Edgar Filing: DIAMOND OFFSHORE DRILLING INC

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-13926

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

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

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

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

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

NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------

Common Stock, $0.01 par value per share New York Stock Exchange

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

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

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

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

As of March 15, 2002 $1,893,371,706

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

As of March 15, 2002 Common Stock, $0.01 par value per share 131,553,155
shares

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement relating to the 2002 Annual
Meeting of Stockholders of Diamond Offshore Drilling, Inc., which will be filed
within 120 days of December 31, 2001, are incorporated by reference in Part III
of this form.

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DIAMOND OFFSHORE DRILLING, INC.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001

TABLE OF CONTENTS

PAGE NO.
--------

Cover Page............................................................ 1
Document Table of Contents............................................ 2
Part I
Item 1. Business.................................................... 3
Item 2. Properties.................................................. 10
Item 3. Legal Proceedings........................................... 10
Item 4. Submission of Matters to a Vote of Security Holders......... 10
Part II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 14
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 28
Item 8. Financial Statements and Supplementary Data................. 29
Consolidated Financial Statements........................... 30
Notes to Consolidated Financial Statements.................. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 58
Part III
Information called for by Part III has been omitted as the
Registrant intends to file with the Securities and Exchange
Commission not later than 120 days after the close of its
fiscal year a definitive Proxy Statement pursuant to
Regulation 14A
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 58
Signatures............................................................ 61

PART I

ITEM 1. BUSINESS.

GENERAL

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

INDUSTRY CONDITIONS

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

Historically, the offshore contract drilling industry has been highly
competitive and cyclical, with periods of high demand, short rig supply and high
dayrates followed by periods of low demand, excess rig supply and low dayrates.
During 2001, oil and natural gas prices began to soften which caused reduced
dayrates and utilization for some classes of the Company's equipment although
the market for other classes of its equipment were minimally impacted.
Geographically, the Gulf of Mexico has been the hardest hit area. In the
short-term, management expects a continuation of current market conditions
unless product prices change. Management believes that, in the longer-term,
deepwater markets will continue to be strong and the Company is therefore
continuing with its ultra-deep moored vessel upgrade program. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Outlook" in Item 7 of this report.

THE FLEET

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

Semisubmersibles. The Company owns and operates 30 semisubmersibles.
Semisubmersible rigs consist of an upper working and living deck resting on
vertical columns connected to lower hull members. Such rigs operate in a
"semi-submerged" position, remaining afloat, off bottom, in a position in which
the lower hull is approximately 55 feet to 90 feet below the water line and the
upper deck protrudes well above the surface. Semisubmersibles are typically
anchored in position and remain stable for drilling in the semi-submerged
floating position due in part to their wave transparency characteristics at the
water line. Semisubmersibles can also be held in position through the use of a
computer controlled thruster (dynamic-positioning) system to maintain the rig's
position over a drillsite. Three semisubmersible rigs in the Company's fleet
have this capability.

The Company owns and operates eight high specification semisubmersibles.
These semisubmersibles are larger than many other semisubmersibles, are capable
of working in deep water or harsh environments and have other advanced features.
Currently, six of the eight high specification semisubmersibles are located in
the Gulf of Mexico, the Ocean Alliance is working offshore Brazil and the Ocean
Baroness has completed its upgrade and is mobilizing to a location offshore
Southeast Asia in connection with its current contract. In addition, one of the
Company's semisubmersibles, the Ocean Rover is in a shipyard in Singapore
undergoing

an upgrade to high specification capabilities. This will increase the number of
high specification rigs to nine by the third quarter of 2003. See "Fleet
Enhancements."

The Company owns and operates 21 other semisubmersibles which operate in
maximum water depths up to 3,500 feet. The diverse capabilities of many of these
semisubmersibles enable them to provide both shallow and deep water service in
the U.S. and in other markets outside the U.S. Currently, 10 of these
semisubmersibles are located in the Gulf of Mexico; three are located offshore
Brazil; three are located in the North Sea; two are located offshore Australia;
two are located offshore West Africa; and one is located offshore Southeast
Asia.

Jack-ups. The Company owns 14 jack-ups. Jack-up rigs are mobile,
self-elevating drilling platforms equipped with legs that are lowered to the
ocean floor until a foundation is established to support the drilling platform.
The rig hull includes the drilling rig, jacking system, crew quarters, loading
and unloading facilities, storage areas for bulk and liquid materials, heliport
and other related equipment. The Company's jack-ups are used extensively for
drilling in water depths from 20 feet to 350 feet. The water depth limit of a
particular rig is principally determined by the length of the rig's legs. A
jack-up rig is towed by tugboats to the drillsite with its hull riding in the
sea, as a vessel, with its legs retracted. Once over a drillsite, the legs are
lowered until they rest on the seabed and jacking continues until the hull is
elevated above the surface of the water. After completion of drilling
operations, the hull is lowered until it rests in the water and then the legs
are retracted for relocation to another drillsite.

Currently 12 of the Company's jack-up rigs are located in the Gulf of
Mexico. Of these jack-up rigs in the Gulf of Mexico, seven are independent-leg
cantilevered rigs, two are mat-supported cantilevered rigs, two are
independent-leg slot rigs and one is a mat-supported slot rig. Both of the
Company's internationally based jack-ups are independent-leg cantilevered rigs
and are currently located offshore Southeast Asia and Australia.

Drillship. Drillships, which are typically self-propelled, are positioned
over a drillsite through the use of either an anchoring system or a
dynamic-positioning system similar to those used on certain semisubmersible
rigs. Deep water drillships compete in many of the same markets as do high
specification semisubmersible rigs. Currently, the Company's drillship, the
Ocean Clipper, is located offshore Brazil.

Fleet Enhancements. The Company's strategy is to maximize utilization and
dayrates by upgrading its fleet to meet customer demand for advanced, efficient,
high-tech rigs, particularly deepwater semisubmersibles. Since 1995, the Company
has increased the number of semisubmersibles capable of operating in over 3,500
feet of water from three to ten, primarily by upgrading its existing fleet. Four
of these successful upgrades were to its Victory-class semisubmersible rigs,
most recently the Ocean Baroness. The design of the Company's Victory-class
semisubmersible rigs with its cruciform hull configurations, long fatigue-life
and advantageous stress characteristics, makes this class of rig particularly
well-suited for significant upgrade projects.

In January 2001 the Company took delivery of its most advanced deepwater
rig, the Ocean Confidence. The rig, a former North Sea, 800-bed accommodation
unit, was converted to a semisubmersible rig capable of operating in 7,500 feet
of water with 6,000 metric tons of variable deckload, a 15,000 psi blow-out
prevention system and four mud pumps to complement the existing Class III
dynamic-positioning system. The net cost of the conversion was approximately
$448.2 million. Since its delivery in January and the commencement of its
five-year term contract, the rig has experienced less than five percent
equipment downtime, one of the top performers of recent new builds or
conversions.

In January 2002 the Company took delivery of its newly upgraded rig, the
Ocean Baroness. Final outfitting has been subsequently completed and the rig is
currently mobilizing to its first drilling location offshore Southeast Asia.
This Victory-class rig has enhancements that include capability for operation in
excess of 7,000-foot water depths on a stand alone basis; approximately 5,590
metric tons variable deckload; a 15,000 psi blow-out prevention system;
3,600-kips riser tensioning and riser with a multiplex control system.
Additional features include a high capacity deck crane, significantly enlarged
cellar deck area, an automated pipe-racking system and a 25- by 91-foot moon
pool which will provide enhanced subsea completion and

development capabilities. Features that will allow for extreme well depth
capabilities include 3- by 2,200-hp and 1- by 1,600-hp mud pumps, a 2.5 million
pound derrick, 1,000-kip traveling equipment and a 4,000 hp drawworks. The cost
to complete the deepwater upgrade of the Ocean Baroness was approximately $170
million.

A similar upgrade is now underway on another of the Company's Victory-class
rigs, the Ocean Rover, which arrived at a Singapore shipyard in January 2002 and
is expected to be completed in the third quarter of 2003 at a cost of
approximately $200 million. Upgrades to the Ocean Rover will include capability
for operation in excess of 7,000-foot water depths on a stand alone basis;
approximately 5,590 metric tons variable deckload; a 15,000 psi blow-out
prevention system; 3,600-kips riser tensioning and riser with a multiplex
control system. Additional features include a high capacity deck crane, a
knuckle-boom crane, significantly enlarged cellar deck area, an automated
pipe-racking system and a 25- by 91-foot moon pool which will provide enhanced
subsea completion and development capabilities. Features that will allow for
extreme well depth capabilities include 3- by 2,200-hp and 1- by 1,600-hp mud
pumps, a 2.5 million pound derrick, 1,000-kip traveling equipment and a 4,000 hp
drawworks. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Capital Resources" in Item 7 of this report.

The Company has also initiated a program to significantly upgrade six of
its 14 jack-up rigs over the next two years to expand the shallow water fleet's
capabilities. The Ocean Titan and the Ocean Tower, both 350-foot water depth
capable independent-leg slot rigs, will have cantilever packages installed. The
cantilever systems enable a rig to cantilever or extend its drilling package
over the aft end of the rig. This is particularly important when attempting to
drill over existing platforms. Cantilever rigs have historically enjoyed greater
dayrate and utilization as compared to slot rigs. The Ocean Spartan, the Ocean
Spur, the Ocean Sovereign and the Ocean Heritage, all 250-foot water depth
capable independent-leg cantilever rigs, will have leg extensions installed
enabling these rigs to work in water depths up to 300 feet. The equipment
necessary for these upgrades is being pre-fabricated and installation is planned
to occur as idle time or as scheduled surveys arise to minimize downtime. The
total cost of these upgrades is expected to be approximately $100 million.

The Company continues to evaluate further rig upgrade opportunities.
However, there can be no assurance whether or to what extent upgrades will
continue to be made to rigs in the Company's fleet. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Capital
Resources" in Item 7 of this report.

More detailed information concerning the Company's fleet of mobile offshore
drilling rigs, as of January 28, 2002, is set forth in the table below.

WATER YEAR
DEPTH BUILT/ LATEST CURRENT
TYPE AND NAME RATING ATTRIBUTES ENHANCEMENT(a) LOCATION CUSTOMER(b)
------------- ------ ---------- -------------- -------- -----------

HIGH SPECIFICATION FLOATERS
SEMISUBMERSIBLES (8):
Ocean Confidence............. 7,500 TDS; DP; 15K; 4M 2001 Gulf of Mexico BP
Ocean Baroness............... 7,000 TDS; VC; 15K; 4M 1973/2002 Singapore Upgrade (c)
Ocean America................ 5,500 TDS; SP; 15K; 3M 1988/1999 Gulf of Mexico Anadarko
Ocean Valiant................ 5,500 TDS; SP; 15K; 3M 1988/1999 Gulf of Mexico Murphy
Ocean Victory................ 5,500 TDS; VC; 15K; 3M 1972/1997 Gulf of Mexico BP
Ocean Star................... 5,500 TDS; VC; 15K; 3M 1974/1999 Gulf of Mexico Kerr McGee
Ocean Alliance............... 5,000 TDS; DP; 15K; 3M 1988/1999 Brazil Petrobras
Ocean Quest.................. 3,500 TDS; VC; 15K; 3M 1973/1996 Gulf of Mexico Kerr McGee
DRILLSHIP (1):
Ocean Clipper................ 7,500 TDS; DP; 15K; 3M 1976/1999 Brazil Petrobras
UNDER CONSTRUCTION (1):
Ocean Rover.................. 7,000 TDS; VC; 15K; 4M 1973/2003 Singapore Upgrade (d)
OTHER SEMISUBMERSIBLES (21):
Ocean Winner................. 3,500 TDS; 3M 1977/1996 Brazil Petrobras
Ocean Worker................. 3,500 TDS; 3M 1982/1992 Gulf of Mexico Shell
Ocean Yatzy.................. 3,300 TDS; DP 1989/1998 Brazil Petrobras
Ocean Voyager................ 3,300 TDS; VC 1973/1995 Gulf of Mexico Westport
Ocean Yorktown............... 2,850 TDS; 3M 1976/1996 Brazil Enterprise
Ocean Concord................ 2,200 TDS; 3M 1975/1999 Gulf of Mexico Amerada Hess
Ocean Lexington.............. 2,200 TDS; 3M 1976/1995 Gulf of Mexico Murphy
Ocean Saratoga............... 2,200 TDS; 3M 1976/1995 Gulf of Mexico Amerada Hess
Ocean Endeavor............... 2,000 TDS; VC 1975/1994 Gulf of Mexico Walter Oil &
Gas
Ocean Epoch.................. 2,000 TDS; 3M 1977/2000 Vietnam BP
Ocean General................ 2,000 TDS; 3M 1976/1999 Australia Anadarko
Ocean Prospector............. 1,700 VC 1971/1981 Gulf of Mexico Cold Stacked
Ocean Bounty................. 1,500 TDS; VC; 3M 1977/1992 Australia Woodside
Ocean Guardian............... 1,500 TDS; 3M 1985 North Sea Shell
Ocean New Era................ 1,500 TDS 1974/1990 Gulf of Mexico Stacked
Ocean Princess............... 1,500 TDS; 15K; 3M 1977/1998 North Sea Talisman
Ocean Whittington............ 1,500 TDS; 3M 1974/1995 Namibia Shell
Ocean Nomad.................. 1,200 TDS; 3M 1975/2001 North Sea Veba
Ocean Ambassador............. 1,100 TDS; 3M 1975/1995 Gulf of Mexico Murphy
Ocean Century................ 800 1973 Gulf of Mexico Cold Stacked
Ocean Liberator.............. 600 TDS 1974/1998 Guinea Bissau Premier
JACK-UPS (14):
Ocean Titan.................. 350 TDS; IS; 15K; 3M 1974/1989 Gulf of Mexico Dominion
Ocean Tower.................. 350 TDS; IS; 3M 1972/1998 Gulf of Mexico Spinnaker
Ocean King................... 300 TDS; IC; 3M 1973/1999 Gulf of Mexico Kerr McGee
Ocean Nugget................. 300 TDS; IC 1976/1995 Gulf of Mexico Seneca
Ocean Summit................. 300 SDS; IC 1972/1991 Gulf of Mexico Seneca (e)
Ocean Warwick................ 300 TDS; IC 1971/1998 Gulf of Mexico BP
Ocean Champion............... 250 MS 1975/1985 Gulf of Mexico Shipyard/repair
Ocean Columbia............... 250 TDS; IC 1978/1990 Gulf of Mexico Murphy
Ocean Heritage............... 250 TDS; IC 1981/1995 Indonesia Maxus
Ocean Sovereign.............. 250 TDS; IC 1981/1994 Indonesia Maxus
Ocean Spartan................ 250 TDS; IC 1980/1994 Gulf of Mexico BP
Ocean Spur................... 250 TDS; IC 1981/1994 Gulf of Mexico BP
Ocean Crusader............... 200 TDS; MC 1982/1992 Gulf of Mexico ChevronTexaco
Ocean Drake.................. 200 TDS; MC 1983/1986 Gulf of Mexico ChevronTexaco

ATTRIBUTES
----------

DP = MS = Mat-Supported Slot Rig TDS = Top-Drive Drilling System
Dynamically-Positioned/Self-Propelled
IC = Independent-Leg Cantilevered Rig SDS = Side-Drive Drilling System 3M = Three Mud Pumps
IS = Independent-Leg Slot Rig VC = Victory-Class 4M = Four Mud Pumps
MC = Mat-Supported Cantilevered Rig SP = Self-Propelled 15K = 15,000 psi Blow-Out Preventer

---------------

(a) Such enhancements include the installation of top-drive drilling systems,
water depth upgrades, mud pump additions and increases in deckload
capacity.

(b) For ease of presentation in this table, customer names have been shortened
or abbreviated.

(c) The Company took delivery of the rig in January 2002, subsequently
completed its final outfitting and has commenced mobilization to a location
offshore Southeast Asia in connection with its contract with Murphy.

(d) In Singapore shipyard for upgrade to high specification capabilities.

(e) Turnkey contract with Diamond Offshore Team Solutions, Inc.

MARKETS

The Company's principal markets for its offshore contract drilling services
are the Gulf of Mexico, Europe, including principally the U.K. sector of the
North Sea, South America, Africa and Australia/ Southeast Asia. The Company
actively markets its rigs worldwide. In the past, rigs in the Company's fleet
have also operated in various other markets throughout the world. See Note 16 to
the Company's Consolidated Financial Statements in Item 8 of this report.

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

OFFSHORE CONTRACT DRILLING SERVICES

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

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

The duration of offshore drilling contracts is generally determined by
market demand and the respective management strategies of the offshore drilling
contractor and its customers. In periods of rising demand for offshore rigs,
contractors typically prefer well-to-well contracts that allow contractors to
profit from increasing dayrates. In contrast, during these periods customers
with reasonably definite drilling programs typically prefer longer term
contracts to maintain dayrate prices at a consistent level. Conversely, in
periods of decreasing demand for offshore rigs, contractors generally prefer
longer term contracts to preserve dayrates at existing levels and ensure
utilization, while customers prefer well-to-well contracts that allow them to
obtain the benefit of lower dayrates. In general, the Company seeks to have a
foundation of long-term contracts with a reasonable balance of single-well,
well-to-well and short-term contracts to minimize the downside impact of a
decline in the market while still participating in the benefit of increasing
dayrates in a rising market.

The Company, through its wholly owned subsidiary, Diamond Offshore Team
Solutions, Inc. ("DOTS"), offers a portfolio of drilling services to complement
the Company's offshore contract drilling business. These services include
overall project management, extended well tests, and drilling and completion
operations. From time to time, DOTS also selectively engages in drilling
services pursuant to turnkey or modified-turnkey contracts under which DOTS
agrees to drill a well to a specified depth for a fixed price. In such cases,
DOTS generally is not entitled to payment unless the well is drilled to the
specified depth and profitability of the contract depends upon its ability to
keep expenses within the estimates used by DOTS in determining the contract
price. Drilling a well under a turnkey contract, therefore, typically requires a
greater cash commitment by the Company and exposes the Company to risks of
potential financial losses that generally are substantially greater than those
that would ordinarily exist when drilling under a conventional dayrate contract.
During 2001, DOTS contributed operating income of $0.6 million to the Company's
consolidated results of operations primarily from the completion of one
international turnkey project, which began in the last quarter of 2000, and
three turnkey permanent plug and abandonment projects in the Gulf of Mexico.
During 2000, DOTS contributed operating income of $1.0 million to the Company's
consolidated results of operations primarily from the completion of four turnkey
projects in the Gulf of Mexico, one international turnkey project and integrated
services provided in Aberdeen, Scotland. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations" and "-- Integrated Services" in Item 7 of this report.

CUSTOMERS

The Company provides offshore drilling services to a customer base that
includes major and independent oil and gas companies and government-owned oil
companies. Several customers have accounted for 10.0% or more of the Company's
annual consolidated revenues, although the specific customers may vary from year
to year. During 2001, the Company performed services for 43 different customers
with BP and Petrobraspetroleo Brasileiro S A ("Petrobras") accounting for 22.0%
and 17.9% of the Company's annual total consolidated revenues, respectively.
During 2000, the Company performed services for approximately 50 different
customers with Petrobras and BP accounting for 25.4% and 20.0% of the Company's
annual total consolidated revenues, respectively. During 1999, the Company
performed services for approximately 45 different customers with Petrobras and
Shell companies (including domestic and foreign affiliates) accounting for 15.5%
and 14.5% of the Company's annual total consolidated revenues, respectively.
During periods of low demand for offshore drilling rigs, the loss of a single
significant customer could have a material adverse effect on the Company's
results of operations.

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

COMPETITION

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

GOVERNMENTAL REGULATION

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

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

INDEMNIFICATION AND INSURANCE

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

In September 2001 the Company's Hull and Machinery insurance underwriters
notified the Company that war risk coverage would be canceled in its physical
damage policies unless the Company paid significant additional insurance
premiums for such coverage. In order to avoid incurring the additional costs,
the Company has permitted such coverage to terminate and expects to self-insure
against physical damage war risk to the extent it is required to do so in the
future. Most of the Company's drilling contracts did not require the Company to
carry physical damage war risk insurance. Four drilling contracts did contain a
requirement for such coverage and have been amended to permit the Company to
self-insure against such risks.

OPERATIONS OUTSIDE THE UNITED STATES

Operations outside the United States accounted for approximately 37.7%,
46.1% and 48.8% of the Company's total consolidated revenues for the years ended
December 31, 2001, 2000 and 1999, respectively. The Company's non-U.S.
operations are subject to certain political, economic and other uncertainties
not encountered in U.S. operations, including risks of war and civil
disturbances (or other risks that may limit or disrupt markets), expropriation
and the general hazards associated with the assertion of national sovereignty
over certain areas in which operations are conducted. No prediction can be made
as to what governmental regulations may be enacted in the future that could
adversely affect the international drilling industry. The Company's operations
outside the United States may also face the additional risk of fluctuating
currency values, hard currency shortages, controls of currency exchange and
repatriation of income or capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Outlook" and

"-- Other -- Currency Risk" in Item 7 of this report and Note 16 to the
Company's Consolidated Financial Statements in Item 8 of this report.

EMPLOYEES

As of December 31, 2001, the Company had approximately 4,100 employees,
including international crews furnished through labor contractors. The Company
has experienced satisfactory labor relations and provides comprehensive benefit
plans for its employees. The Company does not currently consider the possibility
of a shortage of qualified personnel to be a material factor in its business.

ITEM 2. PROPERTIES.

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

ITEM 3. LEGAL PROCEEDINGS.

Raymond Verdin, on behalf of himself and those similarly situated v. Pride
Offshore, Inc., et al; C.A. No. G-01-168 in the United States District Court for
the Southern District of Texas, Houston, Division; formerly styled Raymond
Verdin v. R&B Falcon Drilling USA, Inc., et al; No. G-00-488 in the United
States District Court for the Southern District of Texas, Galveston Division,
filed October 10, 2000. The Company was named as a defendant in a proposed class
action suit filed on behalf of offshore workers against all of the major
offshore drilling companies. The proposed class includes persons hired in the
United States by the companies to work in the Gulf of Mexico and around the
world. The allegation is that the companies, through trade groups, shared
information in violation of the Sherman Antitrust Act and various state laws.
Plaintiff Thomas Bryant has replaced the named plaintiff as the proposed class
representative. The lawsuit is seeking money damages and injunctive relief as
well as attorney's fees and costs. During the first quarter of 2001, the Company
recorded a $10.0 million reserve for this pending litigation in the Company's
Consolidated Statement of Income. In July 2001 the Company filed a stipulation
of settlement with the District Court in which it agreed to settle the
plaintiffs' outstanding claims within the limits of the reserve. In December
2001 the United States District Judge for the Southern District of Texas,
Houston Division, entered an order preliminarily approving the proposed class
action settlement, preliminarily certifying the settlement class, and setting a
fairness hearing for April 18, 2002 to determine whether to give the settlement
final approval. A court appointed settlement administrator will provide notice
of the proposed class action settlement.

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

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

There were no matters submitted to a vote of security holders of the
Company during the fourth quarter of 2001.

EXECUTIVE OFFICERS OF THE REGISTRANT

In reliance on General Instruction G (3) to Form 10-K, information on
executive officers of the Registrant is included in this Part I. The executive
officers of the Company are elected annually by the Board

of Directors to serve until the next annual meeting of the Board of Directors,
or until their successors are duly elected and qualified, or until their earlier
death, resignation, disqualification or removal from office. Information with
respect to the executive officers of the Company is set forth below.

AGE AS OF
NAME JANUARY 31, 2002 POSITION
---- ---------------- --------

James S. Tisch............................... 49 Chairman of the Board of Directors and
Chief Executive Officer
Lawrence R. Dickerson........................ 49 President, Chief Operating Officer and
Director
David W. Williams............................ 44 Executive Vice President
Rodney W. Eads............................... 50 Senior Vice President -- Worldwide
Operations
John L. Gabriel, Jr. ........................ 48 Senior Vice President -- Contracts &
Marketing
Gary T. Krenek............................... 43 Vice President and Chief Financial
Officer
Beth G. Gordon............................... 46 Controller
William C. Long.............................. 35 Vice President, General Counsel &
Secretary

James S. Tisch has served as Chief Executive Officer of the Company since
March 1998. Mr. Tisch has served as Chairman of the Board since 1995 and as a
director of the Company since June 1989. Mr. Tisch has served as Chief Executive
Officer of Loews Corporation ("Loews"), a diversified holding company and the
Company's controlling stockholder, since November 1998 and, prior thereto, as
President and Chief Operating Officer of Loews from 1994. Mr. Tisch, a director
of Loews since 1986, also serves as a director of CNA Financial Corporation, an
89% owned subsidiary of Loews, and serves as a director of Vail Resorts, Inc.

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

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

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

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

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

Beth G. Gordon has served as Controller of the Company since April 2000.
Previously, Ms. Gordon was employed by Pool Energy Services Co. from December
1978 through March 2000 where her most recent position was Vice
President-Finance -- Pool Well Services Co.

William C. Long has served as Vice President, General Counsel and Secretary
of the Company since March 2001. Previously, Mr. Long served as General Counsel
and Secretary of the Company from March 1999, acting General Counsel and
Secretary of the Company from June 1998 through February 1999 and as a Staff
Attorney from January 1997 through May 1998.

PART II

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

PRICE RANGE OF COMMON STOCK

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

COMMON STOCK
-------------------
HIGH LOW
-------- --------

2001
First Quarter............................................... $45.0400 $34.7500
Second Quarter.............................................. 43.9200 33.0300
Third Quarter............................................... 33.5000 23.4300
Fourth Quarter.............................................. 31.4100 24.2000
2000
First Quarter............................................... $40.4375 $26.5000
Second Quarter.............................................. 44.7500 35.1250
Third Quarter............................................... 47.3125 32.8125
Fourth Quarter.............................................. 41.9375 30.1875

On March 15, 2002 the closing price of the Company's common stock, as
reported by the NYSE, was $30.81 per share. As of March 15, 2002 there were
approximately 387 holders of record of the Company's common stock. This number
does not include the stockholders for whom shares are held in a "nominee" or
"street" name.

DIVIDEND POLICY

In 2001 the Company paid cash dividends of $0.125 per share of the
Company's common stock on March 1, June 1, September 4 and December 3 and has
declared a dividend of $0.125 per share payable March 1, 2002 to stockholders of
record on February 1, 2002. In 2000 the Company paid cash dividends of $0.125
per share of the Company's common stock on March 1, June 1, September 4 and
December 1. Any future determination as to payment of dividends will be made at
the discretion of the Board of Directors of the Company and will depend upon the
Company's operating results, financial condition, capital requirements, general
business conditions and such other factors that the Board of Directors deems
relevant.

ITEM 6. SELECTED FINANCIAL DATA.

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

2001 2000 1999 1998 1997
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND RATIO DATA)

INCOME STATEMENT DATA:
Total revenues................... $ 885,349 $ 659,436 $ 821,024 $1,208,801 $ 956,093
Operating income................. 224,866 56,946 223,661 568,581 418,859
Income before extraordinary
loss(1)........................ 181,545 72,281 156,071 383,659 278,605
Net income....................... 173,823 72,281 156,071 383,659 278,605
Net income per share(2):
Basic:
Income before extraordinary
loss...................... 1.37 0.53 1.15 2.78 2.01
Net income per share(1)..... 1.31 0.53 1.15 2.78 2.01
Diluted:
Income before extraordinary
loss...................... 1.31 0.53 1.11 2.66 1.93
Net income per share(1)..... 1.26 0.53 1.11 2.66 1.93
BALANCE SHEET DATA:
Drilling and other property and
equipment, net................. 2,002,873 1,931,182 1,737,905 1,551,820 1,451,741
Total assets..................... 3,502,517 3,079,506 2,681,029 2,609,716 2,298,561
Long-term debt................... 920,636 856,559 400,000 400,000 400,000
OTHER FINANCIAL DATA:
Capital expenditures(3).......... 268,617 323,924 324,133 224,474 281,572
Cash dividends declared per
share.......................... 0.50 0.50 0.50 0.50 0.14
Ratio of earnings to fixed
charges(4)..................... 10.28x 4.97x 15.64x 37.57x 28.94x

---------------

(1) During the year ended December 31, 2001, an extraordinary loss of $7.7
million (net of tax) resulted from the early extinguishment of debt. The
impact of this extraordinary loss was a loss of $0.06 for basic net income
per share and a loss of $0.05 per share on a diluted basis.

(2) All per share amounts give retroactive effect to the Company's July 1997
two-for-one stock split in the form of a stock dividend.

(3) In addition to these capital expenditures, the Company expended $81.0
million for rig acquisitions during the year ended December 31, 1997.

(4) For all periods presented, the ratio of earnings to fixed charges has been
computed on a total enterprise basis. Earnings represent income from
continuing operations plus income taxes and fixed charges. Fixed charges
include (i) interest, whether expensed or capitalized, (ii) amortization of
debt issuance costs, whether expensed or capitalized, and (iii) one-third of
rent expense, which the Company believes represents the interest factor
attributable to rent.

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

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

RESULTS OF OPERATIONS

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, revenues may be adversely affected. As a response to changes in
demand, the Company may withdraw a rig from the market by stacking it or may
reactivate a rig stacked previously, which may decrease or increase revenues,
respectively.

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

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

Operating Income. Operating income is primarily affected by revenue
factors, but is also a function of varying levels of operating expenses.
Operating expenses 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 charged to the operator under drilling contracts. However, if the rig
is to be idle for an extended period of time, the Company may reduce the size of
a rig's crew and take steps to "cold stack" the rig, which lowers expenses and
partially offsets the impact on operating income. The Company recognizes as
operating expenses activities such as inspections, painting projects and routine
overhauls, which meet certain criteria, that maintain rather than upgrade its
rigs. These expenses vary from period to period. Costs of rig enhancements are
capitalized and depreciated over the expected useful lives of the enhancements.
Increased depreciation expense decreases operating income in periods subsequent
to capital upgrades.

YEARS ENDED DECEMBER 31, 2001 AND 2000

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.

YEAR ENDED
DECEMBER 31,
--------------------- INCREASE/
2001 2000 (DECREASE)
--------- --------- ----------
(IN THOUSANDS)

REVENUES
High Specification Floaters.............................. $ 326,835 $ 212,000 $114,835
Other Semisubmersibles................................... 377,715 313,287 64,428
Jack-ups................................................. 174,498 118,885 55,613
Integrated Services...................................... 7,779 23,298 (15,519)
Other.................................................... 547 140 407
Eliminations............................................. (2,025) (8,174) 6,149
--------- --------- --------
Total Revenues................................... $ 885,349 $ 659,436 $225,913
========= ========= ========
CONTRACT DRILLING EXPENSE
High Specification Floaters.............................. $ 122,809 $ 100,782 $ 22,027
Other Semisubmersibles................................... 224,346 213,015 11,331
Jack-ups................................................. 110,125 98,880 11,245
Integrated Services...................................... 7,138 22,328 (15,190)
Other.................................................... 2,571 6,260 (3,689)
Eliminations............................................. (2,025) (8,174) 6,149
--------- --------- --------
Total Contract Drilling Expense.................. $ 464,964 $ 433,091 $ 31,873
========= ========= ========
OPERATING INCOME
High Specification Floaters.............................. $ 204,026 $ 111,218 $ 92,808
Other Semisubmersibles................................... 153,369 100,272 53,097
Jack-ups................................................. 64,373 20,005 44,368
Integrated Services...................................... 641 970 (329)
Other.................................................... (2,024) (6,120) 4,096
Depreciation and Amortization Expense.................... (170,017) (145,596) (24,421)
General and Administrative Expense....................... (25,502) (23,803) (1,699)
--------- --------- --------
Total Operating Income........................... $ 224,866 $ 56,946 $167,920
========= ========= ========

High Specification Floaters.

Revenues. Revenues from high specification floaters increased $114.8
million during the year ended December 31, 2001 from the same period in 2000. Of
this increase, $61.5 million is attributable to the Ocean Confidence, which
began operations in early January 2001 after completion of a conversion to a
high specification drilling unit. The rig was undergoing this conversion
throughout 2000. Higher average operating dayrates contributed $41.9 million to
the revenue improvement from 2000 to 2001. Average operating dayrates increased
from $94,100 during 2000 to $109,200 (excluding the Ocean Confidence) during
2001. The Ocean Alliance and the Ocean America experienced the greatest
increases in dayrates with an average increase of $32,500 per day and $29,500
per day, respectively.

Improved utilization for high specification floaters in 2001 accounted for
$11.4 million of the increase in revenues over 2000. Utilization for this class
of rig rose to 95% in 2001 from 88% in 2000 (excluding the Ocean Confidence).
The greatest improvements were from the Ocean Quest, which was idle for almost
five months longer in 2000 than in 2001, and the Ocean Clipper, which had less
downtime for repairs during 2001.

Contract Drilling Expense. Contract drilling expense for high
specification floaters during the year ended December 31, 2001 increased $22.0
million from the same period in 2000. This increase resulted primarily from
costs incurred by the Ocean Confidence ($21.1 million) which began operations in
January 2001.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles increased $64.4 million
during the year ended December 31, 2001 from the same period in 2000 primarily
due to higher average operating dayrates. Average dayrates increased to $66,900
per day in 2001 from $61,300 in 2000 and contributed an additional $52.3 million
to 2001 revenues. The greatest dayrate increases were for the Ocean General,
Ocean Nomad, Ocean Guardian and the Ocean Bounty. However, lower average
operating dayrates in 2001 for the Ocean Princess and the Ocean Whittington were
partially offsetting.

Improvements in utilization contributed $12.2 million to revenue during the
year ended December 31, 2001 compared to the same period in 2000. Overall,
utilization increased to 70% in 2001 from 61% in 2000. The Ocean Epoch spent
most of 2000 in a shipyard for water depth capability and variable deckload
upgrades while it worked most of 2001. The Ocean Voyager, Ocean New Era and the
Ocean Guardian were all idle approximately a half-year longer in 2000 compared
to 2001. However, utilization decreased in 2001 for the Ocean Whittington and
the Ocean Yorktown. The Ocean Whittington was stacked for almost four months in
2001 for a special survey, repairs and preparation for its December 2001
mobilization to Namibia. The Ocean Yorktown was in a shipyard for over two
months in 2001 for inspection and upgrades in connection with new contract
requirements.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the year ended December 31, 2001 increased $11.3 million
from the same period in 2000. Rig expenses increased $5.2 million for the Ocean
Epoch in 2001 from the same period in 2000 when most of the expenses were
associated with the rig's upgrade and were capitalized. The Ocean New Era's
expenses increased $3.0 million in 2001 as it operated during six months of 2001
but was stacked all of 2000. An additional $2.8 million in contract drilling
expense resulted from the mobilization of the Ocean Whittington from Brazil to
Namibia in late 2001. Also, contract drilling expense increased $2.6 million
from the 2001 inspections of the Ocean Yorktown, Ocean Whittington, Ocean Yatzy
and Ocean Princess and $1.8 million from higher Brazilian custom fees in 2001.
Partially offsetting these cost increases, contract drilling expenses were $5.5
million lower in 2001 due to Ocean Lexington and Ocean Saratoga repair projects
in 2000 not repeated in 2001.

Jack-Ups.

Revenues. Revenues from jack-ups during the year ended December 31, 2001
increased $55.6 million from 2000. All of the Company's jack-up rigs experienced
higher average operating dayrates with the overall average operating dayrate
improving from $26,000 in 2000 to $41,000 in 2001. This 58% improvement in
average operating dayrates resulted in an increase of $63.6 million in revenues.

Lower utilization in 2001 than in 2000 partially offset the revenue
improvements that resulted from the higher average operating dayrates. Revenue
declined $8.0 million in 2001 as a result of 83% utilization in 2001 compared to
89% in 2000. This decrease in utilization was primarily due to inspection and
repairs of the Ocean Summit, Ocean Sovereign, Ocean Crusader and Ocean Champion
during 2001. In addition, the Ocean Nugget was stacked for over one-half of 2001
and the Ocean King was in a shipyard for part of the last two months of 2001 for
inspections and repairs. All of these rigs worked most of 2000. Utilization
improvements which were partially offsetting resulted from the Ocean Heritage
and the Ocean Tower. The Ocean Heritage, which worked all of 2001, spent part of
2000 in a shipyard for repairs while the Ocean Tower worked most of 2001 but was
cold stacked for part of 2000.

Contract Drilling Expense. Contract drilling expense increased $11.2
million for jack-ups during the year ended December 31, 2001 compared to the
same period in 2000. Operating costs were higher in 2001 for the Ocean Champion,
Ocean Summit and Ocean Crusader due to inspection and repairs. In addition, rig

expenses were higher for the Ocean Tower which operated during most of 2001, but
was cold stacked during part of 2000. Contract drilling expense decreased in
2001 for the Ocean Heritage due to major repairs in 2000.

Integrated Services.

Operating income for integrated services decreased as a result of the
difference in number, type and magnitude of projects during 2001 compared to
2000. During 2001, integrated services contributed operating income of $0.6
million to the Company's consolidated results of operations primarily due to the
completion of one international turnkey project, which began in the last quarter
of 2000, and three turnkey permanent plug and abandonment projects in the Gulf
of Mexico. During 2000, DOTS contributed operating income of $1.0 million to the
Company's consolidated results of operations primarily from the completion of
four turnkey projects in the Gulf of Mexico, one international turnkey project
and integrated services provided in Aberdeen, Scotland.

Other.

Other operating income of $2.0 million for the year ended December 31, 2001
decreased $4.1 million from the same period in 2000. This decline resulted
primarily from settlements of prior years' disputed revenue in 2000 and lower
expenditures in 2001 for maintenance and repairs of spare equipment.

Depreciation and Amortization Expense.

Depreciation and amortization expense for the year ended December 31, 2001
increased $24.4 million over the prior year. Higher depreciation in 2001
resulted primarily from depreciation for the Ocean Confidence, which completed
its conversion from an accommodation vessel to a high specification
semisubmersible drilling unit and commenced operations in January 2001. Also,
2001 depreciation was higher due to an increase of $35.2 million in ordinary
capital expenditures compared to 2000.

General and Administrative Expense.

General and administrative expense increased $1.7 million in 2001 compared
to the same period in 2000 primarily due to an increase in personnel costs,
travel and professional expenses.

Gain on Sale of Assets

Gain on sale of assets of $0.3 million for the year ended December 31, 2001
decreased $14.0 million from $14.3 million for the same period in 2000 primarily
due to the January 2000 sale of the Company's jack-up drilling rig, Ocean
Scotian which had been cold stacked offshore The Netherlands prior to the sale.
The rig was sold for $32.0 million in cash which resulted in a gain of $13.9
million ($9.0 million after tax).

Interest Income.

Interest income of $48.7 million for the year ended December 31, 2001
decreased $0.8 million from $49.5 million for the same period in 2000. This
decrease resulted from the Company's investment in marketable securities with
lower interest rates in 2001 compared to 2000 and was partially offset by the
investment of higher cash balances generated by the sale of the Company's 1.5%
convertible senior debentures due 2031 (the "1.5% Debentures") on April 11,
2001, the sale of the Company's zero coupon convertible debentures due 2020 (the
"Zero Coupon Debentures") on June 6, 2000 and the December 2000 lease-leaseback
of the Ocean Alliance. Cash balances available for investment were partially
reduced as a result of the Company's redemption of all of its outstanding 3.75%
convertible subordinated notes due 2007 (the "3.75% Notes") on April 6, 2001.
See "-- Liquidity."

Interest Expense.

Interest expense of $26.2 million for the year ended December 31, 2001
increased $15.9 million from $10.3 million for the same period in 2000 primarily
as a result of less interest capitalized due to the completion

of the Ocean Confidence conversion ($2.6 million interest capitalized in 2001
compared to $13.8 million interest capitalized in 2000), the issuance of the
Zero Coupon Debentures on June 6, 2000, the issuance of the 1.5% Debentures on
April 11, 2001 and interest expense related to the December 2000 lease-leaseback
of the Ocean Alliance. This increase was partially offset by a reduction in
interest expense resulting from the Company's redemption of all of its
outstanding 3.75% Notes on April 6, 2001. See "-- Liquidity."

Other Income and Expense (Other, net).

Other income of $24.7 million for the year ended December 31, 2001
increased $24.4 million from other income of $0.3 million for the same period in
2000. This increase resulted primarily from a $27.1 million gain realized on the
sale of marketable securities and a $7.3 million receipt of a settlement payment
for resolved litigation which were partially offset by a $10.0 million reserve
for pending litigation in connection with a proposed class action suit filed
against all of the major offshore drilling companies. See "Legal Proceedings" in
Part I of Item 3 of this report.

Income Tax Expense.

Income tax expense of $90.8 million for the year ended December 31, 2001
increased $52.2 million from $38.6 million in 2000 primarily as a result of the
increase in "Income before income taxes and extraordinary loss" of $161.5
million in 2001, which was partially offset by a lower effective income tax rate
in 2001. The lower effective income tax rate in 2001 was primarily due to the
Company's decision to permanently reinvest part of the earnings of its U.K.
subsidiaries.

Extraordinary Loss.

On April 6, 2001, the Company redeemed all of its outstanding 3.75% Notes
at 102.08% of the principal amount thereof plus accrued interest for a total
cash payment of $397.7 million. An extraordinary loss of $7.7 million was
incurred as a result of the early extinguishment of debt, consisting of $8.1
million of retirement premiums and the write-off of $3.8 million of associated
debt issuance costs, net of a tax benefit of $4.2 million. See Note 8 to the
Company's Consolidated Financial Statement in Item 8 of Part II of this report.

YEARS ENDED DECEMBER 31, 2000 AND 1999

YEAR ENDED
DECEMBER 31,
---------------------- INCREASE/
2000 1999 (DECREASE)
---------- --------- ----------
(IN THOUSANDS)

REVENUES
High Specification Floaters............................. $ 212,000 $ 262,571 $ (50,571)
Other Semisubmersibles.................................. 313,287 463,168 (149,881)
Jack-ups................................................ 118,885 74,484 44,401
Integrated Services..................................... 23,298 32,769 (9,471)
Other................................................... 140 -- 140
Eliminations............................................ (8,174) (11,968) 3,794
--------- --------- ---------
Total Revenues.................................. $ 659,436 $ 821,024 $(161,588)
========= ========= =========
CONTRACT DRILLING EXPENSE
High Specification Floaters............................. $ 100,782 $ 100,723 $ 59
Other Semisubmersibles.................................. 213,015 223,084 (10,069)
Jack-ups................................................ 98,880 84,830 14,050
Integrated Services..................................... 22,328 32,486 (10,158)
Other................................................... 6,260 2,368 3,892
Eliminations............................................ (8,174) (11,968) 3,794
--------- --------- ---------
Total Contract Drilling Expense................. $ 433,091 $ 431,523 $ 1,568
========= ========= =========
OPERATING INCOME
High Specification Floaters............................. $ 111,218 $ 161,848 $ (50,630)
Other Semisubmersibles.................................. 100,272 240,084 (139,812)
Jack-ups................................................ 20,005 (10,346) 30,351
Integrated Services..................................... 970 283 687
Other................................................... (6,120) (2,368) (3,752)
Depreciation and Amortization Expense................... (145,596) (142,963) (2,633)
General and Administrative Expense...................... (23,803) (22,877) (926)
--------- --------- ---------
Total Operating Income.......................... $ 56,946 $ 223,661 $(166,715)
========= ========= =========

High Specification Floaters.

Revenues. Revenues from high specification floaters during the year ended
December 31, 2000 decreased $50.6 million from 1999. Approximately $65.3 million
of the decline in revenues resulted from lower operating dayrates compared to
1999. The average operating dayrate for high specification floaters during the
year ended December 31, 2000 was $94,100 per day compared to $122,700 per day
during the year ended December 31, 1999. Revenues from high specification
floaters were also lower in 2000 by approximately $6.0 million due to revenues
received for the 1999 mobilizations of the Ocean Alliance from the North Sea to
West Africa and the Ocean Clipper from the Gulf of Mexico to Brazil. The decline
in revenues was partially offset by approximately $20.7 million resulting from
improved utilization during 2000. Utilization for the Company's high
specification floaters was 88% during 2000 compared to 84% during 1999. The
Company's drillship, the Ocean Clipper, operated for most of 2000 under a
three-year contract offshore Brazil. During most of 1999, this rig was in a
shipyard for upgrades and repairs associated with this contract. Also
contributing to the improved utilization in 2000 was the operation of the Ocean
Valiant, which was in the

shipyard during part of 1999 for stability enhancements and other repairs. The
Ocean Quest, which was stacked during part of 2000, but worked all of 1999,
partially offset these utilization improvements in 2000.

Contract Drilling Expense. Contract drilling expense for high
specification floaters during the year ended December 31, 2000 increased $0.1
million from 1999. Costs for the Ocean Valiant in 2000 were $6.7 million lower
than in 1999 primarily due to expenses of $5.3 million incurred for repairs of
the rig while in a shipyard during part of 1999. Costs of $3.7 million for the
1999 mobilizations of the Ocean Alliance from the North Sea to Angola and the
Ocean Clipper, from the Gulf of Mexico to Brazil, also contributed to the
decrease. The decline in 2000 costs was partially offset by higher contract
drilling expenses of $9.0 million (excluding mobilization expense) incurred by
the Ocean Clipper which began operating in 2000 under a three-year contract
offshore Brazil. During most of 1999, the Ocean Clipper was in a shipyard for
upgrades and repairs which were capitalized. Also offsetting the decrease in
costs were expenses of $1.3 million associated with the 2000 mobilization of the
Ocean Alliance from Angola to Brazil.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles during the year ended
December 31, 2000 decreased $149.9 million from 1999. Approximately $78.6
million of the decline in revenues resulted from lower operating dayrates
compared to 1999. The average operating dayrate for the Company's other
semisubmersibles was $61,300 per day during the year ended December 31, 2000
compared to $82,400 per day during the year ended December 31, 1999. In
addition, revenues decreased by approximately $71.3 million resulting from lower
utilization compared to 1999. Utilization for the Company's other
semisubmersibles during the year ended December 31, 2000 was 61% compared to 67%
during the year ended December 31, 1999. The Ocean Epoch underwent an upgrade of
its water depth capabilities and variable deckload and was idle during most of
2000 but worked for most of 1999. The Ocean Rover, Ocean Endeavor, Ocean
Guardian and Ocean Voyager were idle during most of 2000 but worked during most
of 1999. The Ocean Baroness, which was cold stacked during the first half of
2000 and then mobilized to Singapore for an upgrade to high specification
capabilities, worked for most of the first half of 1999. See "-- Capital
Resources." The decline in utilization was partially offset by the Ocean General
and Ocean Winner, which worked all of 2000, but were idle most of 1999.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the year ended December 31, 2000 decreased $10.1 million
from 1999. Operating costs were reduced by $6.8 million due to the Ocean
Baroness which was cold stacked during the first half of 2000 and then mobilized
to Singapore for an upgrade. This rig worked most of the first half of 1999. See
"-- Capital Resources." Contract drilling expense was further reduced by $5.3
million as a result of stacking the Ocean Epoch in late 1999 and $4.2 million
associated with mandatory inspections and repairs of the Ocean New Era in 1999.
Costs in 2000 also decreased by $3.6 million from 1999 due to the inspection and
repair of the Ocean Winner and its mobilization from the Gulf of Mexico to
Brazil in 1999. Cost increases in 2000, which were partially offsetting,
included higher operating costs of $7.5 million in 2000 for the Ocean General,
which was stacked throughout 1999, and $2.4 million associated with the
mandatory inspection and repairs of the Ocean Lexington in 2000.

Jack-Ups.

Revenues. Revenues from jack-ups during the year ended December 31, 2000
increased $44.4 million from 1999. Approximately $35.1 million of the increase
in revenues resulted from improvements in utilization compared to 1999.
Utilization of the Company's jack-ups during the year ended December 31, 2000
was 89% compared to 61% during the year ended December 31, 1999. In addition,
revenues increased approximately $26.4 million due to higher operating dayrates
compared to 1999. The average operating dayrate for the Company's jack-ups was
$26,000 per day during the year ended December 31, 2000 compared to $22,400 per
day during the year ended December 31, 1999. The revenue improvement in 2000 was
partially offset by a decrease in revenues of $17.1 million from the Ocean
Scotian, which was sold in January 2000 but worked for most of 1999.

Contract Drilling Expense. Contract drilling expense for jack-ups during
the year ended December 31, 2000 was $14.1 million higher than for the same
period in 1999. An increase of $18.4 million was due to rigs

returning to work in 2000, which were idle for all or part of 1999. In addition,
contract drilling expense was $4.0 million higher in 2000 due to major repairs
to the Ocean Heritage. Higher contract drilling expense in 2000 was partially
offset by a decrease of $8.4 million due to the January 2000 sale of the Ocean
Scotian.

Integrated Services.

Operating income for integrated services increased as a result of the
difference in number, type and magnitude of projects during the year ended
December 31, 2000 as compared to the same period in 1999. During 2000, DOTS
contributed operating income of $1.0 million to the Company's consolidated
results of operations primarily from the completion of four turnkey projects in
the Gulf of Mexico, one international turnkey project and integrated services
provided in Aberdeen, Scotland. During 1999, DOTS contributed operating income
of $0.3 million to the Company's consolidated results of operations primarily
for the completion of six turnkey projects in the Gulf of Mexico, two of which
began in 1998.

Other.

Other operating income of $6.1 million for the year ended December 31, 2000
increased $3.8 million from the same period in 1999. This increase resulted
primarily from higher expenditures during 2000 for crew training programs and
various settlements of prior years' disputed revenue.

Depreciation and Amortization Expense.

Depreciation and amortization expense of $145.6 million for the year ended
December 31, 2000 increased $2.6 million from $143.0 million for the year ended
December 31, 1999. This increase resulted primarily from higher depreciation for
the Ocean Clipper, Ocean General, Ocean Concord and Ocean King, which completed
various upgrades in the third and fourth quarters of 1999. In addition,
depreciation expense was up due to expenditures associated with the Company's
ongoing rig equipment replacement and enhancement programs. This increase was
partially offset by reduced depreciation in 2000 due to the January 2000 sale of
the Ocean Scotian and a decrease in goodwill amortization resulting from
adjustments to goodwill related to tax benefits not previously recognized for
the excess of tax deductible goodwill over the book amount.

General and Administrative Expense.

General and administrative expense of $23.8 million for the year ended
December 31, 2000 increased $0.9 million from $22.9 million for the year ended
December 31, 1999. Higher expenses in 2000 were primarily due to an increase in
legal and personnel costs. Expenses in 2000 also included costs associated with
the Company's participation in the Subsea Mudlift Drilling Joint Industry
Project.

Gain on Sale of Assets.

Gain on sale of assets for the year ended December 31, 2000 was $14.3
million compared to $0.2 million for the year ended December 31, 1999. Gain on
sale of assets in 2000 included the sale of the Company's jack-up drilling rig,
Ocean Scotian, for $32.0 million in cash resulting in a gain of $13.9 million
($9.0 million after tax). The rig had been cold stacked offshore The Netherlands
prior to the sale.

Interest Income.

Interest income of $49.5 million for the year ended December 31, 2000
increased $14.5 million from $35.0 million for the year ended December 31, 1999.
This increase resulted primarily from the investment of excess cash generated by
the sale of Zero Coupon Debentures on June 6, 2000.

Interest Expense.

Interest expense of $10.3 million for the year ended December 31, 2000
increased $1.1 million from $9.2 million for 1999. Interest costs in 2000 were
$8.6 million higher than in 1999 primarily as a result of the issuance of the
Zero Coupon Debentures on June 6, 2000. This amount was partially offset by a
$7.5 million

increase in interest capitalized for the conversion of the Ocean Confidence and
the deepwater upgrade of the Ocean Baroness. Interest cost capitalized in 2000
was $13.8 million compared to $6.3 million in 1999.

Other Income.

Other income of $0.3 million for the year ended December 31, 2000 increased
$9.6 million from other expense of $9.3 million for the year ended December 31,
1999. In 1999, a pre-tax impairment loss of $10.7 million was recorded as the
result of the decline in fair market value, judged to be other than temporary,
in the Company's investment in equity securities.

Income Tax Expense.

Income tax expense for the year ended December 31, 2000 was $38.6 million
as compared to $84.3 million for 1999. This change resulted primarily from a
decrease of $129.5 million in the Company's income before income tax expense.

OUTLOOK

There has historically been a strong correlation between the price of oil
and natural gas and the demand for offshore drilling services. As natural gas
prices started to decline during the third quarter of 2001, demand for the
Company's jack-up fleet in the Gulf of Mexico began to soften. Although the
Company has maintained jack-up fleet utilization higher than the industry
average, operating dayrates earned by the fleet have deteriorated. Utilization
of the Company's intermediate semisubmersible fleet in the Gulf of Mexico, which
had begun to improve during mid-year 2001, declined again during the fourth
quarter. Contract renewal dayrates for these rigs have also been lower. The
Company does not anticipate a change in these deteriorating market conditions
until oil and gas price expectations rebound.

Utilization for the Company's high specification floaters remained strong
throughout 2001. However, towards the end of the year, some deep-water capacity
became available in the market, and dayrates declined slightly. In the
international markets, demand has not been as adversely affected and dayrates
have remained fairly strong. The Company believes that continued strength in
both high specification and international markets will depend, in large part, on
product price stability and/or improvement. Significant relocations of drilling
rigs from the weaker Gulf of Mexico to international markets could also lower
dayrates in non-U.S. markets.

The Company believes that, in the longer-term, deepwater markets will
remain strong and the Company is therefore continuing with its ultra-deep moored
vessel upgrade program. The Ocean Rover has arrived in a shipyard to begin its
modification process and the Ocean Baroness has completed its upgrade and is
mobilizing to Southeast Asia to begin work under its current contract.

LIQUIDITY

Operating Activities.

At December 31, 2001, the Company's cash and marketable securities totaled
$1.1 billion up from $862.1 million at December 31, 2000. Cash of $199.1 million
generated by repurchase agreements is included in this amount (see Investing
Activities). Cash provided by operating activities for the year ended December
31, 2001 increased by $177.5 million to $374.0 million, compared to $196.5
million for the year ended December 31, 2000. This increase in cash was
primarily attributable to improved results of operations in 2001. Net income,
after adjustment for non-cash items, resulted in an increase in cash of $183.0
million. Cash usage due to changes in net working capital components was $5.5
million lower for the year ended December 31, 2001.

Investing Activities.

Investing activities used $65.9 million of cash during the year ended
December 31, 2001, compared to cash usage of $455.2 million during 2000. The
$389.3 million decrease in cash usage was primarily due to

$166.3 million less cash used in 2001 for the Company's investments in
marketable securities than in 2000. Cash used for capital expenditures in 2001
also decreased $55.3 million as a result of the completion of the conversion of
the Ocean Confidence. Cash provided by investing activities in 2001 included
$199.1 million from securities sold under repurchase agreements and $0.2 million
from the settlement of forward exchange contracts. Proceeds from the sale of
assets were lower by $31.6 million primarily due to the sale of the Ocean
Scotian in January 2000.

Financing Activities.

Financing activities used $53.6 million of cash during the year ended
December 31, 2001 compared to $290.8 million of cash provided in 2000. Sources
of financing for the year ended December 31, 2000 consisted primarily of the
Company's issuance of the Zero Coupon Debentures in June 2000 and the December
2000 lease-leaseback of the Ocean Alliance which resulted in net proceeds of
approximately $392.6 million and $54.7 million, respectively.

On April 6, 2001, the Company redeemed all of its outstanding 3.75% Notes
in accordance with the indenture under which the 3.75% Notes were issued. Prior
to April 6, 2001, $12.4 million principal amount of the 3.75% Notes had been
converted into 307,071 shares of the Company's common stock, par value $0.01 per
share, at the stated conversion price of $40.50 per share. The remaining $387.6
million principal amount of the 3.75% Notes was redeemed at 102.08% of the
principal amount thereof plus accrued interest for a total cash payment of
$397.7 million, resulting in an after-tax charge of $7.7 million, which is
reported as an extraordinary loss in the Consolidated Statement of Income.

On April 11, 2001, the Company issued $460.0 million principal amount of
1.5% Debentures which are due April 15, 2031. The 1.5% Debentures are
convertible into shares of the Company's common stock at an initial conversion
rate of 20.3978 shares per $1,000 principal amount of the 1.5% Debentures
(equivalent to a conversion price of $49.02 per share), subject to adjustment in
certain circumstances. Upon conversion, the Company has the right to deliver
cash in lieu of shares of the Company's common stock. The transaction resulted
in net proceeds of approximately $449.1 million.

Interest of 1.5% per year on the outstanding principal amount is payable
semiannually in arrears on April 15 and October 15 of each year, beginning
October 15, 2001. The 1.5% Debentures are unsecured obligations of the Company
and rank equally with all of the Company's other unsecured senior indebtedness.

The Company will pay contingent interest to holders of the 1.5% Debentures
during any six-month period commencing after April 15, 2008 if the average
market price of a 1.5% Debenture for a measurement period preceding such
six-month period equals 120% or more of the principal amount of such 1.5%
Debenture and the Company pays a regular cash dividend during such six-month
period. The contingent interest payable per $1,000 principal amount of 1.5%
Debentures, in respect of any quarterly period, will equal 50% of regular cash
dividends paid by the Company per share on its common stock during that
quarterly period multiplied by the conversion rate. This contingent interest
component is an embedded derivative and had no fair value at inception or on
December 31, 2001.

Holders may require the Company to purchase all or a portion of their 1.5%
Debentures on April 15, 2008 at a price equal to 100% of the principal amount of
the 1.5% Debentures to be purchased plus accrued and unpaid interest. The
Company may choose to pay the purchase price in cash or shares of the Company's
common stock or a combination of cash and common stock. In addition, holders may
require the Company to purchase for cash all or a portion of their 1.5%
Debentures upon a change in control (as defined).

The Company may redeem all or a portion of the 1.5% Debentures at any time
on or after April 15, 2008 at a price equal to 100% of the principal amount plus
accrued and unpaid interest.

Additional cash used in financing activities during the year ended December
31, 2001 included $104.3 million for dividends paid to stockholders and the
purchase of treasury stock. Depending on market conditions, the Company may,
from time to time, purchase shares of its common stock in the open market.
During 2001, the Company purchased 1,403,900 shares of its common stock at an
aggregate cost of $37.8 million, or at an average cost of $26.90 per share.

Also, cash used in financing activities included $9.7 million from the
first of five annual payments of $13.7 million (principal and interest) in
accordance with the Company's December 2000 lease-leaseback agreement with a
European bank. The lease-leaseback agreement provided for the Company to lease
the Ocean Alliance, one of the Company's high specification semisubmersible
drilling rigs, to the bank for a lump-sum payment of $55.0 million plus an
origination fee of $1.1 million and for the bank to then sub-lease the rig back
to the Company. This financing arrangement has an effective interest rate of
7.13% and is an unsecured obligation of the Company.

Cash used in financing activities was partially offset by premiums of $6.9
million received for the sale of put options covering 1,687,321 shares of the
Company's common stock. The options give 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 has the option to settle in cash or shares of its common stock. All
of these options were outstanding at December 31, 2001. On January 30, February
13, and February 14, 2002, the Company settled some of its outstanding put
options with cash payments of $0.4 million, $0.3 million and $0.5 million,
respectively. These put options covered 1,000,000 shares of the Company's common
stock and were to expire on February 5, and February 19, 2002. On February 12,
2002, the Company purchased 500,000 shares of its common stock at $40.00 per
share to settle put options expiring on that date. See Note 1 to the Company's
Consolidated Financial Statements "-- Common Equity Put Options" in Item 8 of
Part II of this report.

Contractual Cash Obligations.

CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN AFTER 5
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS YEARS
-------- --------- --------- --------- --------
(IN THOUSANDS)

Long-term debt............................. $931,062 $10,426 $23,124 $12,818 $884,694
Operating leases........................... 2,075 1,098 683 277 17
-------- ------- ------- ------- --------
Total obligations.......................... $933,137 $11,524 $23,807 $13,095 $884,711
======== ======= ======= ======= ========

Other.

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

At December 31, 2001 and 2000, 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 rig upgrades 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, periodic assessments will
be made based on industry conditions. In addition, the Company may, from time to
time, issue debt or equity securities, or a combination thereof, to finance
capital expenditures, the acquisition of assets and businesses or for general
corporate purposes. The Company's ability

to effect any such issuance will be dependent on the Company's results of
operations, its current financial condition, current market conditions and other
factors beyond its control.

During the year ended December 31, 2001, the Company spent $160.4 million,
including capitalized interest expense, for rig upgrades. These expenditures
were primarily for the deepwater upgrades of the Ocean Baroness ($114.3 million)
which was completed in March 2002 and the Ocean Rover ($20.7 million) which is
expected to be completed in 2003. Also included in this amount was $12.6 million
for accommodation and stability enhancement upgrades of the Ocean Nomad which
were completed in April 2001. In addition, the pre-fabrication of equipment
required for the upgrade of six of the Company's jack-up rigs accounted for $7.2
million of 2001 rig upgrade expenditures. The Company expects to spend
approximately $275 million for rig upgrade capital expenditures during 2002
which are primarily costs associated with upgrades of the Ocean Rover and six
jack-up rigs. Approximately $34 million of this amount is expected to be used
for the completion of the Ocean Baroness upgrade.

The significant upgrade of the Company's semisubmersible rig, the Ocean
Baroness, to high specification capabilities has resulted in an enhanced version
of the Company's previous Victory-class upgrades. The upgrade included the
following enhancements: capability for operation in 7,000-foot water depths on a
stand alone basis; approximately 5,590 metric tons variable deckload; a 15,000
psi blow-out prevention system; 3,600-kips riser tensioning and riser with a
multiplex control system. Additional features including a high capacity deck
crane, significantly enlarged cellar deck area and a 25- by 91-foot moon pool
will provide enhanced subsea completion and development capabilities. The
Company took delivery of the rig in January 2002. In March 2002 the rig began
mobilizing to a location offshore Southeast Asia to begin its current contract.
The approximate cost of the upgrade was $170 million.

The Ocean Rover, one of the Company's Victory-class semisubmersibles,
arrived at a shipyard in Singapore for a major upgrade in mid-January 2002. The
rig will be upgraded to water depths and specifications similar to the enhanced
Ocean Baroness for an estimated cost of approximately $200 million with
approximately $140 million to be spent in 2002. The upgrade is expected to take
approximately 19 months to complete with delivery estimated to occur in the
third quarter of 2003.

The Company also expects to spend approximately $93 million ($7.2 million
spent in 2001) to significantly upgrade 6 of its 14 jack-up rigs over the next 2
years to expand the shallow water fleet's capabilities. The Ocean Titan and the
Ocean Tower, both 350 feet water depth capable independent-leg slot rigs, are
scheduled to have cantilever packages installed. The cantilever systems enable a
rig to cantilever or extend its drilling package over the aft end of the rig.
This is particularly important when attempting to drill over existing platforms.
Cantilever rigs have historically enjoyed greater dayrates and utilization as
compared to slot rigs. The Ocean Spartan, Ocean Spur, Ocean Sovereign and the
Ocean Heritage, all 250-foot water depth capable independent-leg cantilever
rigs, are scheduled to have leg extensions installed enabling these rigs to work
in water depths up to 300 feet. The equipment necessary for these upgrades is
being pre-fabricated and installation is planned to occur as idle time or
scheduled surveys arise to minimize downtime. The Company expects to finance
these upgrades through the use of existing cash balances or internally generated
funds.

During the year ended December 31, 2001, the Company spent $108.2 million
in association with its ongoing rig equipment replacement and enhancement
programs and to meet other corporate requirements. These expenditures included
purchases of drill pipe, anchor chain, riser and other drilling equipment. The
Company has budgeted $107.1 million for 2002 capital expenditures associated
with its ongoing rig equipment replacement and enhancement programs and other
corporate requirements.

The Company continues to consider transactions, which include, but are not
limited to, the purchase of existing rigs, construction of new rigs and the
acquisition of other companies engaged in contract drilling or related
businesses. Certain of these potential transactions reviewed by the Company
would, if completed, result in its entering new lines of business. In general,
however, these opportunities have been related in some manner to the Company's
existing operations. Although the Company does not, as of the date hereof, have
any commitment with respect to a material acquisition, it could enter into such
an agreement in the future and such acquisition could result in a material
expansion of its existing operations or result in its entering a new
25

line of business. Some of the potential acquisitions considered by the Company
could, if completed, result in the expenditure of a material amount of funds or
the issuance of a material amount of debt or equity securities.

INTEGRATED SERVICES

The Company's wholly owned subsidiary, DOTS, from time to time, selectively
engages in drilling services pursuant to turnkey or modified-turnkey contracts
under which DOTS agrees to drill a well to a specified depth for a fixed price.
In such cases, DOTS generally is not entitled to payment unless the well is
drilled to the specified depth and 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 2001, DOTS contributed operating
income of $0.6 million to the Company's consolidated results of operations
primarily from the completion of one international turnkey project, which began
in the last quarter of 2000, and three turnkey permanent plug and abandonment
projects in the Gulf of Mexico. During 2000, DOTS contributed operating income
of $1.0 million to the Company's consolidated results of operations primarily
from the completion of four turnkey projects in the Gulf of Mexico, one
international turnkey project and integrated services provided in Aberdeen,
Scotland.

OTHER

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

Currency translation adjustments are accumulated in a separate section of
stockholders' equity. When the Company ceases its operations in a currency
environment, the accumulated adjustments are recognized currently in results of
operations. The effect on results of operations from these translation gains and
losses has not been material and they are not expected to have a significant
effect in the future.

Forward Exchange Contracts. In some instances, a foreign exchange forward
contract is 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. On
July 27, 2001, the Company entered into 12 forward contracts to purchase 3.5
million Australian dollars each month end through July 31, 2002. A pre-tax gain
of $0.4 million related to the forward contracts (a $0.3 million realized gain
and a $0.1 million unrealized gain) was recorded in the Consolidated Statement
of Income for the year ended December 31, 2001 in "Other income (expense)."

ACCOUNTING STANDARDS

In October 2001 the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 replaces SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" and provides updated guidance concerning the
recognition and

measurement of an impairment loss for certain types of long-lived assets. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001 with
earlier application encouraged. The adoption of SFAS No. 144 in January 2002 by
the Company has not had nor is it expected to have a material impact on the
Company's consolidated results of operation, financial position or cash flow.

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.
Adoption of SFAS No. 143 in 2003 is not expected to have a material impact on
the Company's consolidated results of operation, financial position or cash
flow.

In June 2001 the FASB issued two new pronouncements, SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
by the purchase method and applies to all business combinations initiated after
June 30, 2001 and also applies to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001 or later.
There are also transition provisions that apply to business combinations
completed before July 1, 2001, that were accounted for by the purchase method.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 for
all goodwill and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were initially
recognized. The Company adopted SFAS No. 142 on January 1, 2002 and has
suspended amortization of goodwill which was $3.3 million, $4.5 million and $5.3
million for the years ended December 31, 2001, 2000 and 1999, respectively. SFAS
No. 142 does not change the SFAS No. 109 "Accounting for Income Taxes"
requirement to reduce goodwill for the excess of tax benefits not previously
recognized. See Note 6 to the Company's Consolidated Financial Statements in
Item 8 of Part II of this report. The adoption of SFAS No. 142 has not had, nor
is it expected to have, a material impact on the Company's consolidated results
of operation, financial position or cash flow.

FORWARD-LOOKING STATEMENTS

Certain written and oral statements made or incorporated by reference from
time to time by the Company or its representatives are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, events, performance or achievements,
and may contain the words "expect," "intend," "plan," "anticipate," "estimate,"
"believe," "will be," "will continue," "will likely result," "project," and
similar expressions. Statements by the Company in this report that contain
forward-looking statements include, but are not limited to, discussions
regarding future market conditions and the effect of such conditions on the
Company's future results of operations (see "-- Outlook"), future uses of and
requirements for financial resources, including, but not limited to,
expenditures related to the deepwater upgrades of the Ocean Baroness and the
Ocean Rover (see "-- Liquidity" and "-- Capital Resources") and interest rate
and foreign exchange risk (see "Quantitative and Qualitative Disclosures About
Market Risk"). Such statements inherently are subject to a variety of risks and
uncertainties that could cause actual results to differ materially from those
projected. Such risks and uncertainties include, among others, general economic
and business conditions, casualty losses, industry fleet capacity, changes in
foreign and domestic oil and gas exploration and production activity,
competition, changes in foreign, political, social and economic conditions, war
risk, regulatory initiatives and compliance with governmental regulations,
customer preferences and various other matters, many of which are beyond the
Company's control. The risks included here are not exhaustive. Other sections of
this report and the Company's other filings with the Securities and Exchange
Commission include additional factors that could adversely impact the Company's
business and financial performance. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements. The
Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statement to reflect any change
in the Company's expectations with regard thereto or any change in events,
conditions or circumstances on which any forward-looking statement is based.

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

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

INTEREST RATE RISK

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

At December 31, 2001, the fair value of the Company's 1.5% Debentures,
based on quoted market prices, was approximately $421.3 million, compared to a
carrying amount of $460.0 million. At December 31, 2001, the contingent interest
component of the Company's 1.5% Debentures was carried at its fair value of
zero.

At December 31, 2001, the fair value of the Company's Zero Coupon
Debentures, based on quoted market prices, was approximately $408.9 million,
compared to a carrying amount of $424.7 million.

At December 31, 2001, the fair value of the Company's Ocean Alliance
lease-leaseback agreement, based on the present value of estimated future cash
flows using a discount rate of 7.59%, was approximately $45.9 million, compared
to a carrying amount of $46.4 million.

At December 31, 2001, the fair market value of the Company's investment in
debt securities issued by the U.S. Treasury and other U.S. government
corporations and agencies, excluding TIP's and CMO's, was approximately $250.1
million, which includes an unrealized holding gain of $2.7 million. The
securities bear interest at rates ranging from 3.0% to 6.3%. These securities
are U.S. government-backed, generally short-term and readily marketable.

The fair market value of the Company's investment in TIP's, based on quoted
market prices, at December 31, 2001 was approximately $55.4 million, which
includes an unrealized holding gain of $1.1 million. These securities bear
interest at 3.6% and have an inflation-adjusted principal. The amount of each
semiannual interest payment is based on the securities' inflation-adjusted
principal amount on an interest payment date and, at maturity, the securities
will be redeemed at the greater of their inflation-adjusted principal or par
amount at original issue. The TIP's are short-term and readily marketable.

The fair market value of the Company's investment in CMO's, based on quoted
market prices at December 31, 2001 was approximately $442.8 million, which
includes an unrealized holding gain of $0.3 million. The CMO's are also
short-term and readily marketable with an implied AAA rating backed by U.S.
government guaranteed mortgages.

FOREIGN EXCHANGE RISK

As of December 31, 2001, the Company had contracted to purchase 3.5 million
Australian dollars each month through July 31, 2002. These foreign exchange
forward contracts are recorded at their fair value determined by discounting
future cash flows at current forward rates. At December 31, 2001, an asset of
$0.1 million, reflecting the fair value of the forward contracts, was included
with "Prepaid expenses and other" in the Consolidated Balance Sheet. The
associated unrealized gain of $0.1 million was included in "Other income
(expense)" in the Consolidated Statement of Income for the year ended December
31, 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheets of Diamond
Offshore Drilling, Inc. and subsidiaries (the "Company") as of December 31, 2001
and 2000, and the related consolidated statements of income, stockholders'
equity, comprehensive income and cash flows for each of the three years in the
period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Diamond Offshore Drilling, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.

Deloitte & Touche LLP
Houston, Texas
January 22, 2002
(February 14, 2002 as to the settlement
of put options described in Note 1)

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

ASSETS

DECEMBER 31,
-----------------------
2001 2000
---------- ----------

Current assets:
Cash and cash equivalents................................. $ 398,990 $ 144,456
Marketable securities..................................... 748,387 717,678
Accounts receivable....................................... 193,653 153,452
Rig inventory and supplies................................ 40,814 40,698
Prepaid expenses and other................................ 45,571 15,906
---------- ----------
Total current assets.............................. 1,427,415 1,072,190
Drilling and other property and equipment, net of
accumulated depreciation.................................. 2,002,873 1,931,182
Goodwill, net of accumulated amortization................... 38,329 55,205
Other assets................................................ 33,900 20,929
---------- ----------
Total assets...................................... $3,502,517 $3,079,506
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Current portion of long-term debt......................... $ 10,426 $ 9,732
Accounts payable.......................................... 31,924 39,795
Accrued liabilities....................................... 87,742 73,149
Taxes payable............................................. 5,862 337
Securities sold under repurchase agreements............... 199,062 --
---------- ----------
Total current liabilities......................... 335,016 123,013
Long-term debt.............................................. 920,636 856,559
Deferred tax liability...................................... 376,095 316,627
Other liabilities........................................... 17,624 15,454
---------- ----------
Total liabilities................................. 1,649,371 1,311,653
---------- ----------
Commitments and contingencies
Stockholders' equity:
Preferred stock (par value $0.01, 25,000,000 shares
authorized, none issued and outstanding)............... -- --
Common stock (par value $0.01, 500,000,000 shares
authorized, 133,457,055 shares issued and 132,053,155
shares outstanding at December 31, 2001 and 133,150,477
shares issued and outstanding at December 31, 2000).... 1,335 1,332
Additional paid-in capital................................ 1,267,952 1,248,665
Retained earnings......................................... 624,507 517,186
Accumulated other comprehensive gains (losses)............ (2,880) 670
Treasury stock, at cost (1,403,900 shares)................ (37,768) --
---------- ----------
Total stockholders' equity........................ 1,853,146 1,767,853
---------- ----------
Total liabilities and stockholders' equity........ $3,502,517 $3,079,506
========== ==========

The accompanying notes are an integral part of the consolidated financial
statements.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------

Revenues.................................................... $885,349 $659,436 $821,024
Operating expenses:
Contract drilling......................................... 464,964 433,091 431,523
Depreciation and amortization............................. 170,017 145,596 142,963
General and administrative................................ 25,502 23,803 22,877
-------- -------- --------
Total operating expenses.......................... 660,483 602,490 597,363
-------- -------- --------
Operating income............................................ 224,866 56,946 223,661
Other income (expense):
Gain on sale of assets.................................... 327 14,324 231
Interest income........................................... 48,682 49,525 34,985
Interest expense.......................................... (26,205) (10,272) (9,212)
Other, net................................................ 24,695 344 (9,302)
-------- -------- --------
Income before income tax expense and extraordinary loss..... 272,365 110,867 240,363
Income tax expense.......................................... (90,820) (38,586) (84,292)
-------- -------- --------
Income before extraordinary loss............................ 181,545 72,281 156,071
Extraordinary loss from early debt extinguishment, net of
income tax benefit of $4,158.............................. (7,722) -- --
-------- -------- --------
Net income.................................................. $173,823 $ 72,281 $156,071
======== ======== ========
Earnings per share:
Basic
Income before extraordinary loss....................... $ 1.37 $ 0.53 $ 1.15
Extraordinary loss..................................... (0.06) -- --
-------- -------- --------
Net............................................... $ 1.31 $ 0.53 $ 1.15
======== ======== ========
Diluted
Income before extraordinary loss....................... $ 1.31 $ 0.53 $ 1.11
Extraordinary loss..................................... (0.05) -- --
-------- -------- --------
Net............................................... $ 1.26 $ 0.53 $ 1.11
======== ======== ========
Weighted average shares outstanding:
Shares of common stock.................................... 132,886 135,164 135,822
Dilutive potential shares of common stock................. 16,408 9,876 9,876
-------- -------- --------
Total weighted average shares outstanding......... 149,294 145,040 145,698
======== ======== ========

The accompanying notes are an integral part of the consolidated financial
statements.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TREASURY STOCK TOTAL
-------------------- PAID-IN RETAINED GAINS --------------------- STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS (LOSSES) SHARES AMOUNT EQUITY
----------- ------ ---------- -------- ------------- ---------- -------- -------------

January 1, 1999........... 139,333,635 $1,393 $1,302,806 $547,783 $(7,998) 3,518,100 $(88,726) $1,755,258
Net income................ -- -- -- 156,071 -- -- -- 156,071
Dividends to
stockholders............ -- -- -- (67,911) -- -- -- (67,911)
Stock options exercised... 8,746 -- 35 -- -- -- -- 35
Exchange rate changes,
net..................... -- -- -- -- (983) -- -- (983)
Loss on investments,
net..................... -- -- -- -- (248) -- -- (248)
----------- ------ ---------- -------- ------- ---------- -------- ----------
December 31, 1999......... 139,342,381 1,393 1,302,841 635,943 (9,229) 3,518,100 (88,726) 1,842,222
----------- ------ ---------- -------- ------- ---------- -------- ----------
Net income................ -- -- -- 72,281 -- -- -- 72,281
Treasury stock
Purchase................ -- -- -- -- -- 2,705,100 (92,959) (92,959)
Retirement.............. (6,223,200) (62) (58,193) (123,430) -- (6,223,200) 181,685 --
Dividends to
stockholders............ -- -- -- (67,608) -- -- -- (67,608)
Stock options exercised... 30,803 1 122 -- -- -- -- 123
Put option premiums....... -- -- 3,875 -- -- -- -- 3,875
Conversion of long-term
debt.................... 493 -- 20 -- -- -- -- 20
Exchange rate changes,
net..................... -- -- -- -- 506 -- -- 506
Gain on investments,
net..................... -- -- -- -- 9,393 -- -- 9,393
----------- ------ ---------- -------- ------- ---------- -------- ----------
December 31, 2000......... 133,150,477 1,332 1,248,665 517,186 670 -- -- 1,767,853
----------- ------ ---------- -------- ------- ---------- -------- ----------
Net income................ -- -- -- 173,823 -- -- -- 173,823
Treasury stock purchase... -- -- -- -- -- 1,403,900 (37,768) (37,768)
Dividends to
stockholders............ -- -- -- (66,502) -- -- -- (66,502)
Put option premiums....... -- -- 6,876 -- -- -- -- 6,876
Conversion of long-term
debt.................... 306,578 3 12,411 -- -- -- -- 12,414
Exchange rate changes,
net..................... -- -- -- -- (170) -- -- (170)
Loss on investments,
net..................... -- -- -- -- (620) -- -- (620)
Minimum pension
adjustment.............. -- -- -- -- (2,760) -- -- (2,760)
----------- ------ ---------- -------- ------- ---------- -------- ----------
December 31, 2001......... 133,457,055 $1,335 $1,267,952 $624,507 $(2,880) 1,403,900 $(37,768) $1,853,146
=========== ====== ========== ======== ======= ========== ======== ==========

The accompanying notes are an integral part of the consolidated financial
statements.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
-----------------------------
2001 2000 1999
-------- ------- --------

Net income.................................................. $173,823 $72,281 $156,071
Other comprehensive gains (losses), net of tax:
Foreign currency translation (loss) gain.................. (170) 506 (983)
Unrealized holding gain (loss) on investments............. 2,501 3,259 (5,903)
Reclassification adjustment for (gain) loss included in
net income........................................... (3,121) 6,134 5,655
Minimum pension liability adjustment...................... (2,760) -- --
-------- ------- --------
Total other comprehensive (loss) gain............. (3,550) 9,899 (1,231)
-------- ------- --------
Comprehensive income........................................ $170,273 $82,180 $154,840
======== ======= ========

The accompanying notes are an integral part of the consolidated financial
statements.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

YEAR ENDED DECEMBER 31,
--------------------------------
2001 2000 1999
--------- --------- --------

Operating activities:
Net income............................................... $ 173,823 $ 72,281 $156,071
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization......................... 170,017 145,596 142,963
Gain on sale of assets................................ (327) (14,324) (231)
(Gain) loss on sale of marketable securities.......... (27,141) (2,103) 522
Extraordinary loss from early debt extinguishment, net
of tax.............................................. 7,722 -- --
Impairment write-down of marketable securities........ -- -- 10,671
Deferred tax provision................................ 74,264 26,155 38,529
Accretion of discount on marketable securities........ (2,369) (7,535) (9,316)
Amortization of debt issuance costs................... 1,482 864 541
Amortization of discount on zero coupon convertible
debentures.......................................... 14,481 8,033 --
Changes in operating assets and liabilities:
Accounts receivable................................... (40,201) (9,883) 90,279
Rig inventory and supplies and other current assets... 3 (9,190) (7,527)
Other assets, non-current............................. (11,178) (604) (2,639)
Accounts payable and accrued liabilities.............. 6,762 (4,592) (30,540)
Taxes payable......................................... 9,443 (12,658) 11,193
Other liabilities, non-current........................ 1,426 3,261 (881)
Other, net............................................ (4,176) 1,234 (1,513)
--------- --------- --------
Net cash provided by operating activities........ 374,031 196,535 398,122
--------- --------- --------
Investing activities:
Capital expenditures.................................. (268,617) (323,924) (324,133)
Proceeds from sale of assets.......................... 1,726 33,279 662
Net change in marketable securities................... 1,753 (164,548) 4,343
Securities sold under repurchase agreements........... 199,062 -- --
Proceeds from settlement of forward contracts......... 226 -- --
--------- --------- --------
Net cash used in investing activities............ (65,850) (455,193) (319,128)
--------- --------- --------
Financing activities:
Acquisition of treasury stock......................... (37,768) (92,959) --
Proceeds from sale of put options..................... 6,876 3,875 --
Payment of dividends.................................. (66,502) (67,608) (67,911)
Proceeds from stock options exercised................. -- 123 35
Issuance of zero coupon convertible debentures........ -- 402,178 --
Debt issuance costs-zero coupon convertible
debentures.......................................... -- (9,556) --
Lease-leaseback agreement............................. (9,732) 55,000 --
Arrangement fees-lease-leaseback agreement............ -- (255) --
Early extinguishment of debt -- 3.75% convertible
subordinated notes.................................. (395,622) -- --
Issuance of 1.5% convertible senior debentures........ 460,000 -- --
Debt issuance costs -- 1.5% convertible senior
debentures.......................................... (10,899) -- --
--------- --------- --------
Net cash provided by (used in) financing
activities..................................... (53,647) 290,798 (67,876)
--------- --------- --------
Net change in cash and cash equivalents.................... 254,534 32,140 11,118
Cash and cash equivalents, beginning of year.......... 144,456 112,316 101,198
--------- --------- --------
Cash and cash equivalents, end of year................ $ 398,990 $ 144,456 $112,316
========= ========= ========

The accompanying notes are an integral part of the consolidated financial
statements.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business

Diamond Offshore Drilling, Inc. (the "Company") was incorporated in
Delaware on April 13, 1989. Loews Corporation ("Loews"), a Delaware corporation
of which the Company had been a wholly owned subsidiary prior to the initial
public offering in October 1995 (the "Common Stock Offering"), owns 53.1% of the
outstanding common stock of the Company.

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

Principles of Consolidation

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

Cash and Cash Equivalents and Marketable Securities

Short-term, highly liquid investments that have an original maturity of
three months or less and deposits in money market mutual funds that are readily
convertible into cash are considered cash equivalents. Cash at December 31, 2001
includes $199.1 million of collateral received in connection with securities
sold under repurchase agreements. See "Securities Sold Under Agreements to
Repurchase."

The Company's investments are classified as available for sale and stated
at fair value. Accordingly, any unrealized gains and losses, net of taxes, are
reported in the Consolidated Balance Sheets in "Accumulated other comprehensive
income" until realized. The cost of debt securities is adjusted for amortization
of premiums and accretion of discounts to maturity and such adjustments are
included in the Consolidated Statements of Income in "Interest income." The sale
and purchase of securities are recorded on the date of the trade. The cost of
debt securities sold is based on the specific identification method and the cost
of equity securities sold is based on the average cost method. Realized gains or
losses and declines in value, if any, judged to be other than temporary are
reported in the Consolidated Statements of Income in "Other income (expense)."

Securities Sold Under Agreements to Repurchase

The Company accounts for repurchase agreements in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." The
Company lends securities to unrelated parties, primarily major brokerage firms.
Borrowers of these securities must deposit collateral with the Company equal to
100% of the fair value of these securities, if the collateral is cash, or 102%
of the fair value of the securities, if the collateral is securities. Cash
deposits from these transactions are invested in short-term investments and a
liability is recognized for the obligation to return the collateral. The Company
continues to receive the interest on the loaned debt securities, as beneficial
owner, and accordingly, the loaned debt securities are included in the
Consolidated Balance Sheets in "Marketable securities". The fair value of
collateral held and included with "Marketable securities" at December 31, 2001
was $198.7 million. The Company did not have any loaned debt securities at
December 31, 2000.

Derivative Financial Instruments

The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities" and its corresponding amendments under SFAS No. 138 on
January 1, 2001. 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 (the "1.5%
Debentures") issued on April 11, 2001. See Note 4.

Supplementary Cash Flow Information

Cash payments made for interest on long-term debt, including commitment
fees, were $17.1 million during the year ended December 31, 2001 and $15.0
million during each of the years ended December 31, 2000 and 1999. Cash payments
made for income taxes, net of refunds, during the years ended December 31, 2001,
2000 and 1999 were $33.1 million, $25.8 million and $35.0 million, respectively.

Rig Inventory and Supplies

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

Drilling and Other Property and Equipment

Drilling and other property and equipment is carried at cost. Maintenance
and routine repairs are charged to income currently while replacements and
betterments, which meet certain criteria, are capitalized. Costs incurred for
major rig upgrades are accumulated in construction work-in-progress, with no
depreciation recorded on the additions, until the month the upgrade is completed
and the rig is placed in service. Upon retirement or sale of a rig, the cost and
related accumulated depreciation are removed from the respective accounts and
any gains or losses are included in the results of operations. Depreciation is
provided on the straight-line method over the remaining estimated useful lives
from the year the asset is placed in service.

Capitalized Interest

The Company incurred total interest cost, including amortization of debt
issuance costs, of $28.8 million, $24.1 million and $15.5 million during the
years ended December 31, 2001, 2000 and 1999, respectively. Interest cost for
construction and upgrade of qualifying assets is capitalized. Interest cost
capitalized during the years ended December 31, 2001, 2000 and 1999 was $2.6
million, $13.8 million and $6.3 million, respectively.

Impairment of Long-Lived Assets

The Company reviews its long-lived assets for impairment when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company evaluated certain rigs in its fleet in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of," and no instance of impairment was noted.

Goodwill

Goodwill from the merger with Arethusa (Off-Shore) Limited ("Arethusa") is
amortized on a straight-line basis over 20 years. Amortization charged to
operating expense during the years ended December 31, 2001, 2000 and 1999
totaled $3.3 million, $4.5 million and $5.3 million, respectively. The Company
adopted SFAS No. 142 "Goodwill and Other Intangible Assets" on January 1, 2002
and accordingly, has suspended amortization of goodwill in 2002. See Note 6.

Debt Issuance Costs

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

Deferred Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The
36

Company's non-U.S. income tax liabilities are based upon the results of
operations of the various subsidiaries and foreign branches in those
jurisdictions in which they are subject to taxation. Beginning in 2001, the
Company decided to indefinitely reinvest a portion of the earnings of its U.K.
subsidiaries. Consequently, no U.S. deferred taxes were provided on these
earnings in 2001.

Treasury Stock

Depending on market conditions, the Company may, from time to time,
purchase shares of its common stock in the open market or otherwise. The
purchase of treasury stock is accounted for using the cost method which reports
the cost of the shares acquired in "Treasury stock" as a deduction from
stockholders' equity in the Consolidated Balance Sheets. During the year ended
December 31, 2001, the Company purchased 1.4 million shares of its common stock
at an aggregate cost of $37.8 million, or at an average cost of $26.90 per
share. During the year ended December 31, 2000, the Company purchased 2.7
million shares of its common stock at an aggregate cost of $93.0 million, or at
an average cost of $34.36 per share. Effective December 31, 2000, the Company
retired 6.2 million shares of its treasury stock at an aggregate cost of $181.7
million.

Common Equity Put Options

During the year ended December 31, 2001, the Company received premiums of
$6.9 million for the sale of put options covering 1,687,321 shares of common
stock. The options give 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 has the option to settle in cash or shares of common stock. Premiums
received for these options are recorded in "Additional paid-in capital" in the
Consolidated Balance Sheets.

Put options outstanding at December 31, 2001 are as follows:

NUMBER OF SHARES
EXPIRATION OF COMMON EXERCISE PRICE
DATE STOCK PER SHARE
---------- ----------------- --------------

2/05/02................................................ 500,000 $27.96
2/12/02................................................ 500,000 $40.00
2/19/02................................................ 250,000 $29.50
2/19/02................................................ 250,000 $28.50
3/29/02................................................ 163,721 $24.99
6/21/02................................................ 23,600 $24.46

On January 30, February 13, and February 14, 2002, the Company settled some
of its outstanding put options with cash payments of $0.4 million, $0.3 million,
and $0.5 million, respectively. These put options covered 1,000,000 shares of
the Company's common stock and were to expire on February 5, and February 19,
2002. During the first quarter of 2002 the Company will reduce "Additional
paid-in-capital" in the Consolidated Balance Sheet for amounts paid to settle
these put options. On February 12, 2002, the Company purchased 500,000 shares of
its common stock at $40.00 per share to settle put options expiring on that day.
During the first quarter of 2002 the Company will reduce "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 report the net
cost of the shares, $16.9 million, in "Treasury stock" as a deduction from
stockholder's equity in the Consolidated Balance Sheet.

Stock-Based Compensation

In 2000 the Company adopted a stock option plan "2000 Stock Option Plan"
whereby certain of the Company's employees, consultants and non-employee
directors may be granted options to purchase stock. The Company accounts for the
2000 Stock Option Plan under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and as interpreted by Financial
Accounting Standards Board Interpretation No. 44, "Accounting for Certain
Transactions involving Stock Compensation." See Note 13.

Comprehensive Income

Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances except
those transactions resulting from investments by owners and distributions to
owners. Comprehensive income includes net income, foreign currency translation
gains and losses, minimum pension liability adjustments and unrealized holding
gains and losses on marketable securities.

Currency Translation

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

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 over the term of the related drilling contract unless
there is excess mobilization cost in which case the excess cost is recognized
currently. Absent a contract, mobilization costs are also recognized currently.
Lump-sum payments received from customers relating to specific contracts are
deferred and amortized to income over the term of the drilling contract.

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

Extraordinary Loss

On April 6, 2001, the Company redeemed all of its outstanding 3.75%
convertible subordinated notes (the "3.75% Notes") at 102.08% of the principal
amount thereof plus accrued interest for a total cash payment of $397.7 million.
An extraordinary loss of $7.7 million was incurred as a result of the early
extinguishment of debt, consisting of $8.1 million of retirement premiums and
the write-off of $3.8 million of associated debt issuance costs, net of a tax
benefit of $4.2 million.

New Accounting Pronouncements

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

after June 15, 2002 with early adoption encouraged. Adoption of SFAS No. 143 in
2003 is not expected to have a material impact on the Company's consolidated
results of operation, financial position or cash flow.

In June 2001 the FASB issued two new pronouncements, SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 requires that all business combinations be accounted for
by the purchase method and applies to all business combinations initiated after
June 30, 2001 and also applies to all business combinations accounted for using
the purchase method for which the date of acquisition is July 1, 2001 or later.
There are also transition provisions that apply to business combinations
completed before July 1, 2001, that were accounted for by the purchase method.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001 for
all goodwill and other intangible assets recognized in an entity's statement of
financial position at that date, regardless of when those assets were initially
recognized. The Company adopted SFAS No. 142 on January 1, 2002 and has
suspended amortization of goodwill which was $3.3 million, $4.5 million and $5.3
million for the years ended December 31, 2001, 2000 and 1999, respectively. SFAS
No. 142 does not change the SFAS No. 109 "Accounting for Income Taxes"
requirement to reduce goodwill for the excess of tax benefits not previously
recognized. See Note 6. The adoption of SFAS No. 142 has not had, nor is it
expected to have, a material impact on the Company's consolidated results of
operation, financial position or cash flow.

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

Fair Value of Financial Instruments

The Company provides fair value information of its financial instruments in
the notes to the consolidated financial statements (see Note 11). The carrying
amount of the Company's current financial instruments approximate fair value
because of the short maturity of these instruments. For non-current financial
instruments the Company uses quoted market prices when available and discounted
cash flows to estimate fair value.

2. EARNINGS PER SHARE

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

FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Income before extraordinary loss -- basic
(numerator):....................................... $181,545 $ 72,281 $156,071
Extraordinary loss from early debt extinguishment,
net of income tax benefit of $4,158............. (7,722) -- --
Effect of dilutive potential shares
Convertible subordinated notes -- 3.75%......... 2,424 4,249 5,988
Zero coupon convertible debentures.............. 8,833 -- --
Convertible senior debentures -- 1.5%........... 3,062 -- --
-------- -------- --------
Net income including conversions -- diluted
(numerator):....................................... $188,142 $ 76,530 $162,059
======== ======== ========
Weighted average shares -- basic (denominator):...... 132,886 135,164 135,822
Effect of dilutive potential shares
Convertible subordinated notes -- 3.75%......... 2,564 9,876 9,876
Zero coupon convertible debentures.............. 6,929 -- --
Convertible senior debentures -- 1.5%........... 6,812 -- --
Stock options................................... 1 -- --
Put options..................................... 102 -- --
-------- -------- --------
Weighted average shares including
conversions -- diluted (denominator):.............. 149,294 145,040 145,698
======== ======== ========
Earnings per share:
Basic
Income before extraordinary loss................... $ 1.37 $ 0.53 $ 1.15
Extraordinary loss................................. (0.06) -- --
-------- -------- --------
Net................................................ $ 1.31 $ 0.53 $ 1.15
======== ======== ========
Diluted
Income before extraordinary loss................... $ 1.31 $ 0.53 $ 1.11
Extraordinary loss................................. (0.05) -- --
-------- -------- --------
Net................................................ $ 1.26 $ 0.53 $ 1.11
======== ======== ========

The computation of diluted earnings per share ("EPS") for the year ended
December 31, 2000 excludes approximately 6.9 million potentially dilutive shares
issuable upon conversion of the Company's zero coupon convertible debentures due
2020 (the "Zero Coupon Debentures"), issued in June 2000, because the inclusion
of such shares would be antidilutive.

Put options covering 1,687,321 shares of common stock at various stated
exercise prices per share were outstanding at December 31, 2001. However, the
computation of diluted EPS for the year ended December 31, 2001 excluded put
options covering 187,321 shares of common stock because the options' exercise
prices were less than the average market price per share of the common stock.

Put options covering 750,000 shares of common stock at an exercise price of
$37.85 per share were outstanding at December 31, 2000, but were not included in
the computation of diluted EPS for the year ended December 31, 2000 because the
options' exercise price was less than the average market price per share of the
common stock. There were no put options sold or outstanding during the year
ended December 31, 1999.

The incremental shares calculated from non-qualified stock options, granted
in accordance with the 2000 Stock Option Plan approved in May 2000, that were
included in the computation of diluted EPS for the year

ended December 31, 2001 did not include 182,700 stock options because the
options' exercise prices were more than the average market price per share of
the common stock.

The incremental shares calculated from non-qualified stock options included
in the computation of diluted EPS for the year ended December 31, 2000, were
immaterial for presentation purposes and did not include 86,500 stock options
because the options' exercise prices were more than the average market price per
share of the common stock.

3. MARKETABLE SECURITIES

Investments classified as available for sale are summarized as follows:

DECEMBER 31, 2001
--------------------------------
UNREALIZED MARKET
COST GAIN VALUE
-------- ---------- --------
(IN THOUSANDS)

Debt securities issued by the U.S. Treasury and other
U.S. government agencies:
Due after one year through five years.............. $247,453 $2,689 $250,142
Due after five years through ten years............. 54,355 1,095 55,450
Collateralized mortgage obligations.................. 442,518 277 442,795
-------- ------ --------
Total...................................... $744,326 $4,061 $748,387
======== ====== ========

DECEMBER 31, 2000
--------------------------------
UNREALIZED MARKET
COST GAIN VALUE
-------- ---------- --------
(IN THOUSANDS)

Debt securities issued by the U.S. Treasury and other
U.S. government agencies:
Due within one year................................ $149,005 $ 60 $149,065
Due after five years through ten years............. 265,981 1,045 267,026
Collateralized mortgage obligations.................. 297,446 3,757 301,203
Equity securities.................................... 231 153 384
-------- ------ --------
Total...................................... $712,663 $5,015 $717,678
======== ====== ========

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:

YEAR ENDED DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)

Proceeds from sales......................................... $2,468,971 $1,345,183
Gross realized gains........................................ 38,584 2,590
Gross realized losses....................................... (11,443) (487)

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, a foreign
exchange forward contract is 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.

On July 27, 2001, the Company entered into 12 forward contracts to purchase
3.5 million Australian dollars each month end through July 31, 2002. These
forward contracts are derivatives as defined by SFAS No. 133. SFAS No. 133
requires that each derivative be stated in the balance sheet at its fair value
with gains and losses reflected in the income statement except that, to the
extent the derivative qualifies for hedge accounting, the gains and losses are
reflected in income in the same period as offsetting losses and gains on the
qualifying hedged positions. SFAS No. 133 further provides specific criteria
necessary for a derivative to qualify for hedge accounting. The forward
contracts purchased by the Company on July 27, 2001, do not qualify for hedge
accounting. A pre-tax gain of $0.4 million related to the forward contracts (a
$0.3 million realized gain and a $0.1 million unrealized gain) was recorded in
the Consolidated Statement of Income for the year ended December 31, 2001 in
"Other income (expense)."

Contingent Interest

On April 11, 2001, the Company issued 1.5% Debentures in the amount of
$460.0 million which are due April 15, 2031, and contain a contingent interest
provision (see Note 8). The contingent interest component is an embedded
derivative as defined by SFAS No. 133 and accordingly must be split from the
host instrument and recorded at fair value on the balance sheet. The contingent
interest component had no value at issuance or at December 31, 2001.

5. DRILLING AND OTHER PROPERTY AND EQUIPMENT

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

DECEMBER 31,
-----------------------
2001 2000
---------- ----------
(IN THOUSANDS)

Drilling rigs and equipment................................. $2,732,333 $2,155,924
Construction work-in-progress............................... 163,308 502,921
Land and buildings.......................................... 14,629 14,224
Office equipment and other.................................. 19,731 18,480
---------- ----------
Cost...................................................... 2,930,001 2,691,549
Less accumulated depreciation............................... (927,128) (760,367)
---------- ----------
Drilling and other property and equipment, net............ $2,002,873 $1,931,182
========== ==========

Construction work-in-progress at December 31, 2001, included approximately
$157.0 million primarily for the significant upgrades of the Ocean Baroness and
Ocean Rover to high specification capabilities.

In January 2001 approximately $448.2 million was reclassified from
construction work-in-progress to drilling rigs and equipment upon completion of
the conversion of the Ocean Confidence from an accommodation vessel to a high
specification semisubmersible drilling unit. The customer accepted the rig on
January 5, 2001, at which time it began a five-year drilling program in the Gulf
of Mexico.

In January 2000 the Company sold a jack-up drilling rig, the Ocean Scotian,
for $32.0 million in cash resulting in a gain of $13.9 million ($9.0 million
after-tax). The rig had been cold stacked offshore The Netherlands prior to the
sale.

6. GOODWILL

The merger with Arethusa in 1996 generated an excess of the purchase price
over the estimated fair value of the net assets acquired. Cost and accumulated
amortization of such goodwill is summarized as follows:

DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

Goodwill.................................................... $ 69,008 $ 82,628
Less: accumulated amortization.............................. (30,679) (27,423)
-------- --------
Total............................................. $ 38,329 $ 55,205
======== ========

During the years ended December 31, 2001 and 2000, adjustments of $13.6
million and $13.5 million, respectively, were recorded to reduce goodwill before
accumulated amortization. The adjustments represent tax benefits not previously
recognized for the excess of tax deductible goodwill over the book goodwill
amount. The Company will continue to reduce goodwill in future periods as the
tax benefits of excess tax goodwill over book goodwill is recognized. Goodwill
is expected to be reduced to zero during the year 2004.

7. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

DECEMBER 31,
-----------------
2001 2000
------- -------
(IN THOUSANDS)

Personal injury and other claims............................ $25,471 $21,565
Payroll and benefits........................................ 25,880 22,688
Interest payable............................................ 1,645 5,870
Reserve for class action litigation......................... 9,699 --
Other....................................................... 25,047 23,026
------- -------
Total............................................. $87,742 $73,149
======= =======

8. LONG-TERM DEBT

Long-term debt consists of the following:

DECEMBER 31,
-------------------
2001 2000
-------- --------
(IN THOUSANDS)

Convertible subordinated notes-3.75%........................ $ -- $399,980
Zero coupon convertible debentures.......................... 424,694 410,211
Convertible senior debentures-1.5%.......................... 460,000 --
Ocean Alliance lease-leaseback agreement.................... 46,368 56,100
-------- --------
931,062 866,291
Less: Current maturities.................................... (10,426) (9,732)
-------- --------
Total............................................. $920,636 $856,559
======== ========

The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 2001, are as follows:

(DOLLARS IN
THOUSANDS)
-----------

2002........................................................ $ 10,426
2003........................................................ 11,155
2004........................................................ 11,969
2005........................................................ 12,818
2006........................................................ --
Thereafter.................................................. 884,694
-----------
931,062
Less: Current maturities.................................... (10,426)
-----------
Total............................................. $ 920,636
===========

Convertible Subordinated Notes

On April 6, 2001, the Company redeemed all of its outstanding 3.75% Notes
in accordance with the indenture under which the 3.75% Notes were issued. Prior
to April 6, 2001, $12.4 million principal amount of the 3.75% Notes had been
converted into 307,071 shares of the Company's common stock, par value $0.01 per
share, at the stated conversion price of $40.50 per share. The remaining $387.6
million principal amount of the 3.75% Notes was redeemed at 102.08% of the
principal amount thereof plus accrued interest for a total cash payment of
$397.7 million resulting in an after-tax charge of $7.7 million, which is
reported as an extraordinary loss in the Consolidated Statement of Income.

Convertible Senior Debentures

On April 11, 2001, the Company issued $460.0 million principal amount of
1.5% Debentures which are due April 15, 2031. The 1.5% Debentures are
convertible into shares of the Company's common stock at an initial conversion
rate of 20.3978 shares per $1,000 principal amount of the 1.5% Debentures,
subject to adjustment in certain circumstances. Upon conversion, the Company has
the right to deliver cash in lieu of shares of the Company's common stock. The
transaction resulted in net proceeds of approximately $449.1 million.

The Company will pay contingent interest to holders of the 1.5% Debentures
during any six-month period commencing after April 15, 2008 if the average
market price of a 1.5% Debenture for a measurement period preceding such
six-month period equals 120% or more of the principal amount of such 1.5%
Debenture and the Company pays a regular cash dividend during such six-month
period. The contingent interest payable per $1,000 principal amount of 1.5%
Debentures, in respect of any quarterly period, will equal 50% of regular cash
dividends paid by the Company per share on its common stock during that
quarterly period multiplied by the conversion rate. This contingent interest
component is an embedded derivative, which had no fair value at issuance or on
December 31, 2001.

Holders may require the Company to purchase all or a portion of their 1.5%
Debentures on April 15, 2008, at a price equal to 100% of the principal amount
of the 1.5% Debentures to be purchased plus accrued and unpaid interest. The
Company may choose to pay the purchase price in cash or shares of the Company's
common stock or a combination of cash and common stock. In addition, holders may
require the Company to purchase, for cash, all or a portion of their 1.5%
Debentures upon a change in control (as defined).

The Company may redeem all or a portion of the 1.5% Debentures at any time
on or after April 15, 2008, at a price equal to 100% of the principal amount
plus accrued and unpaid interest.

Zero Coupon Convertible Debentures

On June 6, 2000, the Company issued Zero Coupon Debentures at a price of
$499.60 per $1,000 debenture, which represents a yield to maturity of 3.50% per
year. The Company will not pay interest prior to maturity unless it elects to
convert the Zero Coupon Debentures to interest-bearing debentures upon the
occurrence of certain tax events. The Zero Coupon Debentures are convertible at
the option of the holder at any time prior to maturity, unless previously
redeemed, into the Company's common stock at a fixed conversion rate of 8.6075
shares of common stock per Zero Coupon Debenture, subject to adjustments in
certain events. The Zero Coupon Debentures are senior unsecured obligations of
the Company.

The Company has the right to redeem the Zero Coupon Debentures, in whole or
in part, after June 6, 2005, for a price equal to the issuance price plus
accrued original issue discount through the date of redemption. Holders have the
right to require the Company to repurchase the Zero Coupon Debentures on the
fifth, tenth and fifteenth anniversaries of issuance at the accreted value
through the date of repurchase. The Company may pay such repurchase price with
either cash or shares of the Company's common stock or a combination of cash and
shares of common stock.

Ocean Alliance Lease-Leaseback

In December 2000 the Company entered into a lease-leaseback agreement with
a European bank. The lease-leaseback agreement provides for the Company to lease
the Ocean Alliance, one of the Company's high specification semisubmersible
drilling rigs, to the bank for a lump-sum payment of $55.0 million plus an
origination fee of $1.1 million and for the bank to then sub-lease the rig back
to the Company. Under the Agreement, which had a five-year term, the Company is
to make five annual payments of $13.7 million. The first annual payment was made
in December 2001. This financing arrangement has an effective interest rate of
7.13% and is an unsecured subordinated obligation of the Company.

Credit Agreement

The Company's $20.0 million short-term revolving credit agreement with a
U.S. bank expired in April 2001. The credit agreement provided for borrowings at
various interest rates and varying commitment fees dependent upon public credit
ratings. The credit agreement contained certain financial and other covenants
and provisions that had to be maintained by the Company for compliance. As of
March 31, 2001, there were no outstanding borrowings under this credit agreement
and the Company was in compliance with each of the covenants and provisions.

9. COMPREHENSIVE INCOME

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

YEAR ENDED DECEMBER 31, 2001
------------------------------------
BEFORE TAX TAX EFFECT NET-OF-TAX
---------- ---------- ----------
(IN THOUSANDS)

Foreign currency translation (loss) gain............. $ (262) $ 92 $ (170)
Minimum pension liability adjustment................. (4,246) 1,486 (2,760)
Unrealized gain (loss) on investments:
Gain (loss) arising during 2001.................... 3,848 (1,347) 2,501
Reclassification adjustment........................ (4,802) 1,681 (3,121)
------- ------- -------
Net unrealized (loss) gain......................... (954) 334 (620)
------- ------- -------
Other comprehensive (loss) income.................... $(5,462) $ 1,912 $(3,550)
======= ======= =======

YEAR ENDED DECEMBER 31, 2000
------------------------------------
BEFORE TAX TAX EFFECT NET-OF-TAX
---------- ---------- ----------
(IN THOUSANDS)

Foreign currency translation gain (loss)............. $ 778 $ (272) $ 506
Unrealized gain (loss) on investments:
Gain (loss) arising during 2000.................... 5,014 (1,755) 3,259
Reclassification adjustment........................ 9,437 (3,303) 6,134
------- ------- ------
Net unrealized gain (loss)......................... 14,451 (5,058) 9,393
------- ------- ------
Other comprehensive income (loss).................... $15,229 $(5,330) $9,899
======= ======= ======

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

Foreign currency translation (loss) gain............. $(1,512) $ 529 $ (983)
Unrealized gain (loss) on investments:
(Loss) gain arising during 1999.................... (9,081) 3,178 (5,903)
Reclassification adjustment........................ 8,700 (3,045) 5,655
------- ------- -------
Net unrealized (loss) gain......................... (381) 133 (248)
------- ------- -------
Other comprehensive (loss) income.................... $(1,893) $ 662 $(1,231)
======= ======= =======

10. COMMITMENTS AND CONTINGENCIES

The Company leases office facilities under operating leases, which expire
through the year 2007. Total rent expense amounted to $1.0 million, $1.2 million
and $1.4 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Minimum future rental payments under leases are approximately $1.1
million, $0.5 million, $0.2 million, $0.1 million, $0.1 million and $17,000 for
the years 2002 to 2007, respectively. There are no minimum future rental
payments under leases after the year 2007.

The Company is contingently liable as of December 31, 2001 in the amount of
$15.7 million under certain performance, bid, customs and export bonds. On the
Company's behalf, banks have issued letters of credit securing certain of these
bonds.

trade groups, shared information in violation of the Sherman Antitrust Act and
various state laws. Plaintiff Thomas Bryant has replaced the named plaintiff as
the proposed class representative. The lawsuit is seeking money damages and
injunctive relief as well as attorney's fees and costs. During the first quarter
of 2001, the Company recorded a $10.0 million reserve for this pending
litigation in the Company's Consolidated Statement of Income. In July 2001 the
Company filed a stipulation of settlement with the District Court in which it
agreed to settle the plaintiffs' outstanding claims within the limits of the
reserve. In December 2001 the United States District Judge for the Southern
District of Texas, Houston Division, entered an order preliminarily approving
the proposed class action settlement, preliminarily certifying the settlement
class, and setting a fairness hearing for April 18, 2002 to determine whether to
give the settlement final approval. A court appointed settlement administrator
will provide notice of the proposed class action settlement.

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

11. FINANCIAL INSTRUMENTS

Concentrations of Credit and Market Risk

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

Concentrations of credit risk with respect to trade accounts receivable are
limited primarily due to the entities comprising the Company's customer base.
Since the market for the Company's services is the offshore oil and gas
industry, this customer base consists primarily of major oil companies and
independent oil and gas producers. The Company provides allowances for potential
credit losses when necessary. No such allowances were deemed necessary for the
years presented and, historically, the Company has not experienced significant
losses on trade receivables. The Company's investments in debt securities, which
are primarily U.S. government securities, do not impose a significant market
risk on the Company as they are generally short-term with ready marketability.
TIP's are not considered high-risk investments. While the amount of each
semiannual interest payment is based on the security's inflation-adjusted
principal amount on an interest payment date, if at maturity the
inflation-adjusted principal is less than the security's par amount, the U.S.
government pays an additional amount so that the inflation-adjusted principal
equals the par amount. Investments in CMO's are not considered high-risk as they
are also short-term and readily marketable with an implied AAA rating backed by
U.S. government guaranteed mortgages.

Fair Values

The amounts reported in the Consolidated Balance Sheets for cash and cash
equivalents, marketable securities, accounts receivable, and accounts payable
approximate fair value. Fair values and related carrying values of the Company's
debt instruments are shown below:

YEAR ENDED DECEMBER 31,
---------------------------------------------------------
2001 2000
--------------------------- ---------------------------
FAIR VALUE CARRYING VALUE FAIR VALUE CARRYING VALUE
---------- -------------- ---------- --------------
(IN MILLIONS)

Zero Coupon Debentures............... $408.9 $424.7 $406.2 $410.2
1.5% Debentures...................... $421.3 $460.0 -- --
3.75% Notes.......................... -- -- $440.2 $440.0
Ocean Alliance Lease-leaseback....... $ 45.9 $ 46.4 $ 54.3 $ 56.1

The estimated fair value amounts have been determined by the Company using
appropriate valuation methodologies and information available to management as
of December 31, 2001 and 2000. Considerable judgment is required in developing
these estimates, and accordingly, no assurance can be given that the estimated
values are indicative of the amounts that would be realized in a free market
exchange. The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it was practicable to
estimate that value:

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

Marketable securities -- The fair values of the debt and equity
securities, including TIP's and CMO's, available for sale were based on
quoted market prices as of December 31, 2001 and 2000.

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

Long-term debt -- The fair value of the Zero Coupon Debentures, the
1.5% Debentures and the 3.75% Notes was based on the quoted market price
from brokers of these instruments. The fair value of the Ocean Alliance
lease-leaseback agreement was based on the present value of estimated
future cash flows using a discount rate of 7.59%.

12. RELATED PARTY TRANSACTIONS

The Company and Loews entered into a services agreement which was effective
upon consummation of the Common Stock Offering (the "Services Agreement")
pursuant to which Loews agreed to continue to perform certain administrative and
technical services on behalf of the Company. Such services include personnel,
telecommunications, purchasing, internal auditing, accounting, data processing
and cash management services, in addition to advice and assistance with respect
to preparation of tax returns and obtaining insurance. Under the Services
Agreement, the Company is required to reimburse Loews for (i) allocated
personnel costs (such as salaries, employee benefits and payroll taxes) of the
Loews personnel actually providing such services and (ii) all out-of-pocket
expenses related to the provision of such services. The Services Agreement may
be terminated at the Company's option upon 30 days' notice to Loews and at the
option of Loews upon six months' notice to the Company. In addition, the Company
has agreed to indemnify Loews for all claims and damages arising from the
provision of services by Loews under the Services Agreement unless due to the
gross negligence or willful misconduct of Loews. The Company was charged $0.3
million, $0.4 million and $0.3 million by Loews for these support functions
during the years ended December 31, 2001, 2000 and 1999, respectively.

13. STOCK OPTION PLAN

The Company's 2000 Stock Option Plan provides for issuance of either
incentive stock options or non-qualified stock options to the Company's
employees, consultants and non-employee directors. Options may be

granted to purchase stock at no less than 100% of the market price of the stock
on the date the option is granted. Such plan reserved for issuance up to 750,000
shares of the Company's common stock, none of which had been issued as of
December 31, 2001. Unless otherwise specified by the Board of Directors at the
time of the grant, stock options have a maximum term of ten years, subject to
earlier termination under certain conditions and vest over four years.

The following table summarizes the stock option activity related to the
2000 Stock Option Plan:

2001 2000
-------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- ---------------- ------- ----------------

Outstanding, January 1............. 109,000 $42.83 -- $ --
Granted............................ 109,300 32.54 113,000 42.84
Forfeited.......................... -- -- (4,000) 43.03
------- ------ ------- ------
Outstanding, December 31........... 218,300 $37.68 109,000 $42.83
======= ====== ======= ======
Exercisable, December 31........... 11,500 $34.16 31,000 $42.34
======= ====== ======= ======

The following table summarizes information for options outstanding and
exercisable at December 31, 2001:

OPTIONS OUTSTANDING
--------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED-AVERAGE -------------------------
RANGE OF REMAINING WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE PRICES NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
--------------- ------- ---------------- ---------------- ------ ----------------

$24.60-$33.51 71,200 9.2 years $29.06 6,000 $29.06
$35.72-$43.03 147,100 8.3 years $41.85 36,500 $41.95

The Company accounts for the 2000 Stock Option Plan in accordance with
Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Accordingly, no compensation expense has been recognized for the
options granted 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 and earnings per share would
have been reduced to the pro forma amounts indicated below:

2001 2000
--------- --------
(IN THOUSANDS EXCEPT
PER SHARE AMOUNTS)

Net Income:
As reported............................................ $173,823 $72,281
Pro forma.............................................. $173,146 $71,918
Earnings Per Share of Common Stock:
As reported............................................ $ 1.31 $ 0.53
Pro forma.............................................. $ 1.30 $ 0.53
Earnings Per Share of Common Stock -- assuming dilution:
As reported............................................ $ 1.26 $ 0.53
Pro forma.............................................. $ 1.26 $ 0.53

The per share weighted-average fair value of stock options granted during
2001 and 2000 was $14.60 and $26.71, respectively. The fair value of options
granted in 2001 and 2000 has been estimated at the date of grant using a
Binomial Option Pricing Model with the following weighted average assumptions:

2001 2000
---- ----

Risk-free interest rate..................................... 4.52% 6.71%
Expected life of options
Employees................................................. 6 6
Directors................................................. 4 6
Expected volatility of the company's stock price............ 49% 69%
Expected dividend yield..................................... 1.64% 1.25%

14. INCOME TAXES

The components of income before income taxes are as follows:

YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Income before income tax expense and extraordinary
loss:
U.S. .............................................. $250,014 $ 97,118 $212,331
Non-U.S. .......................................... 22,351 13,749 28,032
-------- -------- --------
Worldwide.......................................... $272,365 $110,867 $240,363
======== ======== ========

YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Income before income tax expense:
U.S (including pre-tax extraordinary loss)......... $238,134 $ 97,118 $212,331
Non-U.S. .......................................... 22,351 13,749 28,032
-------- -------- --------
Worldwide (including pre-tax extraordinary loss)... $260,485 $110,867 $240,363
======== ======== ========

The components of income tax expense are as follows:

YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)

U.S. -- current......................................... $ 564 $ 7,981 $15,830
Non-U.S. -- current..................................... 11,834 4,450 29,933
------- ------- -------
Total current................................. 12,398 12,431 45,763
------- ------- -------
U.S. -- deferred........................................ 60,649 12,540 24,783
U.S. -- deferred to reduce goodwill..................... 13,615 13,615 13,746
------- ------- -------
Total deferred................................ 74,264 26,155 38,529
------- ------- -------
Total......................................... $86,662 $38,586 $84,292
======= ======= =======

The Company's income tax provision (benefit) is recorded as follows:

YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)

Income before extraordinary loss........................ $90,820 $38,586 $84,292
Extraordinary loss...................................... (4,158) -- --
------- ------- -------
Total......................................... $86,662 $38,586 $84,292
======= ======= =======

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

YEAR ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)

Expected income tax expense at federal statutory rate... $91,169 $38,803 $84,127
Foreign earnings indefinitely reinvested................ (5,222) -- --
Adjustment to prior year return......................... 2 (69) (4)
Other................................................... 713 (148) 169
------- ------- -------
Income tax expense................................. $86,662 $38,586 $84,292
======= ======= =======

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

DECEMBER 31,
---------------------
2001 2000
--------- ---------
(IN THOUSANDS)

Deferred tax assets:
Net operating loss carryforwards.......................... $ 9,867 $ 8,990
Worker's compensation accruals(1)......................... 5,753 4,635
Foreign tax credits....................................... 40,097 30,214
Other(2).................................................. 8,485 4,227
--------- ---------
Total deferred tax assets.............................. 64,202 48,066
========= =========
Deferred tax liabilities:
Depreciation and amortization............................. (378,436) (300,969)
Undistributed earnings of non-U.S. subsidiaries........... (34,348) (37,193)
Non-U.S. deferred taxes................................... (14,684) (14,684)
Other..................................................... (7,076) (7,076)
--------- ---------
Total deferred tax liabilities......................... (434,544) (359,922)
--------- ---------
Net deferred tax liability........................... $(370,342) $(311,856)
========= =========

---------------

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

(2) In 2000 approximately $136 is reflected in "Prepaid expenses and other" in
the Company's Consolidated Balance Sheets.

Except for selective dividends, the Company's practice prior to 1997 was to
reinvest the unremitted earnings of all of its non-U.S. subsidiaries and
postpone their remittance indefinitely. Thus, no additional U.S. taxes were
provided on such earnings. Undistributed earnings of non-U.S. subsidiaries
generated prior to 1997 for which no U.S. deferred income tax provision has been
made for possible future remittances totaled approximately $46.2 million at
December 31, 2001. In addition, the Company has negative undistributed earnings
of non-U.S. subsidiaries generated prior to 1997 of $66.8 million at December
31, 2001, for which no deferred tax benefit has been recognized. It is not
practicable to estimate the amount of unrecognized U.S. deferred taxes, if any,
that might be payable on the actual or deemed remittance of such earnings. On
actual remittance, certain countries impose withholding taxes that, subject to
certain limitations, are then available for use as tax credits against a U.S.
tax liability, if any.

At the beginning of 2001, the Company decided to postpone remittance of a
portion of the earnings of its U.K. subsidiaries. The Company plans to reinvest
these earnings indefinitely and no U.S. taxes were provided on these earnings.
Undistributed earnings of the U.K. subsidiaries in 2001 for which no U.S.
deferred income tax provision has been made were $14.9 million.

The Company believes it is probable that its deferred tax assets of $64.2
million will be realized on future tax returns, primarily from the generation of
future taxable income through both profitable operations and future reversals of
existing taxable temporary differences. However, if the Company is unable to
generate

sufficient taxable income in the future through operating results, a valuation
allowance will be required as a charge to expense.

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

In connection with the merger with Arethusa, the Company acquired net
operating loss ("NOL") carryforwards available to offset future taxable income.
The utilization of these NOL carryforwards is limited pursuant to Section 382 of
the Internal Revenue Code of 1986, as amended (the "Code"). The Company has
previously recorded a deferred tax asset for the benefit of the remaining NOL
carryforwards available for future years. For the year ended December 31, 2001,
the Company was unable to utilize any of these carryforwards. The NOL
carryforwards expire as follows:

TAX BENEFIT OF
YEAR NET OPERATING LOSSES
---- --------------------
(IN THOUSANDS)

2007........................................................ $ 547
2008........................................................ 3,676
2009........................................................ 3,901
2010........................................................ 866
------
Total....................................................... $8,990
======

For the year ended December 31, 2001, the Company had a taxable loss that
resulted in an NOL carryforward of $2.5 million resulting in an associated tax
benefit of $0.9 million that will expire in 2021.

15. EMPLOYEE BENEFIT PLANS

Defined Contribution Plans

The Company maintains defined contribution retirement plans for its U.S.,
U.K. and third country national ("TCN") employees. The plan for U.S. employees
(the "401k Plan") is designed to qualify under Section 401k of the Code. Under
the 401k Plan, each participant may elect to defer taxation on a portion of his
or her eligible earnings, as defined by the 401k Plan, by directing the Company
to withhold a percentage of such earnings. A participating employee may also
elect to make after-tax contributions to the 401k Plan. The Company contributes
3.75% of a participant's defined compensation and matches 25% of the first 6% of
each employee's compensation contributed. Participants are fully vested
immediately upon enrollment in the plan. For the years ended December 31, 2001,
2000 and 1999, the Company's provision for contributions was $6.9 million, $6.2
million and $6.4 million, respectively.

The plan for U.K. employees provides that the Company contributes amounts
equivalent to the employee's contributions generally up to a maximum of 5.25% of
the employee's defined compensation per year. The Company's provision for
contributions for the years ended December 31, 2001, 2000 and 1999 was $0.5
million, $0.4 million and $0.5 million, respectively.

The plan for the Company's TCN employees was effective April 1, 1998 and is
similar to the 401k Plan. The Company contributes 3.75% of a participant's
defined compensation and matches 25% of the first 6% of each employee's
compensation contributed. For the years ended December 31, 2001, 2000 and 1999,
the Company's provision for contributions was $0.6 million, $0.5 million and
$0.6 million, respectively.

Deferred Compensation and Supplemental Executive Retirement Plan

The Company established its Deferred Compensation and Supplemental
Executive Retirement Plan in December 1996. The Company contributes any portion
of the 3.75% of the base salary contribution and the matching contribution to
the 401k Plan that cannot be contributed because of the limitations within the
Code and because of elective deferrals that the participant makes under the
plan. Additionally, the plan provides

that participants may defer up to 10% of base compensation and/or up to 100% of
any performance bonus. Participants in this plan are a select group of
management or highly compensated employees of the Company and are fully vested
in all amounts paid into the plan. The Company's provision for contributions for
the years ended December 31, 2001, 2000 and 1999 was not material.

Pension Plan

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

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

The following provides a reconciliation of benefit obligations and
significant actuarial assumptions:

SEPTEMBER 30,
---------------------------
2001 2000 1999
------- ------- -------
(IN THOUSANDS)

Change in benefit obligation:
Benefit obligation at beginning of year............... $12,581 $12,023 $10,597
Interest cost......................................... 934 894 705
Actuarial gain........................................ 584 42 1,068
Benefits paid......................................... (167) (378) (347)
------- ------- -------
Benefit obligation at end of year..................... $13,932 $12,581 $12,023
======= ======= =======
Change in plan assets:
Fair value of plan assets at beginning of year........ $14,690 $14,427 $12,571
Actual return on plan assets.......................... (1,446) 641 2,203
Benefits paid......................................... (167) (378) (347)
------- ------- -------
Fair value of plan assets at end of year.............. $13,077 $14,690 $14,427
======= ======= =======

SEPTEMBER 30,
------------------------
2001 2000 1999
------ ------ ------
(IN THOUSANDS)

Plan assets over benefit obligation........................ $ -- $2,109 $2,404
Benefit obligation over plan assets........................ (855) -- --
Unrecognized net obligation................................ 4,246 905 215
------ ------ ------
Accrued benefit cost.................................. $3,391 $3,014 $2,619
====== ====== ======

SEPTEMBER 30,
------------------
2001 2000 1999
---- ---- ----

Weighted-average assumptions:
Discount rate............................................. 7.00% 7.50% 7.50%
Expected long-term rate................................... 9.00% 9.00% 9.00%

SEPTEMBER 30,
------------------------
2001 2000 1999
------ ------ ------
(IN THOUSANDS)

Components of net periodic benefit cost:
Interest cost............................................ $ (934) $ (894) $ (705)
Expected return on plan assets........................... 1,311 1,289 1,118
------ ------ ------
Net periodic pension benefit income...................... $ 377 $ 395 $ 413
====== ====== ======

Amounts recognized in the Consolidated Balance Sheets consist of:

SEPTEMBER 30,
------------------------
2001 2000 1999
------ ------ ------
(IN THOUSANDS)

Prepaid benefit cost....................................... $ -- $3,014 $2,619
Accrued benefit liability.................................. (855) -- --
Accumulated other comprehensive income..................... 4,246 -- --
------ ------ ------
Accrued benefit cost.................................. $3,391 $3,014 $2,619
====== ====== ======

16. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS

The Company manages its business on the basis of one reportable segment,
contract drilling of offshore oil and gas wells. Although the Company provides
contract drilling services from different types of offshore drilling rigs and
provides such services in many geographic locations, these operations have been
aggregated into one reportable segment based on the similarity of economic
characteristics among all divisions and locations, including the nature of
services provided and the type of customers of such services.

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):

YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

High specification floaters.......................... $326,835 $212,000 $262,571
Other semisubmersibles............................... 377,715 313,287 463,168
Jack-ups............................................. 174,498 118,885 74,484
Integrated services.................................. 7,779 23,298 32,769
Other................................................ 547 140 --
Eliminations......................................... (2,025) (8,174) (11,968)
-------- -------- --------
Total revenues............................. $885,349 $659,436 $821,024
======== ======== ========

Geographic Areas

At December 31, 2001, the Company had drilling rigs located offshore eight
countries outside of the United States. As a result, the Company is exposed to
the risk of changes in social, political and economic conditions inherent in
foreign operations and the Company's results of operations and the value of its
foreign

assets are affected by fluctuations in foreign currency exchange rates. Revenues
by geographic area are presented by attributing revenues to the individual
country where the services were performed.

YEAR ENDED DECEMBER 31,
------------------------------
2001 2000 1999
-------- -------- --------
(IN THOUSANDS)

Revenues from unaffiliated customers:
United States...................................... $551,786 $355,470 $420,123
Foreign:
Europe/Africa................................... 66,376 69,495 178,254
South America................................... 178,725 177,891 133,528
Australia/Southeast Asia........................ 88,462 56,580 89,119
-------- -------- --------
333,563 303,966 400,901
Interarea revenues from affiliates:
United States...................................... 101,003 98,367 114,393
Europe/Africa...................................... 13,395 3,295 --
Other.............................................. 1,986 -- --
-------- -------- --------
116,384 101,662 114,393
Eliminations......................................... (116,384) (101,662) (114,393)
-------- -------- --------
Total...................................... $885,349 $659,436 $821,024
======== ======== ========

An individual foreign country may, from time to time, contribute a material
percentage of the Company's total revenues from unaffiliated customers. For the
years ended December 31, 2001, 2000 and 1999, individual countries that
contributed 5% or more of the Company's total revenues from unaffiliated
customers are listed below.

YEAR ENDED
DECEMBER 31,
------------------
2001 2000 1999
---- ---- ----

Brazil...................................................... 20.2% 25.5% 15.5%
United Kingdom.............................................. 6.5% 5.9% 10.0%
Australia................................................... 5.9% 5.8% 5.7%
Angola...................................................... 0.0% 2.1% 7.5%

Long-lived tangible assets located in the United States and all foreign
countries in which the Company holds assets as of December 31, 2001, 2000 and
1999 are listed below. A substantial portion of the Company's assets are mobile,
therefore asset locations at the end of the period are not necessarily
indicative of the geographic distribution of the earnings generated by such
assets during the periods.

DECEMBER 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
(IN THOUSANDS)

Drilling and other property and equipment, net:
United States.................................. $1,268,901 $1,312,031 $1,113,908
Foreign:
South America............................... 375,655 388,358 399,471
Europe/Africa............................... 86,659 81,401 154,378
Australia/Southeast Asia.................... 271,658 149,392 70,148
---------- ---------- ----------
733,972 619,151 623,997
---------- ---------- ----------
Total.................................. $2,002,873 $1,931,182 $1,737,905
========== ========== ==========

Brazil is currently the only country with a material concentration of the
Company's assets. Approximately 18.8%, 20.1% and 20.2% of the Company's total
drilling and other property and equipment were located in or offshore Brazil as
of December 31, 2001, 2000 and 1999, respectively.

Major Customers

The Company's customer base includes major and independent oil and gas
companies and government-owned oil companies. Revenues from two major customers
for the periods presented contributed more than 10% of the Company's total
revenues as follows:

YEAR ENDED DECEMBER 31,
-----------------------
2001 2000 1999
----- ----- -----

Percentage of total revenue from one customer............... 22.0% 25.4% 15.5%
Percentage of total revenue from one customer............... 17.9% 20.0% 14.5%

17. OTHER INCOME AND EXPENSE (OTHER, NET)

Other, net consists of the following:

YEAR ENDED DECEMBER 31,
----------------------------
2001 2000 1999
-------- ------- -------
(IN THOUSANDS)

Realized net gain (loss) on marketable securities...... $ 27,141 $ 2,103 $ (522)
Reserve for class action litigation.................... (10,000) -- --
Settlement of litigation............................... 7,284 -- --
Miscellaneous.......................................... 270 (1,759) (8,780)
-------- ------- -------
Total other income (expense), net............ $ 24,695 $ 344 $(9,302)
======== ======= =======

18. UNAUDITED QUARTERLY FINANCIAL DATA

Unaudited summarized financial data by quarter for the years ended December
31, 2001 and 2000 is shown below.

FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

2001
Revenues................................... $205,225 $227,331 $230,636 $222,157
Operating income........................... 48,082 64,525 65,713 46,546
Income before income tax expense and
Extraordinary loss....................... 54,677 77,014 79,430 61,244
Income before extraordinary loss........... 36,828 51,482 53,427 39,808
Net income................................. 36,828 43,760 53,427 39,808
Net income per share:
Basic
Income before extraordinary loss...... $ 0.28 $ 0.39 $ 0.40 $ 0.30
Extraordinary loss.................... -- (0.06) -- --
-------- -------- -------- --------
Net................................... $ 0.28 $ 0.33 $ 0.40 $ 0.30
======== ======== ======== ========
Diluted
Income before extraordinary loss...... $ 0.27 $ 0.37 $ 0.38 $ 0.29
Extraordinary loss.................... -- (0.05) -- --
-------- -------- -------- --------
Net................................... $ 0.27 $ 0.32 $ 0.38 $ 0.29
======== ======== ======== ========
2000
Revenues................................... $167,828 $143,317 $157,348 $190,943
Operating income (loss).................... 24,110 (2,098) 3,128 31,806
Income before income tax expense........... 45,426 5,675 16,068 43,698
Net income................................. 29,488 3,637 10,477 28,679
Net income per share:
Basic.................................... $ 0.22 $ 0.03 $ 0.08 $ 0.21
======== ======== ======== ========
Diluted.................................. $ 0.21 $ 0.03 $ 0.08 $ 0.20
======== ======== ======== ========

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

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

ITEM 11. EXECUTIVE COMPENSATION.

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Reference is made to the information responsive to the Items comprising
this Part III that is contained in the Company's definitive proxy statement for
its 2002 Annual Meeting of Stockholders, which is incorporated herein by
reference.

PART IV

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

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

(1) Financial Statements

PAGE
----

Independent Auditors' Report................................ 29
Consolidated Balance Sheets................................. 30
Consolidated Statements of Income........................... 31
Consolidated Statements of Stockholders' Equity............. 32
Consolidated Statements of Comprehensive Income............. 33
Consolidated Statements of Cash Flows....................... 34
Notes to Consolidated Financial Statements.................. 35

(2) Financial Statement Schedules

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

(3) Index of Exhibits

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

(b) Reports on Form 8-K

The Company made the following reports on Form 8-K during the fourth
quarter of fiscal year 2001:

DATE OF REPORT DESCRIPTION OF REPORT
-------------- ---------------------

October 15, 2001......................... Item 9 Regulation FD disclosure
(Informational only)
October 31, 2001......................... Item 9 Regulation FD disclosure
(Informational only)
November 29, 2001........................ Item 9 Regulation FD disclosure
(Informational only)

EXHIBIT
NUMBER DESCRIPTION
------- -----------

3.1 -- Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998).
3.2 -- Amended and Restated By-laws of the Company (incorporated
by reference to Exhibit 3.2 of the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 2001).
4.1* -- Indenture, dated as of February 4, 1997, between the
Company and The Chase Manhattan Bank, as Trustee.
4.2 -- Second Supplemental Indenture, dated as of June 6, 2000,
between the Company and The Chase Manhattan Bank, as
Trustee (incorporated by reference to Exhibit 4.2 of the
Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended June 30, 2000).
4.3 -- Third Supplemental Indenture, dated as of April 11, 2001,
between the Company and The Chase Manhattan Bank, as
Trustee (incorporated by reference to Exhibit 4.2 of the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2001).
10.1* -- Registration Rights Agreement (the "Registration Rights
Agreement") dated October 16, 1995 between Loews and the
Company.
10.2 -- Amendment to the Registration Rights Agreement, dated
September 16, 1997, between Loews and the Company
(incorporated by reference to Exhibit 10.2 of the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
10.3* -- Services Agreement, dated October 16, 1995, between Loews
and the Company.
10.4+* -- Diamond Offshore Deferred Compensation and Supplemental
Executive Retirement Plan effective December 17, 1996.
10.5+ -- First Amendment to Diamond Offshore Deferred Compensation
and Supplemental Executive Retirement Plan dated March
18, 1998 (incorporated by reference to Exhibit 10.8 of
the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997).
10.6+ -- Diamond Offshore Management Bonus Program, as amended and
restated, and dated as of December 31, 1997 (incorporated
by reference to Exhibit 10.6 of the Company's Annual
Report on Form 10-K for the fiscal year ended December
31, 1997).
10.7 -- Purchase Agreement, dated May 31, 2000, between the
Company and Credit Suisse First Boston Corporation
(incorporated by reference to Exhibit 10.1 of the
Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended June 30, 2000).
10.8 -- Registration Rights Agreement, dated June 6, 2000,
between the Company and Credit Suisse First Boston
Corporation (incorporated by reference to Exhibit 10.2 of
the Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended June 6, 2000).
10.9+* -- 2000 Stock Option Plan.
10.10 -- Purchase Agreement, dated April 6, 2001, between the
Company and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2001).

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.11 -- Registration Rights Agreement, dated April 11, 2001,
between the Company and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (incorporated
by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 2001).
12.1* -- Statement re Computation of Ratios.
21.1 -- List of Subsidiaries of the Company (incorporated by
reference to Exhibit 21.1 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
2000).
23.1* -- Consent of Deloitte & Touche LLP.
24.1* -- Powers of Attorney.

---------------

* Filed herewith.

+ Management contracts or compensatory plans or arrangements.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 18, 2002.

DIAMOND OFFSHORE DRILLING, INC.

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

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

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

/s/ JAMES S. TISCH* Chairman of the Board and March 18, 2002
----------------------------------------------------- Chief Executive Officer
James S. Tisch

/s/ LAWRENCE R. DICKERSON* President, Chief Operating March 18, 2002
----------------------------------------------------- Officer and Director
Lawrence R. Dickerson

/s/ GARY T. KRENEK* Vice President and Chief March 18, 2002
----------------------------------------------------- Financial Officer (Principal
Gary T. Krenek Financial Officer)

/s/ BETH G. GORDON* Controller (Principal March 18, 2002
----------------------------------------------------- Accounting Officer)
Beth G. Gordon

/s/ ALAN R. BATKIN* Director March 18, 2002
-----------------------------------------------------
Alan R. Batkin

/s/ HERBERT C. HOFMANN* Director March 18, 2002
-----------------------------------------------------
Herbert C. Hofmann

/s/ ARTHUR L. REBELL* Director March 18, 2002
-----------------------------------------------------
Arthur L. Rebell

/s/ MICHAEL H. STEINHARDT* Director March 18, 2002
-----------------------------------------------------
Michael H. Steinhardt

/s/ RAYMOND S. TROUBH* Director March 18, 2002
-----------------------------------------------------
Raymond S. Troubh

/s/ WILLIAM B. RICHARDSON* Director March 18, 2002
-----------------------------------------------------
William B. Richardson

*By: /s/ WILLIAM C. LONG
-------------------------------
William C. Long
Attorney-in-fact

INDEX TO EXHIBITS

EXHIBIT
NUMBER DESCRIPTION
------- -----------

10.10 -- Purchase Agreement, dated April 6, 2001, between the
Company and Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated (incorporated by reference to
Exhibit 10.1 of the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2001).
10.11 -- Registration Rights Agreement, dated April 11, 2001,
between the Company and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated (incorporated
by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 2001).
12.1* -- Statement re Computation of Ratios.
21.1 -- List of Subsidiaries of the Company (incorporated by
reference to Exhibit 21.1 of the Company's Annual Report
on Form 10-K for the fiscal year ended December 31,
2000).
23.1* -- Consent of Deloitte & Touche LLP.
24.1* -- Powers of Attorney.

---------------

* Filed herewith.

+ Management contracts or compensatory plans or arrangements.