million for the significant upgrade of the Ocean Rover to high specification
capabilities.

In March 2002, approximately $157.4 million was reclassified from
construction work-in-progress to drilling rigs and equipment upon completion of
the significant upgrade of the Ocean Baroness to high specification
capabilities. The Company took delivery of the Ocean Baroness in January 2002
and it began operations offshore Malaysia in March 2002.

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6. GOODWILL

Goodwill from the merger with Arethusa in 1996 was generated from an
excess of the purchase price over the net assets acquired. Prior to January 1,
2002 the Company was amortizing goodwill on a straight-line basis over 20 years.
The Company adopted SFAS No. 142 on January 1, 2002 and, accordingly, has
suspended amortization of goodwill in 2002.

The Company's net income and earnings per share, adjusted to exclude
amortization expense (net of its related tax benefit) for the quarter and nine
months ended September 30, 2002 and 2001, are as follows:

For purposes of applying SFAS No. 142, the Company determined that it has
one reporting unit to which to assign goodwill. As of January 1, 2002, the
Company performed the transitional goodwill impairment test and determined that
the fair value of the reporting unit exceeded its carrying value, and
accordingly, no further testing for goodwill impairment was required. Annual
goodwill impairment testing will be performed at year-end.

There were no recognized intangible assets other than goodwill associated
with the Arethusa merger.

During each of the nine months ended September 30, 2002 and 2001, an
adjustment of $10.2 million was recorded to reduce goodwill. The adjustments
represent the tax benefits not previously recognized for the excess of tax
deductible goodwill over book goodwill. The Company will continue to reduce
goodwill in future periods as the tax benefits of excess tax goodwill over book
goodwill are recognized. Goodwill is expected to be reduced to zero during the
year 2004.

7. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

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8. LONG-TERM DEBT

Long-term debt consists of the following:

9. COMMITMENTS AND CONTINGENCIES

Various claims have been filed against the Company in the ordinary course
of business, including claims by offshore workers 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.

10. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS

The Company reports its operations as 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.

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):

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Geographic Areas

At September 30, 2002, the Company had drilling rigs located offshore nine
countries other than the United States. As a result, the Company is exposed to
the risk of changes in social, political, economic and other 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 or areas where the services were performed.

11. OTHER INCOME AND EXPENSE (OTHER, NET)

Other, net consists of the following:

12. SUBSEQUENT EVENT

The Company announced on November 5, 2002 that its subsidiary, Diamond
Offshore Drilling Limited, has signed a memorandum of agreement to purchase
the semisubmersible drilling rig Omega for $65.0 million. The agreement is
subject to certain conditions and the purchase is expected to be completed in
the first quarter of 2003.

Prior to the delivery of the rig, the Omega will undergo its regularly
scheduled five year survey at which time the seller has agreed to perform
various upgrades to enhance the rig's equipment.

The Omega, currently working offshore South Africa, is a 3rd generation
Bingo 3000 design rig constructed in 1983 which has been upgraded to work in
water depths of up to 3,000 feet. The rig has worked in the North Sea, West
Africa and the Gulf of Mexico.

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ITEM 2. 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) included
elsewhere herein. References to the "Company" mean Diamond Offshore Drilling,
Inc., a Delaware corporation, and its subsidiaries.

The Company is a leader in deep water drilling with a fleet of 45 offshore
drilling rigs. The fleet consists of 30 semisubmersibles, 14 jack-ups and one
drillship.

Recent Events

Omega. The Company announced on November 5, 2002 that its subsidiary,
Diamond Offshore Drilling Limited, has signed a memorandum of agreement to
purchase the semisubmersible drilling rig Omega for $65.0 million. The agreement
is subject to certain conditions and the purchase is expected to be completed in
the first quarter of 2003.

Prior to the delivery of the rig, the Omega will undergo its regularly
scheduled five year survey at which time the seller has agreed to perform
various upgrades to enhance the rig's equipment.

The Omega, currently working offshore South Africa, is a 3rd generation
Bingo 3000 design rig constructed in 1983 which has been upgraded to work in
water depths of up to 3,000 feet. The rig has worked in the North Sea, West
Africa and the Gulf of Mexico.

Ocean Lexington. On October 4, 2002 the Company reported that its
semisubmersible drilling unit, Ocean Lexington, parted its moorings and drifted
approximately 45 miles from its original location as a result of Hurricane Lili.
The rig and the well that it had been drilling were secured and all personnel
were evacuated prior to the storm in accordance with normal hurricane
procedures. Subsequently the rig was towed back to its original pre-storm
location where it recommenced operations. A top-side inspection and an
underwater examination of the lower hulls was performed and it was determined
that the rig was undamaged.

General

Revenues. The Company's revenues vary based upon demand, which affects the
number of days the fleet is utilized and dayrates earned. When a rig is idle,
generally no dayrate is earned and revenues will decrease as a result. 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, however, revenues may be adversely affected. As a response to
changes in demand, the Company may withdraw a rig from the market by stacking it
or may reactivate a rig stacked previously, 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 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 generally are not affected by changes in dayrates and may not
be significantly affected by fluctuations in utilization. For instance, if a rig
is to be idle for a short period of time, the Company may realize few decreases
in operating expenses since the rig is typically maintained in a prepared state
with

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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 inspections, painting projects and routine
overhauls, which meet certain criteria, 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.

CRITICAL ACCOUNTING POLICIES

The Company's significant accounting policies are outlined in Note 1 to
the financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 2001. Such policies, and management judgements, assumptions
and estimates made in their application, underlie reported amounts of assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

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.

High Specification Floaters.

Revenues. Revenues from high specification floaters decreased $8.8 million
during the quarter ended September 30, 2002 compared to the same quarter of
2001. A decline in average operating dayrates (excluding the

17

Ocean Baroness which was in a shipyard undergoing an upgrade during the third
quarter of 2001), from $120,900 per day during the third quarter of 2001 to
$103,100 per day during the same quarter of 2002, resulted in a $13.1 million
decrease in revenue. The greatest reductions in average dayrates were to the
Ocean America, Ocean Valiant and Ocean Star which dropped $55,000, $45,400 and
$30,500, respectively.

Lower utilization accounted for $8.6 million of the decrease in third
quarter 2002 revenues. Utilization fell to 78% (excluding the Ocean Baroness)
during the third quarter of 2002 from 91% for the same period in 2001. The Ocean
Victory spent approximately half of the third quarter of 2002 in a shipyard for
an inspection and repairs. The Ocean America was stacked for half of the third
quarter of 2002 and the Ocean Star was idle for one month during the same
quarter of 2002. Utilization improvements from the Ocean Alliance, which worked
the entire third quarter of 2002 but was stacked one month during the third
quarter of 2001 undergoing repairs, partially offset the decrease in
utilization.

Partially offsetting the overall decline in revenues was $12.9 million
generated by the Ocean Baroness, which began operations in mid-March 2002 upon
completion of its upgrade to high specification capabilities.

Contract Drilling Expense. Contract drilling expense for high
specification floaters during the quarter ended September 30, 2002 increased
$7.1 million from the same period in 2001 primarily due to $4.5 million in
operating expenses from the Ocean Baroness. Contract drilling expense for the
Ocean Victory and the Ocean Quest increased $1.3 million and $0.7 million,
respectively, during the third quarter of 2002 as both rigs spent time in a
shipyard for inspection and repairs.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles for the quarter ended
September 30, 2002 decreased $20.5 million from the same period in 2001.
Utilization declined to 61% during the third quarter of 2002 from 74% during the
third quarter of 2001, resulting in a $15.7 million revenue reduction. The Ocean
Voyager and the Ocean Endeavor were both cold stacked during the entire third
quarter of 2002 but worked part of the third quarter of 2001. The Ocean New Era
was stacked during the entire third quarter of 2002 but worked all of the same
period in 2001. The Ocean Nomad and the Ocean Worker both were stacked for part
of the third quarter of 2002 but worked all of the third quarter of 2001.
Partially offsetting this decrease in utilization was the Ocean Yorktown which
worked most of the third quarter of 2002 but spent the same period in 2001 in a
shipyard for inspection and repairs.

Of the $20.5 million revenue decline in the third quarter of 2002, $4.8
million resulted from lower overall dayrates earned by the other semisubmersible
rig fleet. However, the average operating dayrate for this fleet increased to
$69,100 during the third quarter of 2002 from $67,200 during the third quarter
of 2001. This occurred because several of the rigs that were contracted at lower
dayrates in the third quarter of 2001 were stacked throughout the third quarter
of 2002. Consequently, the average operating dayrate rose in 2002 for the
working rigs in this category. Significant changes in average operating dayrates
included the Ocean Worker and the Ocean Whittington which were lower by
approximately $87,500 and $42,600, respectively, and the Ocean Guardian and
Ocean Princess which were higher by approximately $21,000 and $19,000,
respectively.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles decreased $5.0 million during the quarter ended September 30,
2002 compared to the same quarter of 2001. Contract drilling expense was $4.2
million lower than in the same period of 2001 as a result of cold stacking the
Ocean Voyager and Ocean Endeavor in 2002. Operating expenses for the Ocean
Yorktown were lower in the third quarter of 2002 compared to the same period of
2001 due to approximately $1.4 million incurred for inspection and repairs in
2001. Cost savings of $1.0 million were achieved by reducing crews on the Ocean
New Era which was stacked during the third quarter of 2002. Partially offsetting
these expense reductions was an increase in expense of $0.9 million for cold
stacking preparations of the Ocean Liberator.

Jack-Ups.

Revenues. Revenues from jack-ups decreased $29.5 million in the third
quarter of 2002 compared to the same period in 2001. Lower average operating
dayrates for all of the Company's jack-up rigs accounted for a $16.9 million
decrease in revenue. Average operating dayrates fell to $22,400 during the third
quarter of 2002 from $44,700 during the third quarter of 2001.

18

Revenues decreased an additional $12.6 million as utilization declined to
65% during the third quarter of 2002 from 84% for the same period in 2001. The
Ocean Spartan, Ocean Spur, Ocean Tower and Ocean Heritage spent parts of the
third quarter of 2002 in shipyards undergoing upgrades which resulted in a $13.7
million decrease in revenue. See "--Capital Resources." The Ocean Champion,
which worked part of the third quarter of 2001, was cold stacked the entire
third quarter of 2002 resulting in a $1.6 million reduction in revenue. Revenues
of $2.1 million contributed by the Ocean Summit were partially offsetting. This
rig worked all of the third quarter of 2002 but was in a shipyard for inspection
and repairs in the third quarter of 2001.

Contract Drilling Expense. Contract drilling expense for jack-ups during
the third quarter of 2002 decreased $6.9 million compared to the same period in
2001. Contract drilling expense for the Ocean Spartan, Ocean Spur, Ocean Tower
and Ocean Heritage was lower by $2.9 million for the third quarter of 2002 as a
result of the reduction in operating costs while these rigs were in shipyards
for upgrades. Contract drilling expense for the Ocean Champion, which was cold
stacked during the third quarter of 2002, decreased $2.2 million from the same
quarter in 2001. In addition, contract drilling expense was lower by $1.4
million in the third quarter of 2002 due to inspections and repairs to the Ocean
Summit incurred during the third quarter of 2001.

Integrated Services.

Operating losses from integrated services occurred in both the quarters
ended September 30, 2002 and 2001 despite a $3.0 million improvement in revenue
resulting primarily from a turnkey well drilled in the Gulf of Mexico during the
third quarter of 2002. During the same period in 2001, engineering services were
provided in the Gulf of Mexico.

Depreciation and Amortization Expense.

Depreciation and amortization expense for the third quarter of 2002
increased $2.0 million over the same period in 2001. Higher 2002 depreciation
resulted primarily from depreciation expense of 2002 capital additions and
additional depreciation for the Ocean Baroness, which completed its deepwater
upgrade and began operations in March 2002. The suspension of goodwill
amortization on January 1, 2002 partially offset this increase. See Note 1
"--Goodwill" and Note 6 to the Company's Consolidated Financial Statements in
Item 1 of Part I of this report.

General and Administrative Expense.

General and administrative expense for the third quarter of 2002 of $7.0
million increased $0.9 million over $6.1 million for the third quarter of 2001
primarily due to higher personnel costs and professional expenses in the third
quarter of 2002.

Interest Income.

Interest income of $6.7 million for the quarter ended September 30, 2002
decreased $6.5 million from $13.2 million for the same period in 2001 primarily
due to lower interest rates earned on cash and marketable securities in 2002.

Gain on Sale of Marketable Securities.

Gain on sale of marketable securities of $21.9 million for the quarter
ended September 30, 2002 increased $15.2 million from $6.7 million for the same
period in 2001 due to the sale of securities with higher interest rates in a
market of declining interest rates.

Income Tax Expense.

Income tax expense of $9.8 million for the quarter ended September 30,
2002 decreased $16.2 million from $26.0 million for the same period in 2001
primarily as a result of a $47.9 million decrease in "Income before income tax
expense" in 2002.

The effective income tax rate for the third quarter of 2002 was 31.1%. The
estimated annual effective tax rate is 31.9%. The Company indefinitely reinvests
the earnings of its U.K. subsidiaries, and accordingly, provides no deferred
U.S. income taxes on these earnings. The tax rate in the U.K. is lower than the
U.S. statutory rate. During the third

19

quarter of 2002, the full year projected earnings of the Company's U.K.
subsidiaries changed relative to the Company's projected worldwide earnings.

NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001

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.

High Specification Floaters.

Revenues. Revenues from high specification floaters during the nine months
ended September 30, 2002 decreased $17.6 million from the same period in 2001.
Lower utilization accounted for $24.1 million of the decrease, dropping from 94%
during the first nine months of 2001 to 82% (excluding the Ocean Baroness which
was in a shipyard undergoing an upgrade during all of 2001) during the same
period in 2002. Utilization for the Ocean America declined as the rig was idle
for approximately five of the first nine months of 2002 but worked throughout
the same period in 2001. In addition, the Ocean Star and the Ocean Victory spent
three months and one and one-half months, respectively, in 2002 in a shipyard
for inspection and repairs but worked all of the first nine months of 2001.

Decreases in the average operating dayrates contributed $20.3 million to
the revenue decline as average dayrates dropped to $108,800 (excluding the Ocean
Baroness) during the first nine months of 2002 from $116,900 during the same
period of 2001. The most significant average dayrate decreases were to the Ocean
Valiant and the Ocean Victory which declined $39,700 and $18,800, respectively.

The Ocean Baroness, which began operations in mid-March 2002 after
completing an upgrade to high specification capabilities, contributed $26.8
million to revenue during the first nine months of 2002.

20

Contract Drilling Expense. Contract drilling expense for high
specification floaters during the nine months ended September 30, 2002 increased
$22.2 million from the same period in 2001. Operating expenses for the Ocean
Baroness added $11.9 million to 2002 contract drilling expense in the first nine
months and included costs incurred in connection with the recovery of its marine
riser, net of costs charged to an insurance claim, as well as its normal
operating costs. Mobilization to the shipyard for inspection and repairs of the
Ocean Star, Ocean Victory and Ocean Quest in 2002 resulted in increased expenses
of $3.7 million. Higher Brazilian customs fees in 2002 for the importation of
spare parts and supplies for the Ocean Alliance and the Ocean Clipper were
responsible for increased costs of $1.9 million. The 2001 recognition of a $1.8
million revision to an estimated insurance deductible for the Ocean Clipper,
which lowered costs in the 2001 period, also contributed to the higher
comparative costs in 2002.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles for the nine months ended
September 30, 2002 decreased $36.4 million from the same period in 2001. Lower
utilization accounted for $30.0 million of the decrease, dropping to 61% for the
first nine months of 2002 from 74% for the same period in 2001. The Ocean
Voyager and the Ocean Endeavor have both been cold stacked since March 2002 and
the Ocean New Era has been stacked throughout the first nine months of 2002. All
of these rigs worked the majority of 2001. During part of the first nine months
of 2002 the Ocean Worker was in a shipyard for inspection and repairs and the
Ocean Saratoga was in a shipyard for repairs. Both of these rigs worked most of
the same period in 2001. The Ocean Ambassador and the Ocean General were both
stacked for more days during the first nine months of 2002 than the same period
in 2001. Utilization of the Ocean Yorktown, which worked most of the first nine
months of 2002 but spent part of the year in a shipyard during the same period
of 2001, was partially offsetting.

Lower overall average dayrates contributed $6.4 million to the decrease in
other semisubmersibles revenue. However, the average operating dayrate for this
fleet increased to $69,300 during the nine months ended 2002 from $65,700 during
the same period of 2001. This occurred because several of the rigs that were
contracted at lower dayrates in 2001 were stacked throughout parts of 2002.
Consequently, the average operating dayrate rose in 2002 for the working rigs in
this category. Significant changes in average operating dayrates included the
Ocean Worker and Ocean Whittington which decreased approximately $72,600 and
$32,600, respectively, and the Ocean Guardian and Ocean Princess which increased
approximately $31,000 and $27,800, respectively.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles was $1.8 million lower in the first nine months of 2002 than in
the same period in 2001. The Ocean Endeavor and the Ocean Voyager, which have
been cold stacked since March 2002, contributed cost savings of $9.8 million
while the Ocean New Era and the Ocean Ambassador, which were both stacked with
reduced crews for most of the nine months ended September 30, 2002, lowered
costs by $3.8 million. Partially offsetting was the mobilization of the Ocean
Worker to a shipyard for inspection and repairs, which added $2.4 million to
contract drilling expense in 2002. Contract drilling expense for the Ocean Nomad
was $2.4 million higher during the first nine months of 2002 primarily due to
the reduction in operating costs in 2001 while the rig was in a shipyard for an
upgrade. An increase in Brazilian customs fees for the importation of spare
parts and supplies for the Ocean Yatzy, Ocean Yorktown and Ocean Winner resulted
in a $2.3 million increase to contract drilling expense. The inspection, repair
and subsequent mobilization of the Ocean General to Vietnam and the preparation
of the Ocean Liberator for cold stacking each added $0.9 million to contract
drilling expense during the first nine months of 2002.

Jack-Ups.

Revenues. Revenues from jack-ups decreased $64.2 million in the first nine
months of 2002 compared to the same period in 2001. Average operating dayrates
of $27,200 during the first nine months of 2002, down from $42,700 during the
first nine months of 2001, resulted in a $41.1 million decline in revenue as all
of the Company's jack-up rigs operating in the Gulf of Mexico experienced
dayrate decreases. Only the Ocean Heritage, a rig which operated offshore
Indonesia and Australia, experienced a substantial increase in average dayrate,
to $83,600 for the first nine months of 2002 from $34,700 for the same period of
2001.

Revenues decreased $23.1 million as a result of a decline in utilization
to 72% in the first nine months of 2002 from 85% for the same period in 2001.
Utilization was down for the Ocean Champion, which was idle and/or cold stacked
the entire first nine months of 2002, and for the Ocean Spartan, Ocean Spur,
Ocean Tower and Ocean Heritage which spent various amounts of time in shipyards
undergoing their upgrades during 2002. All five of these jack-ups worked most of
the first nine months of 2001. Higher utilization in 2002 for the Ocean
Sovereign, which

21

worked the entire first nine months of 2002 but spent most of the first nine
months of 2001 in a shipyard for repairs, was partially offsetting.

Contract Drilling Expense. Contract drilling expense for jack-ups
decreased $10.3 million in the first nine months of 2002 compared to the same
period in 2001. Contract drilling expense was $5.4 million lower in 2002 for the
Ocean Spartan, Ocean Spur, Ocean Tower and Ocean Heritage as a result of a
reduction in operating costs while these rigs were being upgraded. Contract
drilling expense was $4.2 million lower for the Ocean Champion which was idle
and/or cold stacked during the first nine months of 2002 but operated most of
the comparable period in 2001. Increased contract drilling expense during the
first half of 2001 from repairs to the Ocean Nugget, Ocean Crusader and Ocean
Summit also contributed to the cost reductions in 2002. Higher expenses for the
Ocean Heritage in 2002, primarily due to the mobilization of the rig from
Indonesia to Australia and higher labor costs in Australia, were partially
offsetting.

Integrated Services.

Operating income for integrated services decreased $1.7 million during the
nine months ended September 30, 2002 compared to the same period of 2001
resulting from the difference in type and magnitude of projects during those
periods. During the first nine months of 2002, an operating loss of $1.3 million
resulted primarily from an unprofitable turnkey project in the Gulf of Mexico.
During the same period in 2001, operating income of $0.4 million was primarily
due the completion of one international turnkey project.

Depreciation and Amortization Expense.

Depreciation and amortization expense for the nine months ended September
30, 2002 increased $5.6 million over the first nine months of 2001. Higher 2002
depreciation resulted primarily from depreciation for 2002 capital additions and
additional depreciation for the Ocean Baroness, which completed its deepwater
upgrade and began operations in March 2002. The suspension of goodwill
amortization on January 1, 2002 partially offset this increase. See Note 1
"--Goodwill" and Note 6 to the Company's Consolidated Financial Statements in
Item 1 of Part I of this report.

General and Administrative Expense.

General and administrative expense for the nine months ended September 30,
2002 of $21.1 million increased $2.1 million over $19.0 million for the same
period in 2001. This increase was primarily due to higher personnel costs and
professional expenses in 2002.

Interest Income.

Interest income of $23.9 million for the nine months ended September 30,
2002 decreased $12.5 million from $36.4 million for the same period in 2001
primarily due to lower interest rates earned on cash and marketable securities
in 2002. Interest expense of $0.7 million incurred in connection with the
Company's repurchase agreements, which is offset against the related interest
income, also contributed to the decrease. See Note 1 "--Securities Sold Under
Agreements to Repurchase" in Item 1 of Part I of this report.

Interest Expense.

Interest expense of $17.8 million for the nine months ended September 30,
2002 decreased $14.4 million from $32.2 million for the same period in 2001
primarily due to the $11.9 million pre-tax loss from the April 2001 redemption
of the Company's 3.75% Convertible Subordinated Notes Due 2007 ("3.75% Notes").
In addition, the Company's interest rate in 2002 was lower than in 2001
resulting from the redemption in 2001 of the 3.75% Notes and the issuance of the
1.5% Convertible Senior Debentures due 2031 (the "1.5% Debentures") on April 11,
2001. Higher interest capitalized to the Ocean Baroness and Ocean Rover upgrades
also contributed to reduced interest expense during the first nine months of
2002 compared to the same period in 2001. See "--Liquidity."

Gain on Sale of Marketable Securities.

Gain on sale of marketable securities of $34.0 million for the nine months
ended September 30, 2002 increased $14.4 million from $19.6 million for the same
period in 2001 due to the sale of securities with higher interest rates in a
market of declining interest rates.

22

Other Income and Expense (Other, net).

Other income of $0.9 million for the nine months ended September 30, 2002
increased $3.8 million from other expense of $2.9 million for the same period in
2001. Other income in 2002 included a $0.2 million pre-tax gain on forward
contracts and a $0.3 million reversal of the remaining reserve associated with
the class action litigation settled in June 2002. Other expense in 2001 included
a $10.0 million expense associated with the class action litigation reserve
partially offset by a $7.3 million receipt for settled litigation.

Income Tax Expense.

Income tax expense of $26.4 million for the nine months ended September
30, 2002 decreased $38.8 million from $65.2 million for the same period in 2001
primarily as a result of the $116.7 million decrease in "Income before income
tax expense" in 2002.

OUTLOOK

Demand for the Company's services has historically been stimulated by high
oil and natural gas prices. However, the recovery of oil and natural gas prices
that began in late 2001 has not resulted in increased spending by the Company's
customers as previously experienced. The Company believes that its customers are
reluctant to increase offshore contract drilling expenditures because of
economic uncertainty and concern about the sustainability of the product price
recovery.

In the Gulf of Mexico, work for the Company's jack-up fleet remains steady
but the Company believes that this market, which previously in the year had
shown signs of modest improvement, appears to have plateaued. Utilization for
its mid-water depth semisubmersibles in the Gulf of Mexico has improved slightly
since the beginning of the year but the work continues to be on a well-to-well
basis with no long-term contracts being secured. Likewise, the Company's rigs in
the deepwater Gulf of Mexico are staying busy for the most part but working
well-to-well.

Internationally, the Company expects its business to remain relatively
constant with the exception of the North Sea, where a change in the tax regime
has exacerbated an already weak market. In addition, the Ocean Baroness, which
is operating offshore Malaysia, is scheduled to conclude its current commitment
in December 2002.

LIQUIDITY

At September 30, 2002, the Company's cash and marketable securities
totaled $946.9 million, down from $1.1 billion at December 31, 2001. Cash of
$199.1 million generated by repurchase agreements is included at December 31,
2001. See Note 1 "--Securities Sold Under Agreements to Repurchase" in Item 1 of
Part I of this report. A discussion of the sources and uses of cash for the nine
months ended September 30, 2002 compared to the same period in 2001 follows.

Cash generated by net income adjusted for non-cash items, including
depreciation and amortization, for the nine months ended September 30, 2002
decreased $125.5 million compared to the same period in 2001 primarily due to a
decline in results of operations in 2002. Working capital items provided $67.2
million during the nine months ended September 30, 2002 compared to a $40.6
million use of cash in the comparable period of 2001. The $107.8 million
fluctuation in working capital items resulted primarily from a reduction in
accounts receivable related to the lower overall activity of the Company's
fleet.

23

Net cash used in investing activities increased $152.1 million for the
nine months ended September 30, 2002 compared to the same period in 2001. This
increase in cash usage was primarily due to $199.1 million used for the
repurchase of securities sold under repurchase agreements in 2001 and cash used
for capital expenditures in 2002, primarily for the completion of the Ocean
Baroness upgrade and the ongoing upgrade of the Ocean Rover. Cash provided by
investing activities increased $89.8 million in the nine months ended September
30, 2002 compared to the same period in 2001 from the net sale of certain of the
Company's investments in marketable securities.

The Company spent $81.2 million of cash during the first nine months of
2002 primarily for the payment of dividends to stockholders and the purchase of
the Company's common stock. During the first nine months of 2002, the Company
purchased 1,035,800 shares of its common stock at an aggregate cost of $30.6
million, or at an average cost of $29.51 per share. This includes the Company's
purchase of 500,000 shares of its common stock at an aggregate cost of $20.0
million, or $40.00 per share, upon the exercise of put options sold in February
2001. See "--Treasury Stock and Common Equity Put Options" in Note 1 to the
Company's Consolidated Financial Statements in Item 1 of Part I of this report.
In October 2002 the Company purchased 680,900 shares of its common stock at an
aggregate cost of $12.9 million, or at an average of $18.88 per share. Depending
on market conditions, the Company may, from time to time, purchase shares of its
common stock or issue put options in the open market or otherwise.

Cash used in financing activities in the first nine months of 2002 also
included payments totaling $1.2 million for the settlement of put options which
covered 1,000,000 shares of the Company's common stock. Financing activities in
the same period of 2001 provided cash from premiums of $6.3 million received
from the sale of put options covering 1,500,000 shares of the Company's common
stock. The options gave the holders the right to require the Company to
repurchase up to the contracted number of shares of its common stock at the
stated exercise price per share at any time prior to their expiration. The
Company had the option to settle in cash or shares of its common stock. Put
options sold in 2001, which covered 187,321 shares of the Company's common
stock, expired during the nine months ended September 30, 2002. See "--Treasury
Stock and Common Equity Put Options" in Note 1 to the Company's Consolidated
Financial Statements in Item 1 of Part I of this report.

24

Cash provided by financing activities for the first nine months of 2001
consisted primarily of net proceeds of $449.1 million from the issuance of
$460.0 million principal amount of the 1.5% Debentures on April 11, 2001.

The primary source of cash usage for financing activities in 2001 resulted
from the Company's redemption of all of its outstanding 3.75% Notes in
accordance with the indenture under which they were issued. The Company redeemed
the outstanding 3.75% Notes at 102.8% of the principal amount thereof plus
accrued interest of $2.1 million for a total cash payment of $397.7 million,
resulting in an $11.9 million loss which is reported in "Interest expense" in
the Consolidated Statements of Income.

Contractual Cash Obligations.

The Company's primary contractual obligations are its debt obligations
shown below at face value.

The Company is required to repurchase its Zero Coupon Convertible
Debentures due 2020 at the option of the holder in June 2005, June 2010 and June
2015. In addition, the Company may be required by holders to purchase all or a
portion of their 1.5% Debentures on April 15, 2008. The Company has the option
to pay such repurchase price for both series of convertible debentures in cash
or shares of the Company's common stock or a combination of cash and common
stock.

Under the Company's December 2000 lease-leaseback agreement with a
European bank which has a five-year term, the Company is required to make five
annual payments of $13.7 million including principal and interest.

The Company's operating leases have not changed materially from those
discussed and reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 2001.

The Company is contingently liable as of September 30, 2002 in the amount
of $16.5 million under certain performance, bid, customs and export bonds. Banks
have issued letters of credit securing certain of these bonds. All of these
obligations expire in less than one year.

Other.

The Company has an effective shelf registration statement under which it
has the ability to issue an aggregate of approximately $117.5 million in debt,
equity and other securities. 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.

At September 30, 2002 and 2001, the Company had no off-balance sheet debt.

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 the need to upgrade rigs to meet specific customer requirements and
by evaluating the Company's ongoing rig equipment replacement and enhancement
programs, 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, the Company will
continue to make periodic assessments based on industry conditions. In addition,
the

25

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 first nine months of 2002, the Company spent $150.8 million,
including capitalized interest expense, for rig upgrades, of which $81.3 million
was for the conversion of the Ocean Rover, $31.5 million was for the completion
of the Ocean Baroness upgrade and $33.9 million was for the upgrade to six of
the Company's jack-up rigs. The Company expects to spend approximately $242
million for rig upgrade capital expenditures during 2002.

The upgrade of the Ocean Rover, one of the Company's Victory-class
semisubmersibles, was estimated to be approximately 60% complete at the end of
September 30, 2002. The converted rig will include the following enhancements:
capability for operation in 7,000-foot water depths on a stand alone basis;
approximately 5,590 metric tons variable deckload; a 15,000 psi blow-out
prevention system; 3,600-kips riser tensioning and riser with a multiplex
control system. Additional features, including a high capacity deck crane,
significantly enlarged cellar deck area and a 25- by 91-foot moon pool, will
provide enhanced subsea completion and development capabilities. Water depths in
excess of 7,000 feet should be achievable utilizing augmented mooring systems on
a case by case basis. The upgrade is estimated to cost approximately $200
million with approximately $125 million to be spent in 2002. The upgrade, which
began January 2002, is expected to take 19 months to complete with delivery
estimated in the third quarter of 2003.

The significant upgrade of the Company's semisubmersible rig, the Ocean
Baroness, to high specification capabilities resulted in an enhanced version of
the Company's previous Victory-class upgrades. The upgrade was similar to the
upgrade being performed on the Ocean Rover. The Company took delivery of the
Ocean Baroness in January 2002 and began operating offshore Malaysia in March
2002. The approximate cost of the upgrade was $170 million.

The Company also expects to spend approximately $100 million to
significantly upgrade six of its 14 jack-up rigs over a two year period to
expand the jack-up fleet's capabilities. The Ocean Titan and Ocean Tower, both
350-foot water depth capability independent-leg slot rigs, are scheduled to
have cantilever packages installed. The cantilever systems enable a rig to
cantilever or extend its drilling package over the aft end of the rig. This is
particularly important when attempting to drill over existing platforms.
Cantilever rigs have historically enjoyed higher dayrates and greater
utilization compared to slot rigs. Currently, the Ocean Tower is in the early
stages of its upgrade with delivery expected early in 2003. The upgrade planned
for the Ocean Titan is expected to commence in early 2003. The Ocean Spartan,
Ocean Spur, Ocean Sovereign and Ocean Heritage, all 250-foot water depth
capability independent-leg cantilever rigs, are scheduled to have leg extensions
installed enabling these rigs to work in water depths up to 300 feet. The Ocean
Spartan, Ocean Spur and Ocean Heritage are currently in shipyards with their leg
extension upgrades at various stages of completion. The upgrade of the Ocean
Sovereign will commence upon the completion of the Ocean Heritage.

During the nine months ended September 30, 2002, the Company spent $55.3
million in association with its continuing rig enhancement program and to meet
other corporate capital expenditure requirements. These expenditures included
purchases of drill pipe, anchor chain, riser, cranes and other drilling
equipment. The Company expects to spend a total of approximately $100 million
for 2002 capital expenditures associated with its continuing rig enhancement
program (other than rig upgrades) and other corporate requirements.

The Company currently expects to finance these capital expenditures
through the use of existing cash balances or internally generated funds.

The Company continues to consider opportunities, which include, but are
not limited to, the purchase of existing rigs (see "Recent Events"),
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.

26

INTEGRATED SERVICES

The Company's wholly owned subsidiary, Diamond Offshore Team Solutions,
Inc. ("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 other contract requirements are met. Profitability of the contract is
dependent upon its ability to keep expenses within the estimates used 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 the nine months ended September 30, 2002, DOTS had
an operating loss of $1.3 million, primarily from an unprofitable Gulf of Mexico
turnkey project. During the same period in 2001, DOTS provided turnkey and
integrated services resulting in operating income of $0.4 million, primarily
from the completion of one international turnkey project.

ACCOUNTING STANDARDS

In July 2002 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
costs associated with exit or disposal activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an exit or disposal
plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company does not expect the adoption of
SFAS No. 146 to have a material impact on the Company's consolidated results of
operations, financial position or cash flows.

In April 2002 the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment to FASB Statement No. 13, and Technical
Corrections." The rescission of SFAS No. 4 and 64 by SFAS No. 145 streamlines
the reporting of debt extinguishments and requires that only gains and losses
from extinguishments meeting the criteria in Accounting Principles Board ("APB")
Opinion 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" would be classified as extraordinary. Thus,
gains or losses arising from extinguishments that are part of a company's
recurring operations would not be reported as an extraordinary item. SFAS No.
145 is effective for fiscal years beginning after May 15, 2002 with earlier
adoption encouraged. The Company adopted SFAS No. 145 in April 2002 and,
accordingly, reclassified its April 2001 loss of $7.7 million, net-of-tax, from
early extinguishment of debt, as a result of the Company's redemption of the
outstanding 3.75% Notes, out of extraordinary items. The pre-tax loss from early
extinguishment of debt of $11.9 million was reclassified to "Interest expense"
and the related tax benefit was reclassified to "Income tax expense" in the
Consolidated Statement of Income. See Note 1 "--Capitalized Interest" to the
Company's Consolidated Financial Statements in Item 1 of Part I of this report.

In October 2001 the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and provides updated guidance concerning the
recognition and measurement of an impairment loss for certain types of
long-lived assets. SFAS No. 144 is effective for fiscal years beginning after
December 15, 2001 with earlier application encouraged. The Company's adoption of
SFAS No. 144 in January 2002 has not had, nor is it expected to have, a material
impact on the Company's consolidated results of operations, financial position
or cash flows.

In August 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible, long-lived
assets and their associated asset retirement costs. SFAS No. 143 is effective
for fiscal years beginning after June 15, 2002 with early adoption encouraged.
Adoption of SFAS No. 143 in 2003 is not expected to have a material impact on
the Company's consolidated results of operations, financial position or cash
flows.

27

In June 2001 the FASB issued two new pronouncements, SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
by the purchase method and applies to all business combinations initiated after
June 30, 2001 and also applies to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001 or later.
There are also transition provisions that apply to business combinations
completed before July 1, 2001, that were accounted for by the purchase method.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 for
all goodwill and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were initially
recognized. The Company adopted SFAS No. 142 on January 1, 2002 and has
suspended amortization of goodwill. The adoption of SFAS No. 142 has not had,
nor is it expected to have, a material impact on the Company's consolidated
results of operations, financial position or cash flows. See Note 6 to the
Company's Consolidated Financial Statements in Item 1 of Part I of this report.

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 Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, events, performance or achievements,
and may contain the words "expect," "intend," "plan," "anticipate," "estimate,"
"believe," "will be," "will continue," "will likely result," "project," 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 deepwater upgrade of the Ocean Rover and six of the
Company's jack-up rigs (see "-- Liquidity" and "-- Capital Resources") and
interest rate and foreign exchange risk (see "Quantitative and Qualitative
Disclosures About Market Risk"). 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, war risk, 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 and describe additional factors
that could adversely affect the Company's business and financial performance.
Given these risks and uncertainties, investors should not place undue reliance
on forward-looking statements. Each forward-looking statement speaks only as of
the date of this report, and 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.

28

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information included in this Item 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 2 of Part I of this report.

INTEREST RATE RISK

The Company's financial instruments subject to interest rate risk include
the Zero Coupon Convertible Debentures Due 2020 (the "Zero Coupon Debentures"),
the 1.5% Debentures, the Ocean Alliance lease-leaseback agreement, and
investments in debt securities, including U.S. Treasury and other U.S.
government agency securities and collateralized mortgage obligations ("CMO's").

At September 30, 2002, the fair value of the Company's Zero Coupon
Debentures, based on quoted market prices, was approximately $433.9 million,
compared to a carrying amount of $435.9 million.

At September 30, 2002, the fair value of the Company's 1.5% Debentures,
based on quoted market prices, was approximately $413.4 million, compared to a
carrying amount of $460.0 million. At September 30, 2002, the contingent
interest component of the Company's 1.5% Debentures was carried at its fair
value of zero.

At September 30, 2002, the fair value of the Company's Ocean Alliance
lease-leaseback agreement, based on the present value of estimated future cash
flows using a discount rate of 7.28%, was approximately $46.2 million, compared
to a carrying amount of $46.4 million.

At September 30, 2002, the fair market value of the Company's investment
in debt securities issued by the U.S. Treasury and other U.S. government
agencies, excluding CMO's, was approximately $497.3 million, which includes an
unrealized holding gain of $0.1 million. These Treasury bills bear no interest
and had an effective yield of 1.6% at September 30, 2002. These securities are
U.S. government-backed, generally short-term and readily marketable.

The fair market value of the Company's investment in CMO's at September
30, 2002 was approximately $180.7 million, which includes an unrealized holding
gain of $2.8 million. The CMO's bear interest at rates ranging from 5.3% to
7.0%. The CMO's are also short-term and readily marketable with an implied AAA
rating backed by U.S. government guaranteed mortgages.

FOREIGN EXCHANGE RISK

In June 2002 the Company entered into forward contracts to purchase
approximately 50.0 million Australian dollars, 4.2 million Australian dollars to
be purchased monthly from August 29, 2002 through June 26, 2003 and 3.8 million
to be purchased on July 31, 2003. In July 2001 the Company had contracted to
purchase 3.5 million Australian dollars each month through July 31, 2002. These
foreign exchange forward contracts are recorded at their fair value determined
by discounting future cash flows at current forward rates. At September 30,
2002, a liability of $0.7 million, reflecting the fair value of the forward
contracts, was included with "Accrued liabilities" in the Consolidated Balance
Sheet. A pre-tax loss of $0.8 million (comprised of a $0.1 million realized gain
and a $0.9 million unrealized loss) was recorded in the Consolidated Statement
of Income for the quarter ended September 30, 2002 in "Other income (expense)."
A pre-tax gain of $0.2 million (comprised of a $1.0 million realized gain and a
$0.8 million unrealized loss) was recorded in the Consolidated Statement of
Income for the nine months ended September 30, 2002 in "Other income (expense)."
See Note 4 to the Company's Consolidated Financial Statements in Item 1 of
Part I of this report.

29

ITEM 4. CONTROLS AND PROCEDURES.

The Company's management formed a disclosure controls and procedures
committee (the "Disclosure Committee"). The purpose and responsibility of the
Disclosure Committee is to coordinate and review the process by which
information is recorded, processed and reported on a timely basis as required to
be disclosed by the Company in its reports filed or submitted under the
Securities Exchange Act of 1934, as amended. In addition, the Disclosure
Committee is responsible for ensuring that this information is accumulated and
communicated to the Company's management, including its principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.

Evaluation of Disclosure Controls and Procedures

Based on their evaluation of the Company's disclosure controls and
procedures conducted within 90 days prior to the date of filing this report on
Form 10-Q, the Company's principal executive officer and principal financial
officer, have concluded that as of the date of their evaluation, the Company's
disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
promulgated under the Securities Exchange Act of 1934, as amended) are
effective.

Changes in Internal Controls

There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation.

30

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

Not applicable.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

Not applicable.

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

Not applicable.

ITEM 5. OTHER INFORMATION.

On October 1, 2002, 41,875 non-qualified stock options were granted under
the Company's 2000 Stock Option Plan to non-employee directors and executive
officers of the Company. These options were granted at an exercise price of
$19.88 per share with terms of five years for non-employee directors and ten
years for all other participants.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

See the Exhibit Index for a list of those exhibits filed herewith.

(b) The Company filed the following reports on Form 8-K during the third
quarter of 2002:

31

SIGNATURES

Pursuant to the requirements 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.

DIAMOND OFFSHORE DRILLING, INC.
(Registrant)

Date 06-November-2002 By: /s/ Gary T. Krenek
------------------------------------------
Gary T. Krenek
Vice President and Chief Financial Officer

Date 06-November-2002 /s/ Beth G. Gordon
------------------------------------------
Beth G. Gordon
Controller (Chief Accounting Officer)

32

CERTIFICATIONS

I, James S. Tisch, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Diamond Offshore
Drilling, Inc.;

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

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

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

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

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

Date 06-November-2002 /s/ James S. Tisch
-----------------------------------------
James S. Tisch
Chief Executive Officer

33

CERTIFICATIONS

I, Gary T. Krenek, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Diamond Offshore
Drilling, Inc.;

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

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

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

a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;

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

a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and

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

Date 06-November-2002 /s/ Gary T. Krenek
-----------------------------------------
Gary T. Krenek
Chief Financial Officer

34

EXHIBIT INDEX