UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ________________

Commission file number 1-13926

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

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

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes [X] No [ ]

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

As of October 31, 2000 Common stock, $0.01 par value per share 134,019,777 shares

DIAMOND OFFSHORE DRILLING, INC.

TABLE OF CONTENTS FOR FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2000

PAGE NO.

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

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

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

ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets...................................................3
Consolidated Statements of Income.............................................4
Consolidated Statements of Cash Flows.........................................5
Notes to Consolidated Financial Statements....................................6

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS......................................................13

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ....................24

PART II. OTHER INFORMATION.......................................................................25

ITEM 1. LEGAL PROCEEDINGS..............................................................25

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................25

ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................25

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................25

ITEM 5. OTHER INFORMATION..............................................................25

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................25

SIGNATURES.......................................................................................26

EXHIBIT INDEX....................................................................................27

2
3

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)

SEPTEMBER 30, DECEMBER 31,
------------- ------------
2000 1999
------------ ------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 125,948 $ 112,316
Marketable securities ................................................... 755,706 529,042
Accounts receivable ..................................................... 144,451 143,569
Rig inventory and supplies .............................................. 40,629 38,760
Prepaid expenses and other .............................................. 42,045 36,605
------------ ------------
Total current assets ........................ 1,108,779 860,292
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION ................................................ 1,870,650 1,737,905
GOODWILL, NET OF ACCUMULATED AMORTIZATION ................................. 69,816 73,174
OTHER ASSETS .............................................................. 22,671 9,658
------------ ------------
Total assets ................................ $ 3,071,916 $ 2,681,029
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................ $ 49,944 $ 72,630
Accrued liabilities ..................................................... 45,099 44,051
Taxes payable ........................................................... 2,691 18,720
------------ ------------
Total current liabilities ................... 97,734 135,401
LONG-TERM DEBT ............................................................ 806,655 400,000
DEFERRED TAX LIABILITY .................................................... 317,823 291,213
OTHER LIABILITIES ......................................................... 13,021 12,193
------------ ------------
Total liabilities ........................... 1,235,233 838,807
------------ ------------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred stock (par value $0.01, 25,000,000 shares authorized, none
issued and outstanding) ................................................ -- --
Common stock (par value $0.01, 500,000,000 shares authorized,
139,373,677 issued, 135,445,277 outstanding at September 30,
2000 and 139,342,381 issued, 135,824,281 outstanding December
31, 1999) .............................................................. 1,394 1,393
Additional paid-in capital .............................................. 1,306,858 1,302,841
Retained earnings ....................................................... 628,695 635,943
Accumulated other comprehensive income (losses) ......................... 506 (9,229)
Treasury stock, at cost (3,928,400 shares at September 30, 2000
and 3,518,100 shares at December 31, 1999) ............................. (100,770) (88,726)
------------ ------------
Total stockholders' equity .................. 1,836,683 1,842,222
------------ ------------
Total liabilities and stockholders' equity .. $ 3,071,916 $ 2,681,029
============ ============

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

3
4

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------

REVENUES ............................................... $ 157,348 $ 206,740 $ 468,493 $ 650,114

OPERATING EXPENSES:
Contract drilling ............................... 111,294 115,123 315,000 324,642
Depreciation and amortization ................... 37,008 36,085 110,500 107,448
General and administrative ...................... 5,918 5,364 17,853 17,286
---------- ---------- ---------- ----------
Total operating expenses ................... 154,220 156,572 443,353 449,376
---------- ---------- ---------- ----------

OPERATING INCOME ....................................... 3,128 50,168 25,140 200,738

OTHER INCOME (EXPENSE):
Gain on sale of assets .......................... 149 38 14,231 182
Interest income ................................. 16,703 9,065 35,237 26,014
Interest expense ................................ (3,861) (2,152) (6,702) (7,474)
Other, net ...................................... (51) 1,094 (737) 328
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAX EXPENSE ....................... 16,068 58,213 67,169 219,788

INCOME TAX EXPENSE ..................................... (5,591) (20,367) (23,567) (76,897)
---------- ---------- ---------- ----------

NET INCOME ............................................. $ 10,477 $ 37,846 $ 43,602 $ 142,891
========== ========== ========== ==========

EARNINGS PER SHARE:
Basic ........................................... $ 0.08 $ 0.28 $ 0.32 $ 1.05
========== ========== ========== ==========
Diluted ......................................... $ 0.08 $ 0.27 $ 0.32 $ 1.01
========== ========== ========== ==========

WEIGHTED AVERAGE SHARES OUTSTANDING:
Common shares ................................... 135,469 135,824 135,563 135,821
Dilutive potential common shares ................ -- 9,876 9,876 9,876
---------- ---------- ---------- ----------
Total weighted average shares outstanding .. 135,469 145,700 145,439 145,697
========== ========== ========== ==========

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

4
5

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

Nine Months Ended
September 30,
--------------------------
2000 1999
---------- ----------

OPERATING ACTIVITIES:
Net income ........................................................ $ 43,602 $ 142,891
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................... 110,500 107,448
Gain on sale of assets .......................................... (14,231) (182)
(Gain) loss on sale of investment securities .................... 51 (23)
Deferred tax provision .......................................... 21,042 22,858
Accretion of discounts on investment securities ................. (4,709) (7,163)
Amortization of debt issuance costs ............................. 577 404
Amortization of discount on zero coupon convertible debentures .. 4,497 --
Changes in operating assets and liabilities:
Accounts receivable ............................................. (882) 80,812
Rig inventory and supplies and other current assets ............. (7,959) (15,356)
Other assets, non-current ....................................... (4,334) 297
Accounts payable and accrued liabilities ........................ (21,644) (38,168)
Taxes payable ................................................... (15,707) 34,245
Other liabilities, non-current .................................. 828 (1,414)
Other, net ...................................................... 1,103 (509)
---------- ----------
Net cash provided by operating activities ................... 112,734 326,140
---------- ----------

INVESTING ACTIVITIES:
Capital expenditures .............................................. (257,713) (232,180)
Proceeds from sale of assets ...................................... 32,709 578
Net change in marketable securities ............................... (208,130) (46,857)
---------- ----------
Net cash used in investing activities ....................... (433,134) (278,459)
---------- ----------

FINANCING ACTIVITIES:
Acquisition of treasury stock ..................................... (12,044) --
Proceeds from sale of put options ................................. 3,875 --
Payment of dividends .............................................. (50,850) (50,933)
Proceeds from stock options exercised ............................. 129 35
Issuance of zero coupon convertible debentures .................... 402,178 --
Debt issuance costs-zero coupon convertible debentures ............ (9,256) --
---------- ----------
Net cash provided by (used in) financing activities ......... 334,032 (50,898)
---------- ----------

NET CHANGE IN CASH AND CASH EQUIVALENTS ................................. 13,632 (3,217)
Cash and cash equivalents, beginning of period .................... 112,316 101,198
---------- ----------
Cash and cash equivalents, end of period .......................... $ 125,948 $ 97,981
========== ==========

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

5
6

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL

The consolidated financial statements of Diamond Offshore Drilling,
Inc. and subsidiaries (the "Company") should be read in conjunction with the
Annual Report on Form 10-K for the year ended December 31, 1999 (File No.
1-13926).

Interim Financial Information

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

Cash and Cash Equivalents

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

Marketable Securities

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

Supplementary Cash Flow Information

Cash payments made for interest on long-term debt totaled $15.0 million
during both the nine months ended September 30, 2000 and 1999. Cash payments
made, net of refunds, for income taxes during the nine months ended September
30, 2000 and 1999 totaled $23.4 million and $35.5 million, respectively.

Capitalized Interest

Interest cost for construction and upgrade of qualifying assets is
capitalized. The Company incurred interest cost, including amortization of debt
issuance costs, of $7.5 million and $16.3 million during the quarter and nine
months ended September 30, 2000, respectively. Interest cost capitalized during
the quarter and nine months ended September 30, 2000 was $3.7 million and $9.6
million, respectively. The Company incurred interest costs of $3.9 million and
$11.6 million during the quarter and nine months ended September 30, 1999,
respectively. Interest cost capitalized during the quarter and nine months ended
September 30, 1999 was $1.7 million and $4.1 million, respectively.

6
7

Goodwill

Goodwill from the merger with Arethusa (Off-Shore) Limited ("Arethusa")
is amortized on a straight-line basis over 20 years. Amortization expense
totaled $1.1 million and $3.3 million for the quarter and nine months ended
September 30, 2000, respectively. For the quarter and nine months ended
September 30, 1999, amortization expense totaled $1.3 million and $4.1 million,
respectively.

Debt Issuance Costs

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

Treasury Stock

Depending on market conditions, the Company may, from time to time,
purchase shares of its common stock in the open market. The purchase of treasury
stock is accounted for using the cost method, which reports the cost of the
shares acquired in "Treasury stock" as a deduction from stockholders' equity in
the Consolidated Balance Sheets. During the nine months ended September 30,
2000, the Company purchased 410,300 shares of its common stock at an aggregate
cost of $12.0 million, or at an average cost of $29.35 per share. There were no
purchases by the Company of its common stock in 1999.

Common Equity Put Options

In August 2000, in connection with its ongoing stock repurchase
program, the Company sold put options covering 750,000 common shares. The
options give the holders the right to require the Company to repurchase shares
of its common stock at an exercise price of $37.85 at anytime prior to
expiration through February 2001. The Company has the option to settle in cash
or shares of common stock. Premiums received for these options of $3.9 million
are recorded in "Additional paid-in capital" in the Consolidated Balance Sheets.
At September 30, 2000, all of the put options covering 750,000 common shares
were outstanding.

Comprehensive Income

Comprehensive income is the change in equity of a business enterprise
during a period from transactions and other events and circumstances except
those transactions resulting from investments by owners and distributions to
owners. For the quarter and nine months ended September 30, 2000, comprehensive
income totaled $17.4 million and $53.3 million, respectively. For the quarter
and nine months ended September 30, 1999, comprehensive income totaled $37.1
million and $137.8 million, respectively. Comprehensive income includes net
income, foreign currency translation gains and losses, and unrealized holding
gains and losses on investments.

Use of Estimates in the Preparation of Financial Statements

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

Reclassifications

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

7
8

2. EARNINGS PER SHARE

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

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

NET INCOME - BASIC (NUMERATOR): .................. $ 10,477 $ 37,846 $ 43,602 $ 142,891
Effect of dilutive potential shares:
Convertible notes ....................... -- 1,399 3,111 4,858
------------ ------------ ------------ ------------
NET INCOME INCLUDING CONVERSIONS (NUMERATOR): .... $ 10,477 $ 39,245 $ 46,713 $ 147,749
============ ============ ============ ============

WEIGHTED AVERAGE SHARES - BASIC (DENOMINATOR): ... 135,469 135,824 135,563 135,821
Effect of dilutive potential shares:
Convertible notes ....................... -- 9,876 9,876 9,876
------------ ------------ ------------ ------------
WEIGHTED AVERAGE SHARES INCLUDING CONVERSIONS
(DENOMINATOR): ................................... 135,469 145,700 145,439 145,697
============ ============ ============ ============

EARNINGS PER SHARE:
Basic ........................................ $ 0.08 $ 0.28 $ 0.32 $ 1.05
============ ============ ============ ============
Diluted ...................................... $ 0.08 $ 0.27 $ 0.32 $ 1.01
============ ============ ============ ============

On June 6, 2000, the Company issued 20-year zero coupon convertible
debentures (the "Debentures"). The Debentures were issued at a discount with a
yield to maturity of 3.50% per year. The Debentures are convertible into
approximately 6.9 million shares of the Company's common stock at any time prior
to June 6, 2020 at a fixed conversion rate of 8.6075 shares per debenture.

The computation of diluted EPS does not assume conversion of the
convertible notes or zero coupon debentures for the quarter ended September 30,
2000 or conversion of the zero coupon debentures for the year since there would
be an antidilutive effect on earnings per share.

At the 2000 Annual Meeting of Stockholders on May 16, 2000, the Diamond
Offshore Drilling, Inc. 2000 Stock Option Plan was approved. On this date,
88,000 non-qualified stock options were granted at an exercise price of $43.03
per share. The options were not included in the computation of diluted EPS for
the periods presented because the options' exercise price was greater than the
average market price of the common stock. Outstanding non-qualified stock
options granted in July 2000 to purchase 2,500 shares of common stock at an
exercise price of $35.72 per share were included in the computation of diluted
EPS for the periods presented since the average market price of the common stock
was greater than the options' exercise price. However, the incremental shares
calculated were immaterial for presentation purposes.

In August 2000, the Company sold put options covering 750,000 common
shares at an exercise price of $37.85 per share. The options were outstanding
through September 30, 2000 but were not included in the computation of diluted
EPS for the periods presented because the options' exercise price was less than
the average market price of the common stock.

8
9

3. MARKETABLE SECURITIES

Investments classified as available for sale are summarized as follows:

SEPTEMBER 30, 2000
-----------------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
---------- ----------- ----------
(IN THOUSANDS)

Debt securities issued by the U.S. Treasury
Due within one year ......................... $ 173,690 $ (360) $ 173,330
Due after one year through five years ....... 24,998 (115) 24,883
Collateralized mortgage obligations .............. 551,250 4,067 555,317
Equity securities ................................ 1,328 848 2,176
---------- ---------- ----------
Total ....................................... $ 751,266 $ 4,440 $ 755,706
========== ========== ==========

DECEMBER 31, 1999
-----------------------------------------
UNREALIZED MARKET
COST GAIN (LOSS) VALUE
---------- ----------- ----------
(IN THOUSANDS)

Debt securities issued by the U.S. Treasury
Due within one year ......................... $ 259,090 $ (1,123) $ 257,967
Due after one year through five years ....... 124,935 (2,180) 122,755
Collateralized mortgage obligations .............. 153,004 (6,130) 146,874
Equity securities ................................ 1,446 -- 1,446
---------- ---------- ----------
Total ....................................... $ 538,475 $ (9,433) $ 529,042
========== ========== ==========

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.

During the nine months ended September 30, 2000 and 1999, certain debt
securities due within one year were sold or matured for proceeds of $583.4
million and $505.9 million, respectively. Certain debt securities due after one
year were sold for proceeds of $200.7 million and $50.5 million during the nine
months ended September 30, 2000 and 1999, respectively. During the nine months
ended September 30, 2000, equity securities were sold for proceeds of $0.2
million. The resulting after-tax realized gains and losses for the nine months
ended September 30, 2000 and 1999 were not material.

4. DRILLING AND OTHER PROPERTY AND EQUIPMENT

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

SEPTEMBER 30, DECEMBER 31,
------------- ------------
2000 1999
------------ ------------
(IN THOUSANDS)

Drilling rigs and equipment ................................ $ 2,121,045 $ 2,095,613
Construction work in progress .............................. 443,586 241,102
Land and buildings ......................................... 14,175 13,992
Office equipment and other ................................. 18,231 17,552
------------ ------------
Cost ............................................. 2,597,037 2,368,259
Less accumulated depreciation .............................. (726,387) (630,354)
------------ ------------
Drilling and other property and equipment, net .. $ 1,870,650 $ 1,737,905
============ ============

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 Netherlands prior to
the sale.

9
10

5. 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 are summarized as follows:

SEPTEMBER 30, DECEMBER 31,
------------ ------------
2000 1999
------------ ------------
(IN THOUSANDS)

Goodwill ............................... $ 96,112 $ 96,112
Less accumulated amortization .......... (26,296) (22,938)
------------ ------------
Total ........................ $ 69,816 $ 73,174
============ ============

6. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

SEPTEMBER 30, DECEMBER 31,
------------ ------------
2000 1999
------------ ------------
(IN THOUSANDS)

Personal injury and other claims ....... $ 18,850 $ 18,219
Payroll and benefits ................... 20,746 16,281
Interest payable ....................... 1,917 5,667
Other .................................. 3,586 3,884
------------ ------------
Total ........................ $ 45,099 $ 44,051
============ ============

7. LONG-TERM DEBT

Long-term debt consists of the following:

SEPTEMBER 30, DECEMBER 31,
------------ ------------
2000 1999
------------ ------------
(IN THOUSANDS)

Convertible subordinated notes-3.75% ...... $ 400,000 $ 400,000
Zero coupon convertible debentures-3.50% .. 406,655 --
------------ ------------
Total ........................... $ 806,655 $ 400,000
============ ============

Zero Coupon Convertible Debentures

On June 6, 2000, the Company issued zero coupon convertible debentures due
June 6, 2020. The Debentures were issued 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
Debentures to interest-bearing debentures upon the occurrence of certain tax
events. The 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 Debenture,
subject to adjustments in certain events. The Debentures are senior unsecured
obligations of the Company.

The Company has the right to redeem the Debentures, in whole or in part,
after five years 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 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.

10
11

8. COMMITMENTS AND CONTINGENCIES

In October 2000, the Company was named as a defendant in a proposed class
action suit filed on behalf of offshore oil 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 wage
information in order to fix and suppress the wages of the workers in violation
of the Sherman Antitrust Act and various state laws. Because the case has only
recently been filed all of the defendants have not yet answered. No class has
been certified at this time. The lawsuit is seeking unspecified damages as well
as attorney's fees and costs. The Company believes that the case is without
merit and is vigorously contesting liability.

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

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

9. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS

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

Similar Services

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

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(IN THOUSANDS)

High Specification Floaters ..... $ 48,770 $ 64,279 $ 153,636 $ 201,148
Other Semisubmersibles .......... 74,391 114,344 229,737 374,187
Jack-ups ........................ 31,333 15,202 79,385 59,249
Integrated Services ............. 4,889 18,213 8,840 25,623
Other ........................... 140 -- 512 --
Eliminations .................... (2,175) (5,298) (3,617) (10,093)
------------ ------------ ------------ ------------
Total revenues .......... $ 157,348 $ 206,740 $ 468,493 $ 650,114
============ ============ ============ ============

11
12

Geographic Areas

At September 30, 2000, the Company had drilling rigs located offshore six
countries other than 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 or areas where the services were performed.

Revenues from unaffiliated customers:
United States .......................... $ 94,541 $ 118,252 $ 252,047 $ 326,408

Foreign:
Europe/Africa ....................... 8,701 35,384 47,997 156,468
Australia/Southeast Asia ............ 11,190 18,650 41,063 75,003
South America ....................... 42,916 34,454 127,386 92,235
------------ ------------ ------------ ------------
Total revenues ................. $ 157,348 $ 206,740 $ 468,493 $ 650,114
============ ============ ============ ============

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

The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements (including the Notes thereto)
included elsewhere herein.

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

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. Revenues can
also increase or decrease as a result of the acquisition or disposition of rigs.
In order to improve utilization or realize higher dayrates, the Company may
mobilize its rigs from one market to another. During periods of mobilization,
however, revenues may be adversely affected. In response to changes in demand,
the Company may withdraw a rig from the market by stacking it or may reactivate
a rig which was previously stacked, which may decrease or increase revenues,
respectively.

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

Revenues from offshore turnkey 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, nor are
they significantly affected by fluctuations in utilization. For instance, if a
rig is to be idle for a short period of time, the Company realizes few decreases
in operating expenses since the rig is typically maintained in a prepared state
with a full crew. In addition, when a rig is idle, the Company is responsible
for certain operating expenses such as rig fuel and supply boat costs, which are
typically charged to the operator under drilling contracts. However, if the rig
is to be idle for an extended period of time, the Company may reduce the size of
a rig's crew and take steps to "cold stack" the rig, which lowers expenses and
partially offsets the impact on operating income. The Company recognizes as
operating expenses activities such as painting, inspections and routine
overhauls that maintain rather than upgrade its rigs. These expenses vary from
period to period. Costs of rig enhancements and upgrades are capitalized and
depreciated over the expected useful lives of the enhancements. Increased
depreciation expense decreases operating income in periods subsequent to capital
upgrades.

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THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

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

THREE MONTHS ENDED
SEPTEMBER 30,
-------------------------- INCREASE/
2000 1999 (DECREASE)
---------- ---------- ----------
(IN THOUSANDS)

REVENUES
High Specification Floaters ............... $ 48,770 $ 64,279 $ (15,509)
Other Semisubmersibles .................... 74,391 114,344 (39,953)
Jack-ups .................................. 31,333 15,202 16,131
Integrated Services ....................... 4,889 18,213 (13,324)
Other ..................................... 140 -- 140
Eliminations .............................. (2,175) (5,298) 3,123
---------- ---------- ----------
Total Revenues .................... $ 157,348 $ 206,740 $ (49,392)
========== ========== ==========
CONTRACT DRILLING EXPENSE
High Specification Floaters ............... $ 27,503 $ 28,066 $ (563)
Other Semisubmersibles .................... 49,323 52,772 (3,449)
Jack-ups .................................. 27,895 21,152 6,743
Integrated Services ....................... 6,044 16,998 (10,954)
Other ..................................... 2,704 1,433 1,271
Eliminations .............................. (2,175) (5,298) 3,123
---------- ---------- ----------
Total Contract Drilling Expense ... $ 111,294 $ 115,123 $ (3,829)
========== ========== ==========
OPERATING INCOME
High Specification Floaters ............... $ 21,267 $ 36,213 $ (14,946)
Other Semisubmersibles .................... 25,068 61,572 (36,504)
Jack-ups .................................. 3,438 (5,950) 9,388
Integrated Services ....................... (1,155) 1,215 (2,370)
Other ..................................... (2,564) (1,433) (1,131)
Depreciation and Amortization Expense ..... (37,008) (36,085) (923)
General and Administrative Expense ........ (5,918) (5,364) (554)
---------- ---------- ----------
Total Operating Income ............ $ 3,128 $ 50,168 $ (47,040)
========== ========== ==========

High Specification Floaters.

Revenues. Revenues from high specification floaters during the three
months ended September 30, 2000 decreased by $15.5 million from the same period
in 1999. Approximately $14.3 million of the revenue decline resulted from lower
operating dayrates compared to 1999. The average operating dayrate for high
specification floaters during the third quarter of 2000 was $95,000 per day
compared to $119,000 per day during the third quarter of 1999. In addition,
revenues were lower by approximately $1.2 million due to a decline in
utilization caused by the mobilization of the Ocean Alliance from Angola to
Brazil in July 2000 and the subsequent sea trials and acceptance testing prior
to the commencement of its contract in September 2000. The Ocean Quest was also
stacked during part of the third quarter 2000. Utilization of the Company's high
specification floaters during the third quarter of 2000 was 80% compared to 81%
during the third quarter of 1999. Partially offsetting this utilization decline
was the operation of the Ocean Valiant, which was in a shipyard during most of
the third quarter of 1999 for stability enhancements and other repairs. The
operation of the Ocean Clipper under its three-year contract offshore Brazil for
most of the current quarter also partially offset the utilization decreases.
During part of the third quarter of 1999, the Ocean Clipper was in a shipyard
undergoing modifications and upgrades associated with this contract.

Contract Drilling Expense. Contract drilling expense for high
specification floaters during the three months ended September 30, 2000
decreased $0.6 million from the same period in 1999. This decrease resulted
primarily from a decrease in contract drilling expense from 1999 for the Ocean
Valiant, which was in a shipyard for repairs during the third quarter of 1999.
Contract drilling expense increased in 2000 for the Ocean Alliance due to costs
associated with its mobilization from Angola to Brazil, and the subsequent sea
trials and acceptance testing prior to the commencement of its contract.
Additionally, contract drilling expense increased for the Ocean Clipper, which
was operating under its three-year contract offshore Brazil, compared to a
portion of the third quarter of 1999 when the rig was in a shipyard for upgrades
and repairs which were capitalized.

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15

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles during the three months
ended September 30, 2000 decreased $40.0 million from the same quarter in 1999.
Approximately $25.7 million of the decrease resulted from a decline in
utilization as compared to the third quarter of 1999. Utilization of the
Company's other semisubmersibles during the third quarter of 2000 was 59%
compared to 69% during the third quarter of 1999. The upgrade of the water depth
capabilities and variable deckload of the Ocean Epoch continued during the third
quarter of 2000 whereas the rig worked during part of the third quarter of 1999.
The Ocean Rover and Ocean Endeavor, which were stacked during the third quarter
of 2000, worked most of the third quarter of 1999. In addition, revenues were
reduced by approximately $14.2 million due to a decrease in operating dayrates
compared to the same period in 1999. The average operating dayrate for other
semisubmersibles was $60,000 per day during the third quarter of 2000 compared
to $77,000 per day during the third quarter of 1999.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the three months ended September 30, 2000 decreased $3.4
million from the same quarter in 1999. This decrease resulted primarily from
reductions in operating costs from rigs that were idle for all or part of the
quarter ended September 30, 2000. In addition, during the third quarter of 2000,
contract drilling expense decreased for the Ocean Baroness due to the
capitalization of costs associated with its mobilization to Singapore from the
Gulf of Mexico for an upgrade to fifth-generation capabilities. During the third
quarter of 1999, the Ocean Baroness incurred costs associated with its
mobilization from Brazil to the Gulf of Mexico. See "--Capital Resources."

Jack-Ups.

Revenues. Revenues from jack-ups during the three months ended
September 30, 2000 increased $16.1 million from the same quarter in 1999.
Approximately $10.2 million of the increase in revenues resulted from higher
operating dayrates compared to 1999. The average operating dayrate for jack-ups
during the third quarter of 2000 was $27,000 per day compared to $16,000 per day
during the third quarter of 1999. In addition, revenues increased approximately
$7.9 million due to improvements in utilization compared to the third quarter of
1999. Utilization for the Company's jack-ups during the third quarter of 2000
was 91% compared to 67% during the third quarter of 1999. This increase was
partially offset by a decrease in revenues of $2.0 million from the Ocean
Scotian, which was sold in January 2000 but worked for most of the third quarter
of 1999.

Contract Drilling Expense. Contract drilling expense for jack-ups
during the three months ended September 30, 2000 increased $6.7 million over the
same quarter in 1999. This increase was due to an increase in costs of $5.7
million associated with higher utilization of jack-ups compared to the same
quarter in 1999. Also contributing to this increase was $3.6 million for major
repairs to the Ocean Heritage. This increase was partially offset by a decrease
of $2.6 million due to the January 2000 sale of the Ocean Scotian.

Integrated Services.

Revenues and contract drilling expense for integrated services
decreased as a result of the difference in type and magnitude of projects in the
third quarter of 2000 compared to the third quarter of 1999.

Other.

Other contract drilling expense of $2.7 million during the third
quarter of 2000 increased $1.3 million from $1.4 million during the third
quarter of 1999. This increase resulted primarily from payments in the third
quarter of 2000 for settlements to customers as a result of compliance audits
for work performed in prior years and a 1999 operations dispute.

Depreciation and Amortization Expense.

Depreciation and amortization expense for the three months ended
September 30, 2000 of $37.0 million increased $0.9 million from $36.1 million
for the three months ended September 30, 1999. The increase resulted primarily
from an increase in depreciation for the Ocean Clipper, Ocean General, Ocean
Concord and Ocean King, which completed various upgrades in the third and fourth
quarter of 1999. This increase was partially offset by a

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16

decrease in depreciation in the third quarter of 2000 due to the January 2000
sale of the Ocean Scotian and a decrease in goodwill amortization.

Interest Income.

Interest income of $16.7 million for the three months ended September
30, 2000 increased $7.6 million from $9.1 million for the same period in 1999.
This increase resulted primarily from the investment of excess cash generated by
the sale of the zero coupon convertible debentures (the "Debentures") on June 6,
2000. See " --Liquidity."

Interest Expense.

Interest expense of $3.8 million for the three months ended September
30, 2000 increased $1.7 million from $2.2 million for the same period in 1999.
This increase resulted primarily from the accretion of the discount on the
Debentures reduced by an increase in capitalized interest during the third
quarter of 2000 for the conversion of the Ocean Confidence. Interest expense of
$7.5 million incurred during the third quarter of 2000 increased from $3.9
million for the same period in 1999. Interest cost capitalized during the
quarter ended September 30, 2000 was $3.7 million compared to $1.7 million
capitalized during the quarter ended September 30, 1999. See "--Liquidity" and
"--Capital Resources."

Income Tax Expense.

Income tax expense of $5.6 million for the three months ended September
30, 2000 decreased $14.8 million from $20.4 million for the three months ended
September 30, 1999. This decrease resulted primarily from the $42.1 million
decrease in income before income tax expense compared to the three months
ended September 30, 1999.

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17

NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------ INCREASE/
2000 1999 (DECREASE)
------------ ------------ ------------
(IN THOUSANDS)

REVENUES
High Specification Floaters ............... $ 153,636 $ 201,148 $ (47,512)
Other Semisubmersibles .................... 229,737 374,187 (144,450)
Jack-ups .................................. 79,385 59,249 20,136
Integrated Services ....................... 8,840 25,623 (16,783)
Other ..................................... 512 -- 512
Eliminations .............................. (3,617) (10,093) 6,476
------------ ------------ ------------
Total Revenues .................... $ 468,493 $ 650,114 $ (181,621)
============ ============ ============
CONTRACT DRILLING EXPENSE
High Specification Floaters ............... $ 75,654 $ 73,839 $ 1,815
Other Semisubmersibles .................... 155,782 169,761 (13,979)
Jack-ups .................................. 72,367 63,847 8,520
Integrated Services ....................... 9,996 23,948 (13,952)
Other ..................................... 4,818 3,340 1,478
Eliminations .............................. (3,617) (10,093) 6,476
------------ ------------ ------------
Total Contract Drilling Expense ... $ 315,000 $ 324,642 $ (9,642)
============ ============ ============
OPERATING INCOME
High Specification Floaters ............... $ 77,982 $ 127,309 $ (49,327)
Other Semisubmersibles .................... 73,955 204,426 (130,471)
Jack-ups .................................. 7,018 (4,598) 11,616
Integrated Services ....................... (1,156) 1,675 (2,831)
Other ..................................... (4,306) (3,340) (966)
Depreciation and Amortization Expense ..... (110,500) (107,448) (3,052)
General and Administrative Expense ........ (17,853) (17,286) (567)
------------ ------------ ------------
Total Operating Income ............ $ 25,140 $ 200,738 $ (175,598)
============ ============ ============

High Specification Floaters.

Revenues. Revenues from high specification floaters during the nine
months ended September 30, 2000 decreased $47.5 million from the same period in
1999. Revenue declined approximately $57.0 million as a result of lower
operating dayrates compared to 1999. The average operating dayrate for high
specification floaters during the nine months ended September 30, 2000 was
$97,000 per day compared to $126,000 per day during the nine months ended
September 30, 1999. This decrease was partially offset by an increase in
revenues of approximately $9.2 million due to an improvement in utilization.
Utilization for the Company's high specification floaters was 85% during 2000
compared to 83% during 1999. The Company's drillship, the Ocean Clipper, has
operated for most of 2000 under its 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 was the
operation of the Ocean Valiant, which was in a 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 the year-to-date
2000 utilization improvements.

Contract Drilling Expense. Contract drilling expense for high
specification floaters during the nine months ended September 30, 2000 increased
$1.8 million from the same period in 1999. This increase resulted primarily from
costs of $7.5 million incurred for the Ocean Clipper which began operating under
its three-year contract offshore Brazil in 2000. During most of 1999, the Ocean
Clipper was in a shipyard for upgrades and repairs which were capitalized. Also
contributing to the increase in contract drilling expense was $2.1 million from
the 2000 mobilization of the Ocean Alliance from Angola to Brazil. This increase
was partially offset by a decrease in contract drilling expense of $5.0 million
from the Ocean Valiant, which was in a shipyard for repairs during part of 1999,
and $2.5 million for the 1999 mobilization of the Ocean Alliance from the North
Sea to Angola.

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18

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles during the nine months
ended September 30, 2000 decreased $144.5 million from the same period in 1999.
Approximately $76.8 million of the decrease resulted from a decline in
utilization compared to the same period in 1999. Utilization for the Company's
other semisubmersibles during the nine months ended September 30, 2000 was 60%
compared to 69% during the nine months ended September 30, 1999. The Ocean Epoch
underwent an upgrade of its water depth capabilities and variable deckload
during the second and third quarters of 2000 but worked during most of the nine
months ended September 30, 1999. The Ocean Rover, Ocean Endeavor, Ocean Guardian
and Ocean Voyager have been idle through most of 2000 but worked during most of
1999. The Ocean Baroness, which was cold stacked during the first half of 2000
and began its mobilization to Singapore in the third quarter of 2000 for an
upgrade to fifth-generation capabilities, worked most of the same period in
1999. See "--Capital Resources." In addition, revenues declined by approximately
$66.7 million due to lower operating dayrates compared to the same period in
1999. The average operating dayrate for the Company's other semisubmersibles was
$62,000 per day during the nine months ended September 30, 2000 compared to
$86,000 per day during the nine months ended September 30, 1999.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the nine months ended September 30, 2000 decreased $14.0
million from the same period in 1999. This decrease resulted partially from a
$7.1 million reduction of cost as a result of the Ocean Baroness being cold
stacked until the third quarter of 2000, when it was mobilized to Singapore for
an upgrade. See "--Capital Resources." Costs also decreased by $6.3 million from
the same period in 1999 due to the inspection and repair of the Ocean Winner and
its mobilization from the Gulf of Mexico to Brazil in 1999. Contract drilling
expense was further reduced by $4.7 million compared to 1999 due to costs
associated with mandatory inspections and repairs of the Ocean New Era in 1999.
An additional $4.5 million reduction of cost resulted from stacking the Ocean
Epoch in late 1999. Partially offsetting these decreases were costs in 2000 of
$3.1 million associated with the mandatory inspection and repairs of the Ocean
Lexington and $5.3 million in operating costs from the Ocean General, which was
stacked throughout 1999.

Jack-Ups.

Revenues. Revenues from jack-ups during the nine months ended September
30, 2000 increased $20.1 million from the same period in 1999. Approximately
$26.3 million of the increase in revenues resulted from improvements in
utilization compared to 1999. Utilization of the Company's jack-ups during the
first nine months of 2000 was 89% compared to 59% during the same period in
1999. In addition, revenues increased approximately $10.9 million due to higher
operating dayrates compared to the same period in 1999. The average operating
dayrate for the Company's jack-ups was $23,000 per day during the nine months
ended September 30, 2000 compared to $20,000 per day during the nine months
ended September 30, 1999. This increase 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 nine months ended September 30, 2000 increased $8.5 million over the
same period in 1999. An increase of $12.8 million was due to rigs returning to
work in 2000, which were idle for all or part of 1999. In addition, contract
drilling expense increased $3.7 million due to major repairs in 2000 to the
Ocean Heritage. This increase was partially offset by a decrease of $7.9 million
due to the January 2000 sale of the Ocean Scotian.

Integrated Services.

Revenues and contract drilling expense for integrated services
decreased as a result of the difference in number, type and magnitude of
projects during the nine months ended September 30, 2000 compared to the same
period in 1999.

Other.

Other contract drilling expense of $4.8 million during the nine months
ended September 30, 2000 increased $1.5 million from $3.3 million during the
same period in 1999. This increase resulted primarily from payments in the third
quarter of 2000 for settlements to customers as a result of compliance audits
for work performed in prior years and a 1999 operations dispute.

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Depreciation and Amortization Expense.

Depreciation and amortization expense for the nine months ended
September 30, 2000 of $110.5 million increased $3.1 million from $107.4 million
for the nine months ended September 30, 1999. This increase resulted primarily
from an increase in depreciation for the Ocean Clipper, Ocean General, Ocean
Concord and Ocean King, which completed various upgrades in the third and fourth
quarters of 1999. This increase was partially offset by a decrease in
depreciation in 2000 due to the January 2000 sale of the Ocean Scotian and a
decrease in goodwill amortization.

Interest Income.

Interest income of $35.2 million for the nine months ended September
30, 2000 increased $9.2 million from $26.0 million for the same period in 1999.
This increase resulted primarily from the investment of excess cash generated by
the sale of Debentures on June 6, 2000. See " --Liquidity."

Interest Expense.

Interest expense of $6.7 million for the nine months ended September
30, 2000 decreased $0.8 million from $7.5 million for the same period in 1999.
This decrease resulted primarily from an increase in capitalized interest for
the conversion of the Ocean Confidence partially offset by an increase in
interest expense incurred during the nine months ended September 30, 2000.
Interest cost capitalized during the nine months ended September 30, 2000 was
$9.6 million compared to $4.1 million capitalized during the same period in
1999. Interest expense of $16.3 million incurred during the nine months ended
September 30, 2000 increased from $11.6 million for the same period in 1999. The
higher interest expense in the 2000 period resulted primarily from the issuance
of Debentures on June 6, 2000 which accrues at a rate of 3.50% per year. See
"--Liquidity" and "--Capital Resources."

Income Tax Expense.

Income tax expense of $23.6 million for the nine months ended September
30, 2000 decreased $53.3 million from $76.9 million for the nine months ended
September 30, 1999. This decrease resulted primarily from the $152.6 million
decrease in income before income tax expense compared to the nine months
ended September 30, 1999.

OUTLOOK

Despite oil and natural gas prices that remain significantly above
historical averages, the recovery of the markets for various classes of
equipment within the offshore drilling industry remains inconsistent. The market
for high specification floaters, and more particularly the market for jack-ups,
has improved over the last 12 months, while the other semisubmersible market has
been somewhat sluggish. Given the current high level of product prices, the
Company would have expected a much stronger market resurgence across all of its
equipment classes as major oil companies have traditionally increased
exploration spending when oil and natural gas prices have risen. During this
latest period of increasing product prices, the major oil companies have moved
cautiously to invest in future production. The Company believes that, if product
prices remain elevated, the cash generated by the major oil companies should
benefit the market for each of its equipment-types as these companies use the
cash to expand their search for reserves.

Utilization of the Company's jack-up fleet remains high and the Company
expects to see improved results from its jack-ups throughout the rest of this
year and into the next year as contracts are renewed at current market rates.
For its high specification floaters, the Company has maintained high utilization
while dayrates have improved moderately. Although the Company cannot predict the
extent to which current industry conditions may or may not continue, the
immediate outlook for jack-ups and high specification floaters remains strong.

The market for other semisubmersibles, although showing recent signs of
improvement, remains fairly weak worldwide especially in the domestic market and
has resulted in idle time for many of the Company's rigs in this class. The
Company intends to utilize this downtime, when possible, to advance scheduled
inspections and perform modifications or repairs to these rigs. Utilization and
dayrates in the Gulf of Mexico for this class of rig, although beginning to
recover, continue to be low as the industry concentrates on shallow water
natural gas and deepwater prospects. The Company expects that recent signs of
improvement in the market for other semisubmersibles will

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20

continue assuming the continuation of prevailing product prices and worldwide
focus on the need for new production capacity.

The Company believes that, with its fleet size and composition, it is
well positioned to take advantage of opportunities when market conditions
improve.

LIQUIDITY

At September 30, 2000, cash and marketable securities totaled $881.7
million, up from $641.4 million at December 31, 1999. Cash provided by operating
activities for the nine months ended September 30, 2000 decreased by $213.4
million to $112.7 million, compared to $326.1 million for the same period in
1999. The decrease in cash was primarily attributable to a $99.3 million
reduction in operating income and various other related changes, primarily in
accounts receivable and taxes payable.

Investing activities used $433.1 million of cash during the nine months
ended September 30, 2000, compared to $278.5 million during the same period in
1999. The increase in cash usage of $154.6 million resulted primarily from the
Company's investment in collateralized mortgage obligations ("CMO's") purchased
with a portion of the proceeds from the issuance of Debentures. In addition,
capital expenditures were up by $25.5 million primarily due to the conversion of
the Ocean Confidence. A $32.1 million increase in cash was provided by proceeds
from the sale of assets, primarily the sale of the Ocean Scotian in January
2000.

Cash provided by financing activities for the nine months ended
September 30, 2000 increased $384.9 million to $334.0 million, compared to $50.9
million cash used in financing activities for the same period in 1999. Sources
of financing during 2000 consisted primarily of the Company's issuance of
Debentures, which resulted in net proceeds of approximately $392.9 million. The
Company intends to use the net proceeds generated by the issuance of Debentures
for general corporate purposes. The Debentures were issued in June 2000 at a
discount from their value at maturity on June 6, 2020. The 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 Debenture, subject to adjustments in
certain events. The Company will not pay interest on the Debentures prior to
maturity unless it elects to convert the Debentures to interest-bearing
debentures upon the occurrence of certain tax events. The Company has the right
to redeem the Debentures, in whole or in part, after five years 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 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.

Additional sources contributing to cash provided by financing
activities for the nine months ended September 30, 2000 were from premiums
received of $3.9 million for the August 2000 sale of put options covering
750,000 common shares. The options give the holders the right to require the
Company to repurchase shares of its common stock at an exercise price of $37.85
at anytime prior to expiration through February 2001. The Company has the option
to settle in cash or shares of its common stock.

Cash used in financing activities for the nine months ended September
30, 2000 of $62.9 million resulted primarily from 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 the first nine months of 2000, the Company purchased 410,300 shares of
its common stock at an aggregate cost of $12.0 million, or at an average cost of
$29.35 per share.

Other sources of liquidity include the Company's $20.0 million
short-term revolving credit agreement with a U.S. bank. The agreement provides
for borrowings at various interest rates and varying commitment fees dependent
upon public credit ratings. The Company intends to use the facility primarily
for letters of credit that the Company must post, from time to time, for bid and
performance guarantees required in certain parts of the world. The agreement
contains certain financial and other covenants and provisions that must be
maintained by the Company for compliance. As of September 30, 2000, there were
no outstanding borrowings under this agreement and the Company was in compliance
with each of the covenants and provisions.

The Company has the ability to issue an aggregate of approximately
$117.5 million in debt, equity and other securities under a shelf registration
statement. In addition, the Company may issue, from time to time, up to

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21

eight million shares of common stock, which shares are registered under an
acquisition shelf registration statement (upon effectiveness of an amendment
thereto reflecting the effect of the two-for-one stock split declared in July
1997), in connection with one or more acquisitions by the Company of securities
or assets of other businesses.

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

CAPITAL RESOURCES

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

The Company expects to spend approximately $230 million for rig upgrade
capital expenditures during 2000, which are primarily costs associated with the
conversion of the Ocean Confidence. Also included in this amount is
approximately $19 million for variable deckload and water depth capability
upgrades on the Ocean Epoch and $20 million for the deepwater upgrade of the
Ocean Baroness. During the nine months ended September 30, 2000, the Company
expended $204.4 million, including capitalized interest expense, for rig
upgrades, primarily for the conversion of the Ocean Confidence from an
accommodation vessel to a semisubmersible drilling unit capable of operating in
harsh environments and ultra-deep waters.

The conversion of the Ocean Confidence includes the following
enhancements: capability for operation in 7,500 foot water depths; approximately
6,000 tons variable deckload; a 15,000 psi blow-out prevention system; and four
mud pumps to complement the existing Class III dynamic-positioning system. The
Company estimates its net cost of conversion for this rig to be approximately
$430 million. Upon completion of the conversion and customer acceptance, the rig
is scheduled to begin a five-year drilling program in the Gulf of Mexico. A
modification to the drilling contract was made providing for an extension of the
delivery date and commencement of the five-year drilling program from July 1 to
December 1, 2000. This extension will allow the Company additional time to
complete and test the rig for performance in waters up to 7,500 feet. The
Company will incur a penalty based upon the delayed delivery date of the rig and
will be liable for certain types of downtime which could occur during the
drilling of the first two wells under the drilling contract. These penalties
would incrementally reduce revenue from the customer during the five-year
contract term. Should the delivery occur on December 1, 2000, the expected
revenue would be reduced to approximately $313.9 million. The Company expects
the delivery to be prior to December 1, however, it is possible that delays or
unforeseen circumstances could extend delivery beyond the date which would allow
the customer the option to cancel the term contract. Should the Company be
required to remarket the unit, dayrate and term available may not be as
favorable as the existing five-year agreement. In such case, the terms of any
new agreement would be dependent on the market conditions prevailing at that
point in time.

The Company has reached an agreement with a Singapore shipyard which
provides for the significant upgrade of its semisubmersible, the Ocean Baroness,
to fifth-generation capabilities. The deepwater upgrade will be an enhanced
version of the Company's Victory-class upgrades. The upgrade includes the
following enhancements: capability for operation in 6,000 foot water depths;
approximately 6,200 tons variable deckload; a 15,000 psi blow-out prevention
system; and riser with a multiplex control system. Additional features including
a high capacity deck crane, significantly enlarged cellar deck area and a 25
foot by 90 foot moon pool will provide enhanced subsea completion and
development capabilities. Water depths in excess of 6,000 feet should be
achievable utilizing preset taut-leg mooring systems. The preliminary initial
estimated cost for the deepwater upgrade of the Ocean Baroness is approximately
$180 million and is anticipated to take approximately 18 months, including
mobilization to the shipyard. The rig completed its mobilization and arrived in
Singapore in late October. The Company expects to finance the upgrade through
the use of cash on hand and internally generated funds.

During the nine months ended September 30, 2000, the Company expended
$53.3 million in association with its continuing rig enhancement program and to
meet other corporate requirements. These expenditures included

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purchases of king-post cranes, anchor chain, riser, and other drilling
equipment. The Company has budgeted $70 million for 2000 capital expenditures
associated with its continuing rig enhancement program and other corporate
requirements.

From time to time, the Company may decide to add new capacity through
rig conversions, upgrades to existing drilling units, or through new
construction. The Company reviews certain criteria before committing to the
challenging task of upgrading an existing rig or constructing a new one. These
considerations include, but are not limited to, low cost opportunities, cost to
upgrade existing equipment versus the cost of new construction, anticipated
return on the upgrade or newbuild, construction time, opportunity for new
technology, and offshore drilling market developments.

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 it 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
agreement in the future and such acquisition could result in a material
expansion of its existing operations or result in it entering a new line of
business. Some of the potential acquisitions considered by the Company could, if
completed, result in the expenditure of a material amount of funds or the
issuance of a material amount of debt or equity securities.

INTEGRATED SERVICES

The Company's wholly owned subsidiary, Diamond Offshore Team Solutions,
Inc. ("DOTS"), from time to time, selectively engages in drilling services
pursuant to turnkey or modified-turnkey contracts under which DOTS agrees to
drill a well to a specified depth for a fixed price. In such cases, DOTS
generally is not entitled to payment unless the well is drilled to the specified
depth, with the profitability of the contract dependent upon its ability to keep
expenses within the estimates used in determining the contract price. Drilling a
well under a turnkey contract therefore typically requires a greater cash
commitment by the Company and exposes the Company to risks of potential
financial losses that generally are substantially greater than those that would
ordinarily exist when drilling under a conventional dayrate contract. DOTS also
offers a portfolio of drilling services including overall project management,
extended well tests, and completion operations. During the nine months ended
September 30, 2000, DOTS provided turnkey and integrated services and incurred
an operating loss of $1.2 million.

OTHER

Depending on market conditions, the Company may, from time to time,
purchase shares of its common stock in the open market. During October 2000, the
Company purchased 1.4 million shares of its common stock at an aggregate cost of
$51.7 million, or at an average cost of $36.24 per share. From January 1, 2000
through October 31, 2000, the Company has purchased 1.8 million shares of its
common stock at an aggregate cost of $63.7 million, or at an average cost of
$34.70 per share.

ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to clarify four areas
causing difficulties in implementation. The amendment included expanding the
normal purchase and sale exemption for supply contracts, permitting the
offsetting of certain intercompany foreign currency derivatives and thus
reducing the number of third party derivatives, permitting hedge accounting for
foreign-currency denominated assets and liabilities, and redefining interest
rate risk to reduce sources of ineffectiveness. The Company will adopt SFAS 133
and the corresponding amendments under SFAS 138 on January 1, 2001. SFAS 133, as
amended by SFAS 138, is not expected to have a material impact on the Company's
consolidated results of operations, financial position or cash flows.

In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The bulletin summarizes certain of the SEC Staff's view in applying
generally accepted accounting principles to revenue recognition in financial
statements.

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This bulletin through its subsequent revised releases SAB No. 101A and No. 101B
is effective for registrants no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. The Company does not expect the
implementation of this bulletin to have a significant impact on the results of
operations or equity of the Company.

FORWARD-LOOKING STATEMENTS

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

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information included in this Item is considered to constitute
"forward-looking statements" for purposes of the statutory safe harbor provided
in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Forward-Looking
Statements" in Item 2 of Part I of this report.

The Company's financial instruments include the Company's convertible
subordinated notes, zero coupon convertible debentures and investments in debt
securities, including U.S. Treasury securities and collateralized mortgage
obligations ("CMO's"). The Company's convertible subordinated notes, which are
due February 15, 2007, have a stated interest rate of 3.75% and an effective
interest rate of 3.93%. At September 30, 2000, the fair value of these notes,
based on quoted market prices, was approximately $446.8 million, compared to a
carrying amount of $400.0 million. At September 30, 2000, the fair value of the
Company's zero coupon convertible debentures, based on quoted market prices, was
approximately $402.4, compared to a carrying amount of $406.7 million. At
September 30, 2000, the fair market value of the Company's investment in debt
securities issued by the U.S. Treasury was approximately $198.2 million, which
includes an unrealized holding loss of $0.5 million. These securities bear
interest at rates ranging from 5.00% to 8.00%. These securities are U.S.
government-backed and generally short-term and readily marketable. The fair
value of the Company's investment in CMO's at September 30, 2000 was
approximately $555.3 million, which includes an unrealized holding gain of $4.1
million. The CMO's are also short-term and readily marketable with an implied
AAA rating backed by U.S. government guaranteed mortgages.

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

At September 30, 2000, the fair value of the Company's investment in
equity securities was approximately $2.2 million, which includes an unrealized
holding gain of $0.8 million.

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

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 oil 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 wage information in order to fix and suppress the wages of the workers
in violation of the Sherman Antitrust Act and various state laws. Plaintiff
Thomas Bryant has replaced the named plaintiff as the proposed class
representative. Because the case has only recently been filed all of the
defendants have not yet answered. No class has been certified at this time.
The lawsuit is seeking unspecified damages as well as attorney's fees and
costs. The Company believes that the case is without merit and is
vigorously contesting liability.

The Company and its subsidiaries are named defendants in various
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

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

None.

ITEM 5. OTHER INFORMATION.

None.

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

(a) Exhibits

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

(b) There were no reports on Form 8-K filed during the third quarter of
2000.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

DIAMOND OFFSHORE DRILLING, INC.
(Registrant)

Date 03-Nov-2000 By: /s/ Gary T. Krenek
----------- --------------------------------
Gary T. Krenek
Vice President and Chief Financial Officer

Date 03-Nov-2000 /s/ Beth G. Gordon
------------ --------------------------------
Beth G. Gordon
Controller (Chief Accounting Officer)

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INDEX TO EXHIBITS

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

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

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

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

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 to
the Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended June 30, 2000.)

10.1 Purchase Agreement, dated May 31, 2000, between the
Company and Credit Suisse First Boston Corporation
(incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended June 30, 2000.)

10.2 Registration Rights Agreement, dated June 6, 2000,
between the Company and Credit Suisse First Boston
Corporation (incorporated by reference to Exhibit 10.2
to Company's Quarterly Report on Form 10-Q/A for the
quarterly period ended June 30, 2000.)

27.1* Financial Data Schedule.

- ----------

* Filed herewith.