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 March 31, 2003

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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). 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 April 30, 2003 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 MARCH 31, 2003

PAGE NO.

COVER PAGE................................................................................................... 1

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

PART I. FINANCIAL INFORMATION................................................................................ 3

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets..................................................................... 3
Consolidated Statements of Operations........................................................... 4
Consolidated Statements of Cash Flows........................................................... 5
Notes to Unaudited Consolidated Financial Statements............................................ 6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........... 15

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ..................................... 26

ITEM 4. CONTROLS AND PROCEDURES ........................................................................ 28

PART II. OTHER INFORMATION................................................................................... 29

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................ 29

SIGNATURES................................................................................................... 30

CERTIFICATIONS............................................................................................... 31

EXHIBIT INDEX................................................................................................ 33

2

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

MARCH 31, DECEMBER 31,
------------ ------------
2003 2002
------------ ------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 195,525 $ 184,910
Marketable securities ....................................................... 495,563 627,614
Accounts receivable ......................................................... 138,297 146,957
Rig inventory and supplies .................................................. 46,715 45,405
Prepaid expenses and other .................................................. 27,172 28,870
------------ ------------
Total current assets ....................................... 903,272 1,033,756
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION .................................................... 2,250,999 2,164,627
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $30,684 .......................... 21,311 24,714
OTHER ASSETS .................................................................. 35,443 35,668
------------ ------------
Total assets ............................................... $ 3,211,025 $ 3,258,765
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ........................................... $ 11,155 $ 11,155
Accounts payable ............................................................ 37,144 39,721
Accrued liabilities ......................................................... 65,703 63,113
Taxes payable ............................................................... 7,403 4,413
------------ ------------
Total current liabilities .................................. 121,405 118,402
LONG-TERM DEBT ................................................................ 928,313 924,475
DEFERRED TAX LIABILITY ........................................................ 360,643 375,309
OTHER LIABILITIES ............................................................. 33,401 33,065
------------ ------------
Total liabilities .......................................... 1,443,762 1,451,251
------------ ------------
COMMITMENTS AND CONTINGENCIES (NOTE 9) ........................................ -- --
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, 133,457,055
shares issued and 130,336,455 shares outstanding at March 31, 2003 and
December 31, 2002) ........................................................ 1,335 1,335

Additional paid-in capital .................................................. 1,263,692 1,263,692
Retained earnings ........................................................... 583,484 621,342
Accumulated other comprehensive loss ........................................ (3,123) (730)
Treasury stock, at net cost (3,120,600 shares at March 31, 2003 and
December 31, 2002) ........................................................ (78,125) (78,125)
------------ ------------
Total stockholders' equity ................................. 1,767,263 1,807,514
------------ ------------
Total liabilities and stockholders' equity ................. $ 3,211,025 $ 3,258,765
============ ============

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

3

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
---------- ----------

REVENUES:
Contract drilling ................................. $ 139,859 $ 193,668
Revenues related to reimbursable expenses ......... 6,290 7,882
---------- ----------
Total revenues .............................. 146,149 201,550
---------- ----------

OPERATING EXPENSES:
Contract drilling ................................. 113,670 120,947
Reimbursable expenses ............................. 5,738 7,212
Depreciation ...................................... 47,277 42,697
General and administrative ........................ 7,200 6,648
---------- ----------
Total operating expenses .................... 173,885 177,504
---------- ----------

OPERATING INCOME (LOSS) ................................... (27,736) 24,046

OTHER INCOME (EXPENSE):
Interest income ................................... 4,156 9,581
Interest expense .................................. (5,575) (5,470)
Gain (loss) on sale of marketable securities ...... (61) 3,492
Other, net ........................................ 1,743 853
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE ................... (27,473) 32,502

INCOME TAX BENEFIT (EXPENSE) .............................. 5,907 (9,944)
---------- ----------

NET INCOME (LOSS) ......................................... $ (21,566) $ 22,558
========== ==========

EARNINGS (LOSS) PER SHARE:
BASIC ............................................. $ (0.17) $ 0.17
========== ==========
DILUTED ........................................... $ (0.17) $ 0.17
========== ==========

WEIGHTED AVERAGE SHARES OUTSTANDING:
Shares of common stock ............................ 130,336 131,786
Dilutive potential shares of common stock ......... -- 9,482
---------- ----------
Total weighted average shares outstanding ... 130,336 141,268
========== ==========

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

4

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

THREE MONTHS ENDED
MARCH 31,
--------------------------
2003 2002
---------- ----------

OPERATING ACTIVITIES:
Net income (loss) .................................................. $ (21,566) $ 22,558
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation ..................................................... 47,277 42,697
(Gain) on sale of assets ......................................... (1) (32)
(Gain) loss on sale of marketable securities, net ................ 61 (3,492)
Deferred tax provision (benefit) ................................. (9,974) 6,665
Accretion of discounts on marketable securities .................. (856) (649)
Amortization of debt issuance costs .............................. 297 328
Amortization of discount on zero coupon convertible debentures ... 3,838 3,707
Changes in operating assets and liabilities:
Accounts receivable .............................................. 8,660 32,724
Rig inventory and supplies and other current assets .............. 388 18,798
Other assets, non-current ........................................ (72) 448
Accounts payable and accrued liabilities ......................... 13 (4,894)
Taxes payable .................................................... 2,990 1,976
Other liabilities, non-current ................................... 336 (4,253)
Other items, net ................................................. (810) 458
---------- ----------
Net cash provided by operating activities ................... 30,581 117,039
---------- ----------

INVESTING ACTIVITIES:
Capital expenditures (excluding rig acquisitions) .................. (70,226) (57,187)
Rig acquisitions ................................................... (63,500) --
Proceeds from sale of assets ....................................... 78 902
Proceeds from sale of marketable securities ........................ 877,961 914,184
Purchase of marketable securities ................................. (748,664) (887,681)
Securities repurchased under repurchase agreements ................. -- (199,062)
Proceeds from settlement of forward contracts ...................... 677 270
---------- ----------
Net cash used in investing activities ....................... (3,674) (228,574)
---------- ----------

FINANCING ACTIVITIES:
Acquisition of treasury stock ...................................... -- (20,000)
Settlement of put options .......................................... -- (1,193)
Payment of dividends ............................................... (16,292) (16,507)
---------- ----------
Net cash used in financing activities ....................... (16,292) (37,700)
---------- ----------

NET CHANGE IN CASH AND CASH EQUIVALENTS ................................... 10,615 (149,235)
Cash and cash equivalents, beginning of period ..................... 184,910 398,990
---------- ----------
Cash and cash equivalents, end of period ........................... $ 195,525 $ 249,755
========== ==========

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

5

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, 2002 (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 operations, 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.

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 Operations 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. Realized
gains or losses and declines in value, if any, judged to be other than temporary
are reported in the Consolidated Statements of Operations 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 Operations. During the three months
ended March 31, 2002, loaned debt securities that were outstanding at December
31, 2001, were returned to the Company. The Company did not have any loaned debt
securities outstanding at March 31, 2003 or December 31, 2002.

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.

6

Supplementary Cash Flow Information

There were no cash payments made for interest on long-term debt during the
quarters ended March 31, 2003 and 2002. Cash payments made for foreign income
taxes, net of foreign tax refunds, were $1.4 million and $1.3 million during the
quarters ended March 31, 2003 and 2002, respectively. There were no payments of
U.S. income taxes in the first quarter of 2003. In the first quarter of 2002 a
$16.0 million refund of U.S. income tax was received.

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 Operations is as follows:

THREE MONTHS ENDED
MARCH 31,
----------------------
2003 2002
----------------------
(IN THOUSANDS)

Total interest cost including amortization of debt
issuance costs ................................... $ 6,499 $ 6,584
Capitalized interest ................................ (924) (1,114)
----------------------
Total interest expense as reported .............. $ 5,575 $ 5,470
======================

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.

There were no treasury stock purchases in the first quarter of 2003.
During the first quarter of 2002 the Company purchased 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 these put
options, and reported the net cost of the shares, $16.9 million, in "Treasury
stock."

At March 31, 2002, put options covering 23,600 shares of the Company's
common stock at an exercise price of $24.46 per share were outstanding. 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 common stock. Premiums received for these options
were recorded in "Additional paid-in capital" in the Consolidated Balance
Sheets.

The Company settled put options which covered 1,000,000 shares of its
common stock during the first quarter of 2002 with cash payments totaling $1.2
million. The Company reduced "Additional paid-in capital" in the Consolidated
Balance Sheet for amounts paid to settle these put options. Put options sold in
October 2001, which covered 163,721 shares of the Company's common stock,
expired during the first quarter of 2002.

There were no common equity put options issued or outstanding at December
31, 2002, March 31, 2003 or during the quarter ended March 31, 2003.

As of April 30, 2003, Loews Corporation ("Loews") owned 53.8% of the
outstanding shares of common stock of the Company. The Company was a wholly
owned subsidiary of Loews prior to its initial public offering in October 1995.

7

Comprehensive Income (Loss)

A reconciliation of net income (loss) to comprehensive income (loss) at
March 31, 2003 and 2002 is as follows:

THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2003 2002
-------------------------------------
(IN THOUSANDS)

NET INCOME (LOSS) $ (21,566) $ 22,558
OTHER COMPREHENSIVE GAINS (LOSSES), NET OF TAX:
Foreign currency translation loss....................... (87) (17)
Unrealized holding loss on investments.................. (2,293) (3,985)
Reclassification adjustment for gain included in
net income (loss).................................. (13) (2,610)
-------------------------------------
COMPREHENSIVE INCOME (LOSS) $ (23,959) $ 15,946
=====================================

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 Operations in "Other income (expense)." Additionally, translation
gains and losses of subsidiaries operating in hyperinflationary economies are
included in operating results.

Stock-Based Compensation

The Company accounts for its 2000 Stock Option Plan in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Accordingly, no compensation expense has been recognized for the
options granted to employees under the plan. Had compensation expense for the
Company's stock options been recognized based on the fair value of the options
at the grant dates, using the methodology prescribed by SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net income (loss) and
earnings (loss) per share would have been as follows:

THREE MONTHS ENDED
MARCH 31,
---------------------------------------
2003 2002
---------------------------------------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

Net Income (Loss) as reported ................................ $ (21,566) $ 22,558
Add: Stock-based employee compensation
expense included in reported net income (loss),
net of related tax effects ................................ -- --
Deduct: Total stock-based employee compensation
expense determined under fair value based method,
net of related tax effects ................................ (265) (207)
---------------------------------------
Pro forma net income (loss) .................................. $ (21,831) $ 22,351
=======================================

Earnings (Loss) Per Share of Common Stock:
As reported ............................................... $ (0.17) $ 0.17
Pro forma ................................................. $ (0.17) $ 0.17

Earnings (Loss) Per Share of Common Stock - assuming dilution:
As reported ............................................... $ (0.17) $ 0.17
Pro forma ................................................. $ (0.17) $ 0.17

8

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 related 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.

Income from reimbursements received for the purchase of supplies,
equipment, personnel services and other services provided at the request of the
customer in accordance with a contract or agreement is recorded, for the gross
amount billed to the customer, as "Revenues related to reimbursable expenses" in
the Consolidated Statements of Operations in accordance with the guidance
provided by the Emerging Issues Task Force 01-14 "Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expense Incurred."

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.

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 December 2002 the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS No. 148 amends the disclosure requirements of
SFAS No. 123 to require prominent disclosures in both annual and interim
financial statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No. 148
is effective for financial statements for fiscal years ending after December 15,
2002. The Company accounts for stock-based employee compensation in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees." However,
the Company has adopted the provisions of SFAS No. 148 which require prominent
disclosure regarding the method of accounting for stock-based employee
compensation in its annual and interim financial statements.

In July 2002 the 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's adoption of SFAS No. 146 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 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 APB Opinion 30, "Reporting the
Results of Operations-Reporting the Effects

9

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, out of
extraordinary items.

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 the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002 with early adoption encouraged. The
adoption of SFAS No. 143 in January 2003 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.

2. EARNINGS (LOSS) PER SHARE

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

THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2003 2002
-------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NET INCOME (LOSS) - BASIC (NUMERATOR): $ (21,566) $ 22,558
Effect of dilutive potential shares 1.5% Debentures ..... -- 971
-------------------------------------
NET INCOME (LOSS) INCLUDING CONVERSIONS - DILUTED (NUMERATOR) $ (21,566) $ 23,529
=====================================
WEIGHTED AVERAGE SHARES - BASIC (DENOMINATOR): 130,336 131,786
Effect of dilutive potential shares
1.5% Debentures .................................... -- 9,383
Stock options ...................................... -- 4
Put options ........................................ -- 95
-------------------------------------
WEIGHTED AVERAGE SHARES INCLUDING CONVERSIONS - DILUTED
(DENOMINATOR) 130,336 141,268
=====================================
EARNINGS (LOSS) PER SHARE:
Basic .................................................... $ (0.17) $ 0.17
=====================================
Diluted .................................................. $ (0.17) $ 0.17
=====================================

The computation of diluted earnings per share ("EPS") for the quarters
ended March 31, 2003 and 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"). For the quarter
ended March 31, 2003 the computation of diluted EPS excludes 9.4 million
potentially dilutive shares issuable upon conversion of the Company's 1.5%
Debentures. The inclusion of such shares would be antidilutive.

Put options covering 1,663,721 shares of common stock at various stated
exercise prices per share were outstanding during part of the first quarter of
2002 prior to their expiration or settlement. Put options covering 23,600 shares
of common stock at an exercise price of $24.46 per share were outstanding at
March 31, 2002. The computation of diluted EPS for the first quarter of 2002
excluded put options covering 937,321 shares of common stock because the
options' exercise prices were less than the average market price per share of
the common stock. There were no put options outstanding during the quarter ended
March 31, 2003.

The computation of diluted EPS for the quarters ended March 31, 2003 and
2002 did not include stock options representing 421,900 shares and 218,300
shares of common stock, respectively. These stock options were excluded because
the options' exercise prices were more than the average market price per share
of the common stock.

10

3. MARKETABLE SECURITIES

Investments classified as available for sale are summarized as follows:

MARCH 31, 2003
-------------------------------------
UNREALIZED FAIR
COST GAIN (LOSS) VALUE
-------------------------------------
(IN THOUSANDS)

Debt securities issued by the U.S. Treasury and
other U.S. government agencies:
Due within one year........................ $ 324,746 $ (6) $ 324,740
Collateralized mortgage obligations.............. 170,198 625 170,823
-------------------------------------
Total...................................... $ 494,944 $ 619 $ 495,563
=====================================

DECEMBER 31, 2002
-------------------------------------
UNREALIZED FAIR
COST GAIN VALUE
-------------------------------------
(IN THOUSANDS)

Debt securities issued by the U.S. Treasury and
other U.S. government agencies:
Due within one year........................ $ 449,445 $ 20 $ 449,465
Collateralized mortgage obligations.............. 174,003 4,146 178,149
-------------------------------------
Total...................................... $ 623,448 $ 4,166 $ 627,614
=====================================

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:

THREE MONTHS ENDED
MARCH 31,
---------------------------------
2003 2002
---------------------------------
(IN THOUSANDS)

Proceeds from sales................... $ 877,961 $ 914,184
Gross realized gains.................. 108 6,264
Gross realized losses................. (169) (2,772)

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.

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

11

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 March 31,
2003, an asset of $0.8 million, reflecting the fair value of the forward
contracts, was included with "Prepaid expenses and other" in the Consolidated
Balance Sheet. A pre-tax gain of $1.4 million (comprised of a $0.7 million
realized gain and a $0.7 million unrealized gain) was recorded in the
Consolidated Statements of Operations for the quarter ended March 31, 2003 in
"Other income (expense)." For the quarter ended March 31, 2002 a pre-tax gain of
$0.7 million related to the forward contracts (comprised of a $0.3 million
realized gain and a $0.4 million unrealized gain) was recorded in the
Consolidated Statements of Operations in "Other income (expense)."

Contingent Interest

The Company's $460.0 million principal amount of 1.5% Debentures, issued
April 11, 2001 which are due April 15, 2031, contain a contingent interest
provision. 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, at December 31, 2002 or at March 31, 2003.

5. DRILLING AND OTHER PROPERTY AND EQUIPMENT

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

MARCH 31, DECEMBER 31,
----------------------------
2003 2002
----------------------------
(IN THOUSANDS)

Drilling rigs and equipment............................... $ 3,209,670 $ 3,091,892
Construction work-in-progress............................. 156,940 141,247
Land and buildings........................................ 15,035 15,035
Office equipment and other................................ 21,254 21,076
----------------------------
Cost................................................ 3,402,899 3,269,250
Less: accumulated depreciation............................ (1,151,900) (1,104,623)
----------------------------
Drilling and other property and equipment, net...... $ 2,250,999 $ 2,164,627
============================

Construction work-in-progress at March 31, 2003 included $143.2 million
for the significant upgrade of the Ocean Rover to high specification
capabilities.

In March 2003, Diamond Offshore Drilling Limited, a subsidiary of the
Company, completed the acquisition of the third-generation semisubmersible
drilling rig, Omega, renamed Ocean Patriot, for $65.0 million. The Company
capitalized $63.5 million to drilling rigs and equipment and recorded $1.5
million to rig inventory.

In December 2002, the acquisition of the third-generation semisubmersible
drilling rig, West Vanguard, renamed Ocean Vanguard, was completed for $68.5
million. The Company capitalized $67.0 million to drilling rigs and equipment
and recorded $1.5 million to rig inventory.

6. GOODWILL

Goodwill from the merger with Arethusa Off-Shore Limited ("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, suspended amortization of goodwill at that time.

For purposes of applying SFAS No. 142, the Company determined that it has
one reporting unit to which to assign goodwill. The Company performed the annual
goodwill impairment test on December 31, 2002 and determined that the fair value
of the reporting unit exceeded its carrying value, and accordingly, no further
steps were required for testing goodwill impairment at that time. Annual
goodwill impairment testing will be performed at each year-end.

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

12

During each of the three months ended March 31, 2003 and 2002, an
adjustment of $3.4 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:

MARCH 31, DECEMBER 31,
----------------------------
2003 2002
----------------------------
(IN THOUSANDS)

Payroll and benefits........................ $ 29,057 $ 29,337
Personal injury and other claims............ 6,815 6,815
Interest payable............................ 3,953 1,588
Deferred revenue............................ 2,366 3,539
Other....................................... 23,512 21,834
----------------------------
Total............................. $ 65,703 $ 63,113
============================

8. LONG-TERM DEBT

Long-term debt consists of the following:

MARCH 31, DECEMBER 31,
----------------------------
2003 2002
----------------------------
(IN THOUSANDS)

Zero Coupon Debentures.......................... $ 443,526 $ 439,688
1.5% Debentures................................. 460,000 460,000
Ocean Alliance lease-leaseback agreement........ 35,942 35,942
----------------------------
939,468 935,630
Less: Current maturities........................ (11,155) (11,155)
----------------------------
Total..................................... $ 928,313 $ 924,475
============================

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.

13

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):

THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
------------------------
(IN THOUSANDS)

High Specification Floaters...................... $ 63,634 $ 74,647
Other Semisubmersibles........................... 51,703 88,080
Jack-ups......................................... 23,566 29,500
Integrated Services.............................. 1,189 1,823
Eliminations..................................... (233) (382)
------------------------
Total Contract Drilling Revenues............ 139,859 193,668
Revenues Related to Reimbursable Expenses........ 6,290 7,882
------------------------
Total revenues........................... $ 146,149 $ 201,550
========================

Geographic Areas

At March 31, 2003, 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.

THREE MONTHS ENDED
MARCH 31,
------------------------
2003 2002
------------------------
(IN THOUSANDS)

Revenues from unaffiliated customers:
United States.................................. $ 79,760 $ 97,343

Foreign:
Europe/Africa............................... 5,861 31,127
Australia/Southeast Asia.................... 20,053 31,150
South America............................... 40,475 41,930
------------------------
Total revenues......................... $ 146,149 $ 201,550
========================

11. INCOME TAXES

In 2002 the Company formed a Cayman Island corporation, Diamond Offshore
International Limited, which is a wholly-owned subsidiary of the Company.
Certain of the Company's rigs that operate internationally are now owned and
operated, directly or indirectly, by the Cayman Island subsidiary. Effective
January 1, 2003 the Company began to postpone remittance of the earnings from
this subsidiary to the U.S. and indefinitely reinvest these earnings
internationally. Consequently, no U.S. taxes were provided on these earnings in
the first quarter of 2003 and the estimated total Company annual effective tax
rate as of March 31, 2003 was 21.5%.

In the first quarter of 2002, a portion of the earnings from the Company's
U.K. subsidiaries were considered to be indefinitely reinvested. No U.S. taxes
were provided on these earnings in the first quarter of 2002 and the estimated
annual effective tax rate as of March 31, 2002 was 30.6%. These U.K.
subsidiaries are now owned, directly or indirectly, by Diamond Offshore
International Limited, the Company's newly formed Cayman Island subsidiary.
Consequently, earnings from the U.K. subsidiaries for the quarter ended March
31, 2003 are part of the earnings of the Cayman Island subsidiary on which no
U.S. taxes are provided.

14

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 47 offshore
drilling rigs. The fleet consists of 32 semisubmersibles, 14 jack-ups and one
drillship.

GENERAL

Revenues. The Company's revenues vary based upon demand, which affects the
number of days the fleet is utilized and the 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 primary 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.

Revenues from reimbursements received for the purchase of supplies,
equipment, personnel services and other services provided at the request of the
customer in accordance with a contract or agreement are recorded for the gross
amount billed to the customer, as "Revenues related to reimbursable expenses" in
the Consolidated Statements of Operations in accordance with the guidance
provided by the Emerging Issues Task Force 01-14 "Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expense Incurred."

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 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 a cost of the operator under a drilling contract. 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, meeting certain criteria, which 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.
Higher depreciation expense decreases operating income in periods subsequent to
capital upgrades.

CRITICAL ACCOUNTING ESTIMATES

The Company's significant accounting policies are included in Note 1 of
its Notes to Consolidated Financial Statements in Part I, Item 1 of this report.
Management's judgments, assumptions and estimates are inherent in the
preparation of the Company's financial statements and the application of its
significant accounting policies. The Company believes that its most critical
accounting estimates are as follows:

Property, Plant and Equipment. Drilling and other property and equipment
is carried at cost. Maintenance and routine repairs are charged to income
currently while replacements and betterments, which meet certain criteria, are
capitalized. Depreciation is amortized on the straight-line method over the
remaining

15

estimated useful lives. Management makes judgments, assumptions and estimates
regarding capitalization, useful lives and salvage values. Changes in these
assumptions could produce results that differ from those reported. The Company
also evaluates its property and equipment for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Management's assumptions are an inherent part of an asset
impairment evaluation and the use of different assumptions could produce results
that differ from those reported.

Personal Injury Claims. The Company's retention of liability for personal
injury claims, which primarily results from Jones Act liability in the Gulf of
Mexico, is $0.5 million per claim with an aggregate annual deductible of $1.5
million. The Company estimates its liability for personal injury claims based on
the existing facts and circumstances in conjunction with historical experience
regarding past personal injury claims. Eventual settlement or adjudication of
these claims could differ significantly from the estimated amounts.

16

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2003 AND 2002

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.

THREE MONTHS ENDED
MARCH 31,
----------------------------- INCREASE/
2003 2002 (DECREASE)
----------------------------------------------
(in thousands)

CONTRACT DRILLING REVENUE
High Specification Floaters ............. $ 63,634 $ 74,647 $ (11,013)
Other Semisubmersibles .................. 51,703 88,080 (36,377)
Jack-ups ................................ 23,566 29,500 (5,934)
Integrated Services ..................... 1,189 1,823 (634)
Eliminations ............................ (233) (382) 149
----------------------------------------------
TOTAL CONTRACT DRILLING REVENUE ......... $ 139,859 $ 193,668 $ (53,809)
==============================================

REVENUES RELATED TO REIMBURSABLE EXPENSES $ 6,290 $ 7,882 $ (1,592)

CONTRACT DRILLING EXPENSE
High Specification Floaters ............. $ 38,276 $ 35,528 $ 2,748
Other Semisubmersibles .................. 49,717 56,873 (7,156)
Jack-ups ................................ 24,251 25,682 (1,431)
Integrated Services ..................... 1,249 2,841 (1,592)
Other ................................... 410 405 5
Eliminations ............................ (233) (382) 149
----------------------------------------------
TOTAL CONTRACT DRILLING EXPENSE ......... $ 113,670 $ 120,947 $ (7,277)
==============================================

REIMBURSABLE EXPENSES ................... $ 5,738 $ 7,212 $ (1,474)

OPERATING INCOME (LOSS)
High Specification Floaters ............. $ 25,358 $ 39,119 $ (13,761)
Other Semisubmersibles .................. 1,986 31,207 (29,221)
Jack-ups ................................ (685) 3,818 (4,503)
Integrated Services ..................... (60) (1,018) 958
Other ................................... (410) (405) (5)
Reimbursables, net ...................... 552 670 (118)
Depreciation ............................ (47,277) (42,697) (4,580)
General and Administrative Expense ...... (7,200) (6,648) (552)
----------------------------------------------
TOTAL OPERATING INCOME (LOSS) ........... $ (27,736) $ 24,046 $ (51,782)
==============================================

High Specification Floaters.

Revenues. Contract drilling revenues from high specification floaters
decreased $11.0 million during the first quarter of 2003 compared to the same
quarter of 2002. Lower average operating dayrates for most of the rigs in this
classification contributed $13.3 million to the overall decrease as the average
dayrate fell from $115,800 per day in the first quarter of 2002 to $94,300 per
day in the first quarter of 2003.

An improvement in utilization for high specification floaters in the first
quarter of 2003 contributed $2.3 million to revenues and partially offset the
negative effect of lower average dayrates. This improvement resulted primarily
from the Ocean Baroness, which was on contract part of the first quarter of 2003
but did not begin operating in the first quarter of 2002 until mid-March when
its upgrade to high specification capabilities was complete. However, excluding
the Ocean Baroness, the utilization rate for the remaining rigs in this
classification declined to 86% in the first quarter of 2003 from 88% for the
same period in 2002, primarily due to the Ocean

17

Valiant which was stacked most of the first quarter of 2003 but worked the
entire first quarter of 2002. Partially offsetting, the Ocean Star operated
throughout the first quarter of 2003 but was in a shipyard for inspection and
repair in the same period in 2002.

Contract Drilling Expense. Contract drilling expense for high
specification floaters for the quarter ended March 31, 2003 increased $2.7
million from the same period in 2002. This increase in operating costs occurred
primarily as a result of the Ocean Baroness operating throughout the first
quarter of 2003 compared to the first quarter of 2002 when the rig operated only
15 days after completing its upgrade to high specification capabilities.
Contract drilling expenses were also higher in the first quarter of 2003 due to
the Ocean Valiant's mobilization to a shipyard for inspection. Partially
offsetting was a decrease in operating costs in the first quarter of 2003 which
resulted from the mobilization, inspection and repair of the Ocean Star in the
first quarter of 2002.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles for the quarter ended March
31, 2003 decreased $36.4 million from the same period in 2002. A decline in
utilization reduced revenues $25.0 million as utilization rates fell from 69%
during the first quarter of 2002 to 43% during the first quarter of 2003. The
Ocean Princess and Ocean Whittington were stacked and the Ocean Liberator was
cold stacked the entire first quarter of 2003. The Ocean Guardian and Ocean
Epoch were stacked most of the first quarter of 2003. All of these rigs worked
most of the same period in 2002.

Lower average operating dayrates for other semisubmersibles resulted in an
$11.4 million revenue reduction as average operating dayrates fell from $67,700
per day during the first quarter of 2002 to $61,700 per day for the same period
of 2003. The most significant dayrate changes were to the Ocean Worker, Ocean
Winner and the Ocean Nomad which decreased by $72,800, $35,400 and $32,800,
respectively.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles in the first quarter of 2003 decreased $7.2 million compared to
the same period of 2002. The reduction is primarily due to the Ocean Voyager,
Ocean Liberator, Ocean Endeavor and the Ocean New Era, which were cold stacked
the entire first quarter of 2003. All of these rigs, except for the Ocean New
Era, worked during part of the first quarter of 2002. Also, contract drilling
expenses for the Ocean Worker were lower in first quarter of 2003 compared to
the same period in 2002 when costs were incurred for the rig's mobilization,
inspection and repairs. Partially offsetting were contract drilling expenses
generated by the Ocean Vanguard and the Ocean Patriot, which the Company
purchased in December 2002 and March 2003, respectively.

Jack-Ups.

Revenues. Revenues from jack-ups decreased $5.9 million during the first
quarter of 2003 compared to the same quarter of 2002. Lower utilization resulted
in $4.6 million of the overall revenue decline as utilization fell from 78%
during the first quarter of 2002 to 68% during the same period of 2003. During
the quarter ended March 31, 2003 the Ocean Tower spent the entire period in a
shipyard undergoing a cantilever upgrade and various other projects and the
Ocean Sovereign spent most of the quarter in a shipyard for a leg extension
upgrade. These rigs operated throughout most of the first quarter of 2002. The
Ocean Spartan was stacked for approximately one-half of the first quarter of
2003 but worked most of the first quarter of 2002. The revenue decline was
partially offset by the Ocean Drake which worked the entire first quarter of
2003 but was stacked for approximately one-half of the first quarter of 2002.

Average operating dayrates dropped to $27,600 per day during the first
quarter of 2003, from $29,900 per day during the first quarter of 2002,
contributing $1.3 million to the overall revenue decline. The Ocean Heritage
experienced the largest decrease, from $69,600 per day during the first quarter
of 2002 to $46,700 during the same quarter of 2003.

Contract Drilling Expense. Contract drilling expense for jack-ups during
the first quarter of 2003 decreased $1.4 million from the same period in 2002.
Lower costs resulted primarily from the Ocean Champion, which was cold stacked
the entire first quarter of 2003 but only one-half of the first quarter of 2002,
and the Ocean Tower which was undergoing an upgrade during most of the first
quarter of 2003.

18

Integrated Services.

During the first quarter of 2003 integrated services had an operating loss
of $0.1 million as only one turnkey plug and abandon project in the Gulf of
Mexico was completed in the quarter. During the same period in 2002, an
integrated services' operating loss of $1.0 million resulted from a turnkey well
in the Gulf of Mexico.

Reimbursables, net.

Reimbursables include items that the Company purchases, and/or services it
performs, at the request of its customers. Revenues related to reimbursable
items, offset by the related expenditures for these items, were $0.6 million and
$0.7 million for the quarters ended March 31, 2003 and 2002, respectively.

Depreciation.

Depreciation expense increased $4.6 million to $47.3 million in the first
quarter of 2003 compared to $42.7 million in the first quarter of 2002. Higher
depreciation in 2003 resulted primarily from additional depreciation for the
Ocean Baroness, which completed an upgrade to high specification capabilities
and began operations in mid-March 2002, additional depreciation for four of the
Company's jack-up rigs which completed upgrades in late 2002 and the first
quarter of 2003 and depreciation of the Ocean Vanguard, a semisubmersible rig
which the Company purchased in December 2002.

General and Administrative Expense.

General and administrative expense for the first quarter of 2003 of $7.2
million increased $0.6 million over $6.6 million for the first quarter of 2002,
primarily due to higher professional expenses for legal fees and tax planning
for foreign operations during the first quarter of 2003.

Interest Income.

Interest income of $4.2 million for the first quarter of 2003 decreased
$5.4 million, from $9.6 million for the same period in 2002, primarily due to
less cash investment in the first quarter of 2003 in addition to lower interest
rates earned on cash and marketable securities in the first quarter of 2003.

Gain (Loss) on Sale of Marketable Securities.

A loss on the sale of marketable securities of $0.1 million occurred in
the first quarter of 2003 compared to a $3.5 million gain on the sale of
marketable securities for the same period in 2002.

Income Tax Benefit (Expense).

An income tax benefit of $5.9 million was recognized on a pre-tax loss of
$27.5 million in the first quarter of 2003 compared to tax expense of $9.9
million which was recognized on pre-tax income of $32.5 million in the first
quarter of 2002.

The total Company effective income tax rate for the first quarter of 2003
was 21.5%. In 2002 the Company formed a Cayman Island corporation, Diamond
Offshore International Limited, which is a wholly owned subsidiary of the
Company. Certain of the Company's rigs that operate internationally are now
owned and operated, directly or indirectly, by the Cayman Island subsidiary.
Effective January 1, 2003 the Company began to postpone remittance of the
earnings from this subsidiary to the U.S. and to indefinitely reinvest these
earnings internationally. Consequently, no U.S. taxes were provided on these
earnings in the first quarter of 2003.

The total Company effective income tax rate for the first quarter of 2002
was 30.6%. In the first quarter of 2002, a portion of the earnings from the
Company's U.K. subsidiaries were considered to be indefinitely reinvested and no
U.S. taxes were provided on those earnings. These U.K. subsidiaries are now
owned, directly or indirectly, by Diamond Offshore International Limited, the
Company's newly formed Cayman Island subsidiary. Consequently, earnings from the
U.K. subsidiaries for the quarter ended March 31, 2003 are part of the earnings
of the Cayman Island subsidiary on which no U.S. taxes are provided.

19

INDUSTRY CONDITIONS

The offshore contract drilling industry has historically been very
cyclical with the demand for its services fluctuating in correlation with the
price of oil and natural gas. However, the strong product prices that were
prevalent throughout 2002 and in the first quarter of 2003 did not generate the
expected increase in dayrates and utilization. The Company believes that its
customers were hesitant to spend money on drilling because of a lack of
confidence in product price sustainability as well as uncertainty surrounding
the economy in general and the effects of the war in Iraq on the oil markets.

In the Gulf of Mexico, well-to-well contracts continue to be the norm for
the Company's deep water semisubmersible fleet, its mid-water semisubmersible
fleet and its jack-up fleet and there continues to be limited backlog.
Consequently, the Company does not foresee any significant improvement in this
market in the short term but it believes that this market could rebound later in
the year in response to low oil and natural gas inventories.

Internationally, the Company expects the markets in which it operates to
remain relatively flat and consequently expects utilization and rates in these
markets to remain relatively unchanged in the short-term. However, the Company
has received a letter of intent from one of its customers to operate the Ocean
Rover for a three well program following the completion of its upgrade. The
Company expects the rig to be out of the shipyard in July 2003. In addition, the
Company has entered into a drilling contract to operate the Ocean Baroness
offshore Indonesia and estimates the initial term of the drilling contract to be
approximately 400 days.

The Company notes that no assurance can be given that any improvement in
industry conditions would necessarily result in improved dayrates or utilization
of the Company's rigs.

OPERATIONS OUTSIDE THE UNITED STATES

The Company's non-U.S. operations are subject to certain political,
economic and other uncertainties not normally 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 offshore
contract 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.

The Company currently has operations in Vietnam, Singapore, Indonesia, and
Australia and in addition is performing rig upgrades on the Ocean Rover and
Ocean Sovereign in a Singapore shipyard. These areas have been identified as at
risk for exposure to severe acute respiratory syndrome (SARS). The Company is
closely monitoring this situation and has implemented steps to minimize the
impact on its operations. As of the date of this report, the outbreak of SARS
has not had a material impact on the Company's operations or rig upgrades.
However, there can be no assurance that SARS, and measures taken to combat its
spread, will not adversely affect future operations, rig upgrades or financial
results.

LIQUIDITY

At March 31, 2003, the Company's cash and marketable securities totaled
$691.1 million, down from $812.5 million at December 31, 2002. A discussion of
the sources and uses of cash for the quarter ended March 31, 2003 compared to
the same period in 2002 follows.

20

THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002 CHANGE
----------------------------------------------
(IN THOUSANDS)

NET CASH PROVIDED BY OPERATING ACTIVITIES
Net income (loss) ................................... $ (21,566) $ 22,558 $ (44,124)
Depreciation ........................................ 47,277 42,697 4,580
Deferred tax provision .............................. (9,974) 6,665 (16,639)
Other non-cash items, net ........................... 3,339 (138) 3,477
Net changes in operating assets and liabilities...... 11,505 45,257 (33,752)
----------------------------------------------
$ 30,581 $ 117,039 $ (86,458)
==============================================

Cash generated by a net loss adjusted for non-cash items, including
depreciation, for the first quarter of 2003 decreased $86.5 million compared to
the same period in 2002 primarily due to a decline in the results of operations
in 2003.

THREE MONTHS ENDED
MARCH 31,
-----------------------------
2003 2002 CHANGE
----------------------------------------------
(IN THOUSANDS)

NET CASH USED IN INVESTING ACTIVITIES
Capital expenditures (excluding rig acquisition) ....... $ (70,226) $ (57,187) $ (13,039)
Rig acquisition ........................................ (63,500) -- (63,500)
Proceeds from sale of assets ........................... 78 902 (824)
Proceeds from sale of marketable securities ........... 877,961 914,184 (36,223)
Purchase of marketable securities ...................... (748,664) (887,681) 139,017
Securities repurchased under repurchase agreements...... -- (199,062) 199,062
Proceeds from settlement of forward contracts .......... 677 270 407
----------------------------------------------
$ (3,674) $ (228,574) $ 224,900
==============================================

Net cash used in investing activities decreased $224.9 million for the
first quarter of 2003 compared to the same period in 2002. This decrease in cash
usage was primarily due to the first quarter 2002 expenditure of $199.1 million
used for the repurchase of securities sold under repurchase agreements in 2001
and a decrease in cash provided by investing activities in the first quarter of
2003 from the net sale of certain of the Company's investments in marketable
securities. Cash used for the purchase of the semisubmersible rig, Omega,
renamed the Ocean Patriot, and higher capital expenditures primarily for the
ongoing upgrade of the Ocean Rover and the upgrade of three of the Company's
jack-up rigs in the first quarter of 2003 was greater compared to similar
purchases in the same period of 2002.

THREE MONTHS ENDED
MARCH 31,
-------------------------
2003 2002 CHANGE
--------------------------------------
(IN THOUSANDS)

NET CASH USED IN FINANCING ACTIVITIES
Payment of dividends......................... $ (16,292) $ (16,507) $ 215
Acquisition of treasury stock................ -- (20,000) 20,000
Settlement of put options.................... -- (1,193) 1,193
--------------------------------------
$ (16,292) $ (37,700) $ 21,408
======================================

The Company spent $16.3 million of cash in the first quarter of 2003 for
the payment of dividends to stockholders compared to $16.5 million in the first
quarter of 2002, as a result of the Company's purchase of shares of its common
stock during 2002.

During the first quarter of 2002, the Company purchased 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

21

Part I of this report. 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.

In addition, cash was used in financing activities in the first quarter of
2002 for payments totaling $1.2 million for the settlement of put options which
covered 1,000,000 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. 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.

Contractual Cash Obligations.

The Company's long-term debt and operating leases have not changed
materially outside the ordinary course of the Company's business from those
discussed and reported in the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.

The Company is contingently liable as of March 31, 2003 in the amount of
$39.8 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 March 31, 2003 and December 31, 2002, 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 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 quarter of 2003, the Company spent $39.9 million,
including capitalized interest expense, for rig upgrades, of which $24.1 million
was for the deepwater upgrade of the Ocean Rover and $15.8 million was for the
upgrade of six of the Company's jack-up rigs. The Company expects to spend a
total of approximately $125 million for rig upgrade capital expenditures during
2003 ($80 million to complete the upgrade to the Ocean Rover and $45 million to
complete the upgrades to three of the Company's jack-up rigs).

The upgrade of the Ocean Rover, which began in January 2002, is expected
to be completed in the third quarter of 2003. The upgraded rig will be able to
operate in 7,000-foot water depths on a stand alone basis, and water depths in
excess of 7,000 feet should be achievable utilizing augmented mooring systems on
a case by case basis.

The Company's two year program to expand the capabilities of its jack-up
fleet by significantly upgrading six of its 14 jack-up rigs is now more than 50%
complete. Three of these upgrades were completed in 2002. The Ocean Titan and
Ocean Tower, both 350-foot water depth capability independent-leg slot rigs
prior to the upgrades,

22

are having cantilever packages installed. The Ocean Tower completed its
cantilever upgrade in March 2003 for approximately $25.8 million and is
currently in a Gulf of Mexico shipyard completing other capital projects. The
upgrade of the Ocean Titan is scheduled to begin in the second quarter of 2003.
The Ocean Sovereign, a 250-foot water depth independent-leg cantilever rig, is
currently in a shipyard undergoing leg extension installations to allow the rig
to work in water depths up to 300 feet.

During the quarter ended March 31, 2003, the Company spent $30.3 million
on its continuing rig enhancement program and to meet other corporate capital
expenditure requirements. In addition, the Company spent $65.0 million ($63.5
million capitalized to rig equipment) for the purchase of the third-generation
semisubmersible drilling rig, Omega, renamed the Ocean Patriot. The Company
expects to spend a total of approximately $110 million in 2003 for capital
expenditures associated with its continuing rig enhancement program (other than
rig upgrades) and other corporate requirements.

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

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 quarter ended March 31, 2003 integrated
services had an operating loss of $0.1 million as only one turnkey plug and
abandon project in the Gulf of Mexico was completed in the quarter. During the
quarter ended March 31, 2002 integrated services had an operating loss of $1.0
million resulting from a turnkey well, also in the Gulf of Mexico.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2002 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS
No. 123, "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements regarding the method
of accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for financial statements for
fiscal years ending after December 15, 2002. The Company accounts for
stock-based employee compensation in accordance with Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." However, the
Company has adopted the provisions of SFAS No. 148 which require prominent
disclosure regarding the method of accounting for stock-based employee
compensation in its annual and interim financial statements.

In July 2002 the 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's adoption of SFAS No. 146 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 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 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

23

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, out of extraordinary items.

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 the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002 with early adoption encouraged. The
adoption of SFAS No. 143 in January 2003 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.

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 (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical fact are, or may be deemed to be, forward-looking statements.
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, events, performance or achievements,
and may contain or be identified by the words "expect," "intend," "plan,"
"predict," "anticipate," "estimate," "believe," "should," "could," "may,"
"might," "will be," "will continue," "will likely result," "project,"
"forecast," "budget" and similar expressions. Statements by the Company in this
report that contain forward-looking statements include, but are not limited to,
information concerning possible or assumed future results of operations of the
Company and statements about the following subjects:

- future market conditions and the effect of such conditions on the
Company's future results of operations (see " - Industry
Conditions");
- future uses of and requirements for financial resources, including,
but not limited to, expenditures related to the upgrades of the
Ocean Rover and three of the Company's jack-up rigs (see " -
Liquidity" and " - Capital Resources");
- interest rate and foreign exchange risk (see "Quantitative and
Qualitative Disclosures About Market Risk");
- future contractual obligations (see " - Liquidity - Contractual Cash
Obligations");
- business strategy;
- growth opportunities;
- competitive position;
- expected financial position;
- future cash flows;
- future dividends;
- financing plans;
- tax planning;
- budgets for capital and other expenditures (see "--Capital
Resources");
- timing and cost of completion of rig upgrades and other capital
projects (see "--Capital Resources");
- delivery dates and drilling contracts related to rig conversion and
upgrade projects (see " -- Industry Conditions" and "Capital
Resources");
- plans and objectives of management;
- performance of contracts;
- outcomes of legal proceedings;
- compliance with applicable laws; and
- adequacy of insurance or indemnification.

Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected or expressed in forward-looking statements. Such risks and
uncertainties include, among others, the following:

24

- general economic and business conditions;
- worldwide demand for oil and natural gas;
- changes in foreign and domestic oil and gas exploration, development
and production activity;
- oil and natural gas price fluctuations and related market
expectations;
- the ability of the Organization of Petroleum Exporting Countries,
commonly called OPEC, to set and maintain production levels and
pricing, and the level of production in non-OPEC countries;
- policies of the various governments regarding exploration and
development of oil and gas reserves;
- advances in exploration and development technology;
- the political environment of oil-producing regions;
- casualty losses;
- operating hazards inherent in drilling for oil and gas offshore;
- industry fleet capacity;
- market conditions in the offshore contract drilling industry,
including dayrates and utilization levels;
- competition;
- changes in foreign, political, social and economic conditions;
- risks of international operations, compliance with foreign laws and
taxation policies and expropriation or nationalization of equipment;
- foreign exchange and currency fluctuations and regulations, and the
inability to repatriate income or capital;
- risks of war, military operations, other armed hostilities,
terrorist acts and embargoes;
- changes in offshore drilling technology, which could require
significant capital expenditures in order to maintain
competitiveness;
- regulatory initiatives and compliance with governmental regulations;
- compliance with environmental laws and regulations;
- customer preferences;
- effects of litigation;
- cost, availability and adequacy of insurance;
- adequacy of the Company's sources of liquidity;
- risks inherent in turnkey operations, including the risk of failure
to complete a well and cost overruns;
- the availability of qualified personnel to operate and service the
Company's drilling rigs; 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 affect the Company's business,
results of operations and financial performance. Given these risks and
uncertainties, investors should not place undue reliance on forward-looking
statements. Forward-looking statements included in this report speak only as of
the date of this report. 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.

25

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information included in this Item 3 is considered to constitute
"forward-looking statements" for purposes of the statutory safe harbor provided
in Section 27A of the Securities Act and Section 21E of the Exchange Act. 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.

The Company's measure of market risk exposure represents an estimate of
the change in fair value of its financial instruments. Market risk exposure is
presented for each class of financial instrument held by the Company at March
31, 2003 and December 31, 2002 assuming immediate adverse market movements of
the magnitude described below. The Company believes that the various rates of
adverse market movements represent a measure of exposure to loss under
hypothetically assumed adverse conditions. The estimated market risk exposure
represents the hypothetical loss to future earnings and does not represent the
maximum possible loss or any expected actual loss, even under adverse
conditions, because actual adverse fluctuations would likely differ. In
addition, since the Company's investment portfolio is subject to change based on
its portfolio management strategy as well as in response to changes in the
market, these estimates are not necessarily indicative of the actual results
which may occur.

Exposure to market risk is managed and monitored by senior management.
Senior management approves the overall investment strategy employed by the
Company and has responsibility to ensure that the investment positions are
consistent with that strategy and the level of risk acceptable to it. The
Company may manage risk by buying or selling instruments or entering into
offsetting positions.

Interest Rate Risk

The Company has exposure to interest rate risk arising from changes in the
level or volatility of interest rates. The Company's investments in marketable
securities are primarily in fixed maturity securities. The Company monitors its
sensitivity to interest rate risk by evaluating the change in the value of its
financial assets and liabilities due to fluctuations in interest rates. The
evaluation is performed by applying an instantaneous change in interest rates by
varying magnitudes on a static balance sheet to determine the effect such a
change in rates would have on the recorded market value of the Company's
investments and the resulting effect on stockholders' equity. The analysis
presents the sensitivity of the market value of the Company's financial
instruments to selected changes in market rates and prices which the Company
believes are reasonably possible over a one-year period.

The sensitivity analysis estimates the change in the market value of the
Company's interest sensitive assets and liabilities that were held on March 31,
2003 and December 31, 2002 due to instantaneous parallel shifts in the yield
curve of 100 basis points, with all other variables held constant.

The interest rates on certain types of assets and liabilities may
fluctuate in advance of changes in market interest rates, while interest rates
on other types may lag behind changes in market rates. Accordingly the analysis
may not be indicative of, is not intended to provide, and does not provide a
precise forecast of the effect of changes of market interest rates on the
Company's earnings or stockholders' equity. Further, the computations do not
contemplate any actions the Company could undertake in response to changes in
interest rates.

The Company's long-term debt, as of March 31, 2003 and December 31, 2002
is denominated in U.S. dollars. The Company's debt has been primarily issued at
fixed rates, and as such, interest expense would not be impacted by interest
rate shifts. The impact of a 100 basis point increase in interest rates on fixed
rate debt would result in a decrease in market value of $154.0 and $153.8
million, respectively. A 100 basis point decrease would result in an increase in
market value of $192.5 and $192.7 million, respectively.

Foreign Exchange Risk

Foreign exchange rate risk arises from the possibility that changes in
foreign currency exchange rates will impact the value of financial instruments.
As of March 31, 2003, the Company had contracted to purchase 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. These foreign exchange forward contracts are recorded at their fair
value determined by discounting future cash flows at current forward rates.

26

An asset of $0.8 million and $0.2 million reflecting the fair value of the
forward contracts was included with "Prepaid expenses and other" in the
Consolidated Balance Sheet at March 31, 2003 and December 31, 2002,
respectively. The sensitivity analysis assumes an instantaneous 20% change in
the foreign currency exchange rates versus the U.S. dollar from their levels at
March 31, 2003 and December 31, 2002, with all other variables held constant.

The following table presents the Company's market risk by category
(interest rates and foreign currency exchange rates):

FAIR VALUE ASSET (LIABILITY) MARKET RISK
------------------------------------ ----------------------------------
MARCH 31, DECEMBER 31, MARCH 31, DECEMBER 31,
CATEGORY OF RISK EXPOSURE: 2003 2002 2003 2002
- ------------------------------------------------------------------------ ----------------------------------
(IN THOUSANDS)

Interest rate:
Marketable securities.......... $ 495,563 (a) $ 627,614 (a) $ 11,000(c) $ 21,500(c)
Long-term debt................ (911,800)(b) (901,800)(b)
Foreign Exchange.................. 848 151 1,000(d) 2,300(d)

- ----------

(a) The fair market value of the Company's investment in marketable
securities is based on the quoted closing market prices on March 31, 2003 and
December 31, 2002.

(b) The fair values of the Company's 1.5% convertible senior debentures
due 2031 and zero coupon convertible debentures due 2020 are based on the quoted
closing market prices on March 31, 2003 and December 31, 2002. The fair value of
the Company's Ocean Alliance lease-leaseback agreement is based on the present
value of estimated future cash flows using a discount rate of 6.01% for March
31, 2003 and 6.62% for December 31, 2002.

(c) The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of an increase in
interest rates of 100 basis points at March 31, 2003 and December 31, 2002.

(d) The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of a decrease in
foreign exchange rates of 20% at March 31, 2003 and December 31, 2002.

27

ITEM 4. CONTROLS AND PROCEDURES.

The Company's management formed a disclosure controls and procedures
committee (the "Disclosure Committee") in 2002. 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, furnished or submitted under
the Exchange Act. 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 of 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 Exchange Act) 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.

28

PART II. OTHER INFORMATION

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 made the following reports on Form 8-K during the first
quarter of 2003:

Date of Report Description of Report

January 9, 2003 Item 9 Regulation FD disclosure (informational only)

January 27, 2003 Item 9 Regulation FD disclosure (informational only)

March 4, 2003 Item 9 Regulation FD disclosure of CEO/CFO
Certifications (pursuant to section 906 of the
Sarbanes-Oxley Act of 2002) for the Company's Annual
Report on Form 10-K for the year ended December
31, 2002 (informational only)

March 6, 2003 Item 9 Regulation FD disclosure (informational only)

29

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 05-May-2003 By: \s\ Gary T. Krenek
------------------------------------------
Gary T. Krenek
Vice President and Chief Financial Officer

Date 05-May-2003 \s\ Beth G. Gordon
------------------------------------------
Beth G. Gordon
Controller (Chief Accounting Officer)

30

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 05-May-2003 \s\ James S. Tisch
--------------------------------
James S. Tisch
Chief Executive Officer

31

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 05-May-2003 \s\ Gary T. Krenek
--------------------------------
Gary T. Krenek
Chief Financial Officer

32

EXHIBIT INDEX

Exhibit No. Description
- ----------- -----------

3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 to 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 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2001).

99.1* Certification dated May 5, 2003 by the chief executive officer
of the Company furnished solely pursuant to 18
U.S.C. Section 1350 (as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002)

99.2* Certification dated May 5, 2003 by the chief financial officer
of the Company furnished solely pursuant to 18
U.S.C. Section 1350 (as adopted by Section 906 of the
Sarbanes-Oxley Act of 2002)

- -------------
* Filed herewith

33