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, 2001
------------------
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.

<Table>

As of October 31, 2001 Common stock, $0.01 par value per share 132,053,155 shares
</Table>

DIAMOND OFFSHORE DRILLING, INC.

TABLE OF CONTENTS FOR FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2001

<Table>
<Caption>
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......................................................15

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................27

PART II. OTHER INFORMATION......................................................................28

ITEM 1. LEGAL PROCEEDINGS..............................................................28

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS......................................28

ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................28

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................28

ITEM 5. OTHER INFORMATION..............................................................28

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................28

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

EXHIBIT INDEX....................................................................................31
</Table>

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)

<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2001 2000
------------- ------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................... $ 244,161 $ 144,456
Marketable securities ........................................................ 744,915 717,678
Accounts receivable .......................................................... 198,350 153,452
Rig inventory and supplies ................................................... 40,791 40,698
Prepaid expenses and other ................................................... 20,287 44,673
----------- -----------
Total current assets ............................. 1,248,504 1,100,957
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION ..................................................... 1,939,243 1,902,415
GOODWILL, NET OF ACCUMULATED AMORTIZATION ...................................... 42,464 55,205
OTHER ASSETS ................................................................... 59,222 20,929
----------- -----------
Total assets ..................................... $ 3,289,433 $ 3,079,506
=========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ............................................ $ 9,732 $ 9,732
Accounts payable ............................................................. 58,175 59,021
Accrued liabilities .......................................................... 65,055 53,923
Taxes payable ................................................................ 7,208 337
----------- -----------
Total current liabilities ........................ 140,170 123,013
LONG-TERM DEBT ................................................................. 927,400 856,559
DEFERRED TAX LIABILITY ......................................................... 356,266 316,627
OTHER LIABILITIES .............................................................. 18,524 15,454
----------- -----------
Total liabilities ................................ 1,442,360 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 issued, 132,093,155 outstanding at September 30,
2001 and 133,150,477 issued and outstanding at December 31, 2000) ........... 1,335 1,332
Additional paid-in capital ................................................... 1,267,373 1,248,665
Retained earnings ............................................................ 601,206 517,186
Accumulated other comprehensive income ....................................... 13,972 670
Treasury stock, at cost (1,363,900 shares at September 30, 2001) ............. (36,813) --
----------- -----------

Total stockholders' equity ....................... 1,847,073 1,767,853
----------- -----------
Total liabilities and stockholders' equity ....... $ 3,289,433 $ 3,079,506
=========== ===========
</Table>

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

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
--------- --------- --------- ---------

REVENUES ................................................. $ 230,636 $ 157,348 $ 663,192 $ 468,493

OPERATING EXPENSES:
Contract drilling ................................. 115,726 111,294 338,979 315,000
Depreciation and amortization ..................... 43,143 37,008 126,873 110,500
General and administrative ........................ 6,054 5,918 19,020 17,853
--------- --------- --------- ---------
Total operating expenses ..................... 164,923 154,220 484,872 443,353
--------- --------- --------- ---------

OPERATING INCOME ......................................... 65,713 3,128 178,320 25,140

OTHER INCOME (EXPENSE):
Gain on sale of assets ............................ 83 149 292 14,231
Interest income ................................... 13,156 16,703 36,436 35,237
Interest expense .................................. (5,927) (3,861) (20,364) (6,702)
Other, net ........................................ 6,405 (51) 16,437 (737)
--------- --------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE AND
EXTRAORDINARY LOSS ................................... 79,430 16,068 211,121 67,169

INCOME TAX EXPENSE ....................................... (26,003) (5,591) (69,384) (23,567)
--------- --------- --------- ---------

INCOME BEFORE EXTRAORDINARY LOSS ......................... 53,427 10,477 141,737 43,602

EXTRAORDINARY LOSS FROM EARLY DEBT EXTINGUISHMENT,
NET OF INCOME TAX BENEFIT OF $4,158 ...................... -- -- (7,722) --
--------- --------- --------- ---------

NET INCOME ............................................... $ 53,427 $ 10,477 $ 134,015 $ 43,602
========= ========= ========= =========

EARNINGS PER SHARE:
BASIC
Income before extraordinary loss .................. $ 0.40 $ 0.08 $ 1.06 $ 0.32
Extraordinary loss ................................ -- -- (0.06) --
--------- --------- --------- ---------
NET ............................................... $ 0.40 $ 0.08 $ 1.00 $ 0.32
========= ========= ========= =========

DILUTED
Income before extraordinary loss .................. $ 0.38 $ 0.08 $ 1.02 $ 0.32
Extraordinary loss ................................ -- -- (0.05) --
--------- --------- --------- ---------
NET ............................................... $ 0.38 $ 0.08 $ 0.97 $ 0.32
========= ========= ========= =========

WEIGHTED AVERAGE SHARES OUTSTANDING:
Shares of common stock ............................ 132,889 135,469 133,166 135,563
Dilutive potential shares of common stock ......... 16,528 -- 16,362 9,876
--------- --------- --------- ---------
Total weighted average shares outstanding .... 149,417 135,469 149,528 145,439
--------- --------- --------- ---------
</Table>

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

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
2001 2000
--------- ---------

OPERATING ACTIVITIES:
Net income .......................................................... $ 134,015 $ 43,602
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ..................................... 126,873 110,500
Gain on sale of assets ............................................ (292) (14,231)
Gain on sale of investment securities ............................. (19,626) (51)
Extraordinary loss from early debt extinguishment, net of tax ..... 7,722 --
Deferred tax provision ............................................ 42,686 21,042
Accretion of discounts on investment securities ................... (2,358) (4,709)
Amortization of debt issuance costs ............................... 1,134 577
Amortization of discount on zero coupon convertible debentures .... 10,819 4,497
Changes in operating assets and liabilities:
Accounts receivable ............................................... (44,898) (882)
Rig inventory and supplies and other current assets ............... 24,293 (7,959)
Other assets, non-current ......................................... (32,561) (4,334)
Accounts payable and accrued liabilities .......................... 4,618 (21,638)
Taxes payable ..................................................... 11,029 (15,707)
Other liabilities, non-current .................................... 3,070 828
Other, net ........................................................ (1,979) 1,103
--------- ---------
Net cash provided by operating activities ..................... 264,545 112,638
--------- ---------

INVESTING ACTIVITIES:
Capital expenditures ................................................ (162,457) (257,713)
Proceeds from sale of assets ........................................ 1,577 32,709
Net change in marketable securities ................................. 17,091 (208,028)
Settlement of forward contracts ..................................... 100 --
--------- ---------
Net cash used in investing activities ......................... (143,689) (433,032)
--------- ---------

FINANCING ACTIVITIES:
Acquisition of treasury stock ....................................... (30,966) (12,044)
Proceeds from sale of put options ................................... 6,294 3,875
Payment of dividends ................................................ (49,993) (50,850)
Proceeds from stock options exercised ............................... -- 123
Issuance of zero coupon convertible debentures ...................... -- 402,178
Debt issuance costs - zero coupon convertible debentures ............ -- (9,256)
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 .............. (10,864) --
--------- ---------
Net cash (used in) provided by financing activities ........... (21,151) 334,026
--------- ---------

NET CHANGE IN CASH AND CASH EQUIVALENTS ................................... 99,705 13,632
Cash and cash equivalents, beginning of period ...................... 144,456 112,316
--------- ---------
Cash and cash equivalents, end of period ............................ $ 244,161 $ 125,948
========= =========
</Table>

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

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, 2000 (File No. 1-13926).

Interim Financial Information

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

Cash and Cash Equivalents

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.

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" 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)."

Derivative Financial Instruments

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 amended certain provisions of SFAS No. 133 to clarify areas
causing difficulties in implementation. The Company adopted SFAS No. 133 and the
corresponding amendments under SFAS No. 138 on January 1, 2001. Adoption of SFAS
No. 133, as amended by SFAS No. 138, has not had nor is it expected to have a
material impact on the Company's consolidated results of operations, financial
position or cash flows.

Supplementary Cash Flow Information

Cash payments made for interest on long-term debt during the nine months
ended September 30, 2001 and 2000 totaled $9.6 million and $15.0 million,
respectively. Cash payments made, net of refunds, for income taxes during the
nine months ended September 30, 2001 and 2000 totaled $15.4 million and $23.4
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 $6.7 million and $22.2 million during the quarter and nine

months ended September 30, 2001, respectively. Interest cost capitalized during
the quarter and nine months ended September 30, 2001 was $0.8 million and $1.8
million, respectively. The Company incurred interest cost 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.

Goodwill

Goodwill is amortized on a straight-line basis over 20 years. Amortization
charged to operating expense during the quarter and nine months ended September
30, 2001 totaled $0.8 million and $2.5 million, respectively. For the quarter
and nine months ended September 30, 2000, amortization expense totaled $1.1
million and $3.3 million, respectively. The Company expects to adopt SFAS No.
142, "Goodwill and Other Intangible Assets" on January 1, 2002 and to suspend
amortization of goodwill at that time.

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 or otherwise. The
purchase of treasury stock is accounted for using the cost method, which reports
the cost of the shares acquired in "Treasury stock" as a deduction from
stockholders' equity in the Consolidated Balance Sheets. During the nine months
ended September 30, 2001, the Company purchased 1,363,900 shares of its common
stock at an aggregate cost of $36.8 million, or at an average cost of $26.99 per
share. 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. In October 2001, the Company purchased
40,000 shares of its common stock at an aggregate cost of $1.0 million, or at an
average cost of $25.00 per share.

Common Equity Put Options

During the nine months ended September 30, 2001, the Company received
premiums of $6.3 million for the sale of put options covering 1,500,000 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 September 30, 2001 are as follows:

<Table>
<Caption>
NO. 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
</Table>

In October 2001, the Company received premiums of $0.5 million for the
sale of put options covering 163,721 shares of common stock. The options give
the holders the right to require the Company to repurchase shares of its common
stock at an exercise price of $24.99 per share at any time prior to their
expiration on March 29, 2002. The Company has the option to settle in cash or
shares of common stock.

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. See
Note 8.

Comprehensive Income

Comprehensive income is the change in equity of a business enterprise
during a period resulting from transactions and other events and circumstances
except those from investments by owners and distributions to owners. For the
quarter and nine months ended September 30, 2001, comprehensive income totaled
$66.0 million and $147.3 million, respectively. For the quarter and nine months
ended September 30, 2000, comprehensive income totaled $17.4 million and $53.3
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 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 amounts 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.

2. EARNINGS PER SHARE

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

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2001 2000 2001 2000
--------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

INCOME BEFORE EXTRAORDINARY LOSS - BASIC (NUMERATOR): ...... $ 53,427 $ 10,477 $ 141,737 $ 43,602
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% ............ -- -- 2,457 3,111
Zero coupon convertible debentures ................ 2,157 -- 6,691 --
Convertible senior debentures - 1.5% .............. 1,029 -- 2,029 --
--------- ----------- --------- ---------
NET INCOME INCLUDING CONVERSIONS - DILUTED (NUMERATOR): .... $ 56,613 $ 10,477 $ 145,192 $ 46,713
========= =========== ========= =========

WEIGHTED AVERAGE SHARES - BASIC (DENOMINATOR): ............. 132,889 135,469 133,166 135,563
Effect of dilutive potential shares
Convertible subordinated notes - 3.75% ............ -- -- 3,429 9,876
Zero coupon convertible debentures ................ 6,929 -- 6,929 --
Convertible senior debentures - 1.5% .............. 9,383 -- 5,946 --
Put options ....................................... 216 -- 58 --
--------- ----------- --------- ---------
WEIGHTED AVERAGE SHARES INCLUDING CONVERSIONS - DILUTED
(DENOMINATOR): ............................................. 149,417 135,469 149,528 145,439
========= =========== ========= =========
EARNINGS PER SHARE:
BASIC
Income before extraordinary loss ....................... $ 0.40 $ 0.08 $ 1.06 $ 0.32
Extraordinary loss ..................................... -- -- (0.06) --
--------- ----------- --------- ---------
NET .................................................... $ 0.40 $ 0.08 $ 1.00 $ 0.32
========= =========== ========= =========
DILUTED
Income before extraordinary loss ....................... $ 0.38 $ 0.08 $ 1.02 $ 0.32
Extraordinary loss ..................................... -- -- (0.05) --
--------- ----------- --------- ---------
NET .................................................... $ 0.38 $ 0.08 $ 0.97 $ 0.32
========= =========== ========= =========
</Table>

Diluted earnings per share ("EPS") for the quarter ended September 30,
2000 excludes 9.8 million potentially dilutive shares issuable upon conversion
of the 3.75% Notes because the inclusion of such shares would be antidilutive.

The computation of diluted EPS for the quarter and nine months ended
September 30, 2000 excludes approximately 6.9 million and 3.0 million,
respectively, 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 750,000 shares of common stock at an exercise price
of $37.85 per share were outstanding through September 30, 2000 but were not
included in the computation of diluted EPS for the quarter and nine months ended
September 30, 2000 because the options' exercise price was less than the average
market price per share of the common stock.

Non-qualified stock options were not included in the computation of
diluted EPS for the quarter ended September 30, 2001 because the options'
exercise price was 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 nine months ended September
30, 2001 and the quarter and nine months ended September 30, 2000 were
immaterial for presentation purposes.

3. MARKETABLE SECURITIES

Investments classified as available for sale are summarized as follows:

<Table>
<Caption>
SEPTEMBER 30, 2001
----------------------------------
UNREALIZED FAIR
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 ....... $325,582 $ 13,675 $339,257
Due after five years through ten years ...... 161,487 8,778 170,265
Collateralized mortgage obligations .............. 232,212 3,181 235,393
-------- -------- --------
Total ....................................... $719,281 $ 25,634 $744,915
======== ======== ========
</Table>

<Table>
<Caption>
DECEMBER 31, 2000
----------------------------------
UNREALIZED FAIR
COST GAIN VALUE
-------- ---------- --------
(IN THOUSANDS)

Debt securities issued by the U.S. Treasury
and other U.S. government agencies:
Due within one year ......................... $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
======== ======== ========
</Table>

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

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

<Table>
<Caption>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
----------- -----------
(IN THOUSANDS)

Proceeds from sales .......... $ 1,434,795 $ 784,332
Gross realized gains ......... 19,720 957
Gross realized losses ........ (94) (906)
</Table>

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. 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 twelve 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 133. SFAS 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 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 loss of $0.3 million related to the forward contracts (a
$0.1 million realized gain offset by a $0.4 million unrealized loss) was
recorded in the Consolidated Statements of Income for the three months and nine
months ended September 30, 2001 in "Other income (expense)."

Contingent Interest

On April 11, 2001, the Company issued 1.5% convertible senior debentures
(the "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 133 and
accordingly must be split from the host instrument and recorded at fair value on
the balance sheet. The contingent interest component had no value at issuance or
at September 30, 2001.

5. DRILLING AND OTHER PROPERTY AND EQUIPMENT

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

<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2001 2000
------------- ------------
(IN THOUSANDS)

Drilling rigs and equipment ..................................... $ 2,698,250 $ 2,155,924
Construction work in progress ................................... 92,198 474,154
Land and buildings .............................................. 14,355 14,224
Office equipment and other ...................................... 19,152 18,480
----------- -----------
Cost .................................................. 2,823,955 2,662,782
Less accumulated depreciation ................................... (884,712) (760,367)
----------- -----------
Drilling and other property and equipment, net ....... $ 1,939,243 $ 1,902,415
=========== ===========
</Table>

In January 2001, approximately $450.0 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.

6. GOODWILL

Cost and accumulated amortization of goodwill is summarized as follows:

<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2001 2000
------------- ------------
(IN THOUSANDS)

Goodwill .......................... $ 72,415 $ 82,628
Less accumulated amortization ..... (29,951) (27,423)
-------- --------
Total ................... $ 42,464 $ 55,205
======== ========
</Table>

During the nine months ended September 30, 2001, adjustments of $10.2
million 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 goodwill recorded in accordance with accounting
principles generally accepted in the United States of America.

7. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2001 2000
------------- ------------
(IN THOUSANDS)

Personal injury and other claims ....... $24,714 $21,565
Payroll and benefits ................... 26,881 22,688
Interest payable ....................... 6,463 5,870
Other .................................. 6,997 3,800
------- -------
Total ........................ $65,055 $53,923
======= =======
</Table>

8. LONG-TERM DEBT

Long-term debt consists of the following:

<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
2001 2000
------------- ------------
(IN THOUSANDS)

Convertible subordinated notes - 3.75% ...... $ -- $399,980
Zero coupon convertible debentures .......... 421,032 410,211
Convertible senior debentures - 1.5% ........ 460,000 --
Ocean Alliance lease-leaseback agreement .... 56,100 56,100
-------- --------
937,132 866,291
Less current maturities ..................... 9,732 9,732
-------- --------
Total ............................. $927,400 $856,559
======== ========
</Table>

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 Statements of Income for
the nine months ended September 30, 2001.

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.

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, which had no fair value at issuance or on
September 30, 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.

9. COMMITMENTS AND CONTINGENCIES

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. No
class has been certified as of the date of this report. The lawsuit is seeking
money damages and injunctive relief as well as attorneys' 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 Statements 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. The stipulation, however, is subject to approval by the District
Court. On July 30, 2001 the Chief U.S. District Judge for the Southern District
of Texas issued a special order transferring this case to the U.S. District
Court for the Southern District of Texas, Houston Division. The lawsuit is now
styled Raymond Verdin, on behalf of himself and those similarly situated v.
Pride Offshore, Inc., et al; C.A. No. G-01-168. At that time all settings and
deadlines then in effect were cancelled, subject to further orders from the
Honorable Sim Lake, U.S. District Court Judge, Houston Division.

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.

10. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS

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

Similar Services

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

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(IN THOUSANDS)

High Specification Floaters ....... $ 81,168 $ 48,770 $ 240,386 $ 153,636
Other Semisubmersibles ............ 101,206 74,391 279,237 229,737
Jack-ups .......................... 48,245 31,333 139,203 79,385
Integrated Services ............... 16 4,889 5,524 8,840
Other ............................. 1 140 210 512
Eliminations ...................... -- (2,175) (1,368) (3,617)
--------- --------- --------- ---------
Total revenues ............ $ 230,636 $ 157,348 $ 663,192 $ 468,493
========= ========= ========= =========
</Table>

Geographic Areas

At September 30, 2001, the Company had drilling rigs located offshore
seven countries other than the United States. As a result, the Company is
exposed to the risk of changes in social, political, economic and other
conditions inherent in foreign operations and the Company's results of
operations and the value of its foreign assets are affected by fluctuations in
foreign currency exchange rates. Revenues by geographic area are presented by
attributing revenues to the individual country or areas where the services were
performed.

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS)

Revenues from unaffiliated customers:
United States ............................. $148,767 $ 94,541 $422,265 $252,047

Foreign:
Europe/Africa .......................... 17,772 8,701 43,058 47,997
Australia/Southeast Asia ............... 25,450 11,190 61,817 41,063
South America .......................... 38,647 42,916 136,052 127,386
-------- -------- -------- --------
Total revenues .................... $230,636 $157,348 $663,192 $468,493
======== ======== ======== ========
</Table>

11. OTHER INCOME AND EXPENSE (OTHER, NET)

Other, net consists of the following:

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
-------- -------- -------- --------
(IN THOUSANDS)

Realized net gain on marketable
securities ................................. $ 6,720 $ 82 $ 19,626 $ 51
Reserve for pending litigation .............. -- -- (10,000) --
Settlement of resolved litigation ........... -- -- 7,284 --
Miscellaneous ............................... (315) (133) (473) (788)
-------- -------- -------- --------
Total other income (expense), net ...... $ 6,405 $ (51) $ 16,437 $ (737)
======== ======== ======== ========
</Table>

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

The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements (including the Notes thereto) included
elsewhere herein. References to the "Company" mean Diamond Offshore Drilling,
Inc., a Delaware corporation, and its subsidiaries.

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

RESULTS OF OPERATIONS

General

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

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

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

Operating Income. Operating income is primarily affected by revenue
factors, but is also a function of varying levels of operating expenses.
Operating expenses generally are not affected by changes in dayrates and may not
be significantly affected by fluctuations in utilization. For instance, if a rig
is to be idle for a short period of time, the Company may realize few decreases
in operating expenses since the rig is typically maintained in a prepared state
with 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.

THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

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.

<Table>
<Caption>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------------- INCREASE/
2001 2000 (DECREASE)
--------- --------- ----------
(IN THOUSANDS)

REVENUES
High Specification Floaters ............... $ 81,168 $ 48,770 $ 32,398
Other Semisubmersibles .................... 101,206 74,391 26,815
Jack-ups .................................. 48,245 31,333 16,912
Integrated Services ....................... 16 4,889 (4,873)
Other ..................................... 1 140 (139)
Eliminations .............................. -- (2,175) 2,175
--------- --------- ---------
Total Revenues .................... $ 230,636 $ 157,348 $ 73,288
========= ========= =========
CONTRACT DRILLING EXPENSE
High Specification Floaters ............... $ 30,921 $ 27,816 $ 3,105
Other Semisubmersibles .................... 56,074 49,301 6,773
Jack-ups .................................. 27,619 27,895 (276)
Integrated Services ....................... 196 6,044 (5,848)
Other ..................................... 916 2,413 (1,497)
Eliminations .............................. -- (2,175) 2,175
--------- --------- ---------
Total Contract Drilling Expense ... $ 115,726 $ 111,294 $ 4,432
========= ========= =========
OPERATING INCOME
High Specification Floaters ............... $ 50,247 $ 20,954 $ 29,293
Other Semisubmersibles .................... 45,132 25,090 20,042
Jack-ups .................................. 20,626 3,438 17,188
Integrated Services ....................... (180) (1,155) 975
Other ..................................... (915) (2,273) 1,358
Depreciation and Amortization Expense ..... (43,143) (37,008) (6,135)
General and Administrative Expense ........ (6,054) (5,918) (136)
--------- --------- ---------
Total Operating Income ............ $ 65,713 $ 3,128 $ 62,585
========= ========= =========
</Table>

High Specification Floaters.

Revenues. Revenues from high specification floaters during the three
months ended September 30, 2001 increased from the same period in 2000.
Approximately one-half of the increase ($16.5 million) was due to the Ocean
Confidence working during the third quarter of 2001. The rig was completing its
conversion to a high specification semisubmersible drilling unit during the same
period of 2000. In addition, revenues increased approximately $9.9 million due
to higher dayrates. Overall, average operating dayrates increased from $95,000
per day to $117,400 per day (excluding the Ocean Confidence) from the third
quarter of 2000 to the third quarter of 2001. Increases in average operating
dayrates included a $50,500 per day increase to $117,500 per day for the Ocean
America and a $31,600 per day increase to $105,000 per day for the Ocean Star.

Improvements in utilization also contributed approximately $6.0 million to
revenue. Utilization (excluding the Ocean Confidence) increased from 80% for the
third quarter of 2000 to 90% for the same period in 2001. Utilization for the
Ocean Clipper and the Ocean Alliance improved over 2000 when these rigs
experienced downtime for repairs.

Contract Drilling Expense. Contract drilling expense for high
specification floaters during the three months ended September 30, 2001
increased from the same period in 2000. The Ocean Confidence, which began
operations in January 2001 after completing its conversion to a high
specification semisubmersible drilling unit, added $5.0 million to contract
drilling expense for the third quarter of 2001. However, contract drilling
expense for the Ocean Alliance was lower in the third quarter of 2001 due to
costs incurred during the same period in 2000 for the mobilization of the rig
from Angola to Brazil. Other high specification floater contract drilling
expenses remained relatively unchanged from the third quarter of 2000 to the
same period in 2001, despite the overall increase in utilization, as none of the
rigs had significantly reduced their crews while idle.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles during the three months
ended September 30, 2001 increased from the same period in 2000 primarily due to
higher average operating dayrates. Higher dayrates contributed $19.2 million to
the increase in revenues for the quarter ended September 30, 2001. The average
operating dayrate for other semisubmersibles increased approximately $7,200 per
day from the third quarter of 2000 to $67,200 per day in the third quarter of
2001. Only two of the Company's twenty-three semisubmersible rigs in this
classification experienced decreases to their average operating dayrate from the
third quarter of 2000.

Revenues were also greater in the third quarter of 2001 than the same
quarter of 2000 due to an increase in utilization. Overall, utilization
increased to 74% from 59% in the third quarter of 2000. The Ocean Epoch, Ocean
New Era, and Ocean Endeavor all worked the entire third quarter of 2001 compared
to the same period in 2000. The upgrade of water depth capabilities and variable
deckload of the Ocean Epoch was ongoing during the third quarter of 2000 while
the Ocean New Era and the Ocean Endeavor were idle during the same period. These
three rigs contributed an additional $13.9 million to revenues in the third
quarter of 2001. Revenues decreased from the third quarter of 2000 for the Ocean
Whittington and the Ocean Yorktown. During most of the current year quarter the
Ocean Whittington was in a shipyard for repairs and the Ocean Yorktown was in a
shipyard for a special survey and upgrades in connection with new contract
requirements. Revenues from these two rigs decreased $10.9 million from the
third quarter 2000.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the three months ended September 30, 2001 increased from
the same period in 2000. Costs for the Ocean Epoch in the third quarter of 2001
were $2.5 million higher than in the same quarter of 2000 when costs associated
with the rig upgrade were capitalized. In addition, contract drilling expense
for the Ocean Yorktown increased $2.0 million from the third quarter of 2000 due
to costs associated with a special survey and contract upgrades during the third
quarter of 2001. Costs also increased in the third quarter of 2001 by
approximately $1.3 million due to the mobilization of the Ocean Whittington to a
shipyard for repairs.

Jack-Ups.

Revenues. Revenues from jack-ups during the quarter ended September 30,
2001 increased from the same period in 2000 primarily due to an increase in
average operating dayrates. Average operating dayrates increased for all of the
jack-ups in the fleet and contributed an additional $18.9 million to revenues.
The average operating dayrate for the Company's jack-ups increased 66% from
$27,000 per day during the third quarter of 2000 to $44,700 per day during the
third quarter of 2001.

Utilization for the Company's jack-ups decreased from 91% for the third
quarter of 2000 to 84% for the third quarter of 2001. The Ocean Summit was in a
shipyard the entire third quarter of 2001 for repairs and a special survey. In
addition, the Ocean Champion spent most of the third quarter of 2001 in a
shipyard for a special survey and repairs while the Ocean Nugget was idle for
part of the third quarter of 2001. As a result, revenues during the current
quarter decreased $4.8 million from the same quarter in 2000. However,
utilization improvements for the Ocean Heritage contributed $3.2 million to
third quarter 2001 revenues. The rig worked the entire third quarter of 2001
compared to the third quarter of 2000 when the rig was in a shipyard for
repairs.

Contract Drilling Expense. Contract drilling expense for jack-ups during
the three months ended September 30, 2001 decreased compared to the same period
in 2000. Contract drilling expense for the Ocean Heritage was lower in the third
quarter of 2001 than in the same period of 2000 when the rig was in a shipyard
for repairs. Increases in expense were primarily due to shipyard repairs and
special surveys performed on the Ocean Summit and the Ocean Champion during the
third quarter of 2001.

Integrated Services.

Operating income for integrated services increased in the third quarter of
2001 compared to the third quarter of 2000 as a result of the difference in type
and magnitude of projects during those periods. During the third quarter of
2001, engineering services were provided in the Gulf of Mexico while during the
same period in 2000 an operating loss resulted from a turnkey project in the
Gulf of Mexico that took longer than expected to complete.

Depreciation and Amortization Expense.

Depreciation and amortization expense increased $6.1 million in the third
quarter of 2001 from the third quarter of 2000. 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.

Interest Income.

Interest income of $13.2 million for the quarter ended September 30, 2001
decreased $3.5 million from $16.7 million for the same period in 2000. This
decrease resulted primarily from a lower average interest rate on investments
held during the third quarter of 2001 versus investments held during the same
quarter of the prior year.

Interest Expense.

Interest expense of $5.9 million for the quarter ended September 30, 2001
increased $2.0 million from $3.9 million for the same period in 2000 primarily
as a result of less interest being capitalized due to the completion of the
Ocean Confidence conversion, 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 $6.4 million for the quarter ended September 30, 2001
increased $6.5 million from other expense of $0.1 million for the same period in
2000. This increase resulted primarily from a $6.7 million gain realized on the
sale of marketable securities.

Income Tax Expense.

Income tax expense of $26.0 million for the quarter ended September 30,
2001 increased $20.4 million from $5.6 million for the same period in 2000
primarily as a result of the increase in "Income before income taxes and
extraordinary loss" of $63.4 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 the
earnings of its UK subsidiaries.

NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000

<Table>
<Caption>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------- INCREASE/
2001 2000 (DECREASE)
--------- --------- ----------
(IN THOUSANDS)

REVENUES
High Specification Floaters .................... $ 240,386 $ 153,636 $ 86,750
Other Semisubmersibles ......................... 279,237 229,737 49,500
Jack-ups ....................................... 139,203 79,385 59,818
Integrated Services ............................ 5,524 8,840 (3,316)
Other .......................................... 210 512 (302)
Eliminations ................................... (1,368) (3,617) 2,249
--------- --------- ---------
Total Revenues ......................... $ 663,192 $ 468,493 $ 194,699
========= ========= =========
CONTRACT DRILLING EXPENSE
High Specification Floaters .................... $ 90,400 $ 76,316 $ 14,084
Other Semisubmersibles ......................... 162,644 155,879 6,765
Jack-ups ....................................... 79,322 72,073 7,249
Integrated Services ............................ 5,170 9,995 (4,825)
Other .......................................... 2,811 4,354 (1,543)
Eliminations ................................... (1,368) (3,617) 2,249
--------- --------- ---------
Total Contract Drilling Expense ........ $ 338,979 $ 315,000 $ 23,979
========= ========= =========
OPERATING INCOME
High Specification Floaters .................... $ 149,986 $ 77,320 $ 72,666
Other Semisubmersibles ......................... 116,593 73,858 42,735
Jack-ups ....................................... 59,881 7,312 52,569
Integrated Services ............................ 354 (1,155) 1,509
Other .......................................... (2,601) (3,842) 1,241
Depreciation and Amortization Expense .......... (126,873) (110,500) (16,373)
General and Administrative Expense ............. (19,020) (17,853) (1,167)
--------- --------- ---------
Total Operating Income ................. $ 178,320 $ 25,140 $ 153,180
========= ========= =========
</Table>

High Specification Floaters.

Revenues. Revenues from high specification floaters during the nine months
ended September 30, 2001 increased from the same period in 2000. The majority of
the increase ($45.7 million) was generated by the Ocean Confidence which began
working in early January 2001. The rig was undergoing a conversion to a high
specification semisubmersible drilling unit throughout 2000. Average operating
dayrates for high specification floaters increased from $97,000 per day for the
first nine months of 2000 to $108,200 per day (excluding the Ocean Confidence)
for the same period of 2001. The average operating dayrate for the Ocean
Alliance increased from $79,500 per day during the first nine months of 2000,
while working in Angola, to $116,200 per day during the same period in 2001
while working in Brazil. Overall, higher dayrates added $28.9 million to
revenues in the first nine months of 2001.

Utilization for high specification floaters improved to 94% for the first
nine months of 2001 from 85% for the same period in 2000, excluding the Ocean
Confidence. This improvement in utilization contributed $12.1 million to 2001
revenues. Utilization improved for the Ocean Quest, which was idle for almost
five months in 2000 compared to one month in 2001, and the Ocean Clipper which
had less downtime for repairs during the first nine months of 2001 than the
same period of 2000.

Contract Drilling Expense. Contract drilling expense for high specification
floaters increased during the nine months ended September 30, 2001 compared to
the same period in 2000. This increase resulted primarily from costs incurred by
the Ocean Confidence ($16.6 million) which began operations in January 2001.
Contract drilling expense decreased in 2001 for the Ocean Alliance as the rig
incurred greater expenses in 2000 due to the mobilization of the rig from Angola
to Brazil.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles increased during the nine
months ended September 30, 2001 from the same period in 2000 due to increases in
average operating dayrates and improvements in utilization. Average dayrates
increased to $65,700 per day for the first nine months of 2001 from $62,000 for
the same period in 2000 and contributed an additional $25.8 million to 2001
revenues. The greatest dayrate increases were for the Ocean General, Ocean
Nomad, and Ocean Bounty. However, average operating dayrates decreased for the
Ocean Princess and the Ocean Whittington.

Improvements in utilization, 71% for the nine months ended September 30,
2001 compared to 60% for the same period in 2000, added $22.7 million to 2001
revenues. The Ocean Guardian and the Ocean Voyager were idle longer in 2000 than
in 2001, while the Ocean New Era was idle the entire period ended September 30,
2000 compared to approximately four months in 2001. The Ocean Epoch spent most
of the first nine months of 2000 in a shipyard for water depth capability and
variable deckload upgrades compared to the same period in 2001 when the rig
worked approximately seven months. However, utilization decreased in 2001 for
the Ocean Whittington and the Ocean Yorktown as both rigs were in shipyards, the
Ocean Whittington for a special survey and repairs and the Ocean Yorktown for a
special survey and upgrades in connection with new contract requirements.

Contract Drilling Expense. Contract drilling expense for other
semisubmersibles during the nine months ended September 30, 2001 increased from
the same period in 2000. Rig expenses increased $3.6 million for the Ocean Epoch
for the nine months ended 2001 from the same period in 2000 when most of the
expenses were associated with the rig's upgrade and were capitalized. In
addition, contract drilling expense for the Ocean Yorktown increased $2.4
million in the first nine months of 2001 primarily due to a special survey and
contract upgrades. Also, the third quarter 2001 mobilization of the Ocean
Whittington to a shipyard for repairs increased costs by $1.3 million in the
first nine months of 2001 compared to the same period in 2000.

Jack-Ups.

Revenues. Revenues for jack-ups improved over the nine months ended
September 30, 2001 compared to the same period in 2000. The Company's jack-up
fleet experienced an 86% increase in average operating dayrates, from $23,000
per day for the first nine months of 2000 to $42,700 for the same period of
2001. Average operating dayrates for each of the jack-up rigs increased at least
40% over 2000 and contributed an additional $64.6 million to revenues in the
first nine months of 2001 over the same period in 2000.

Utilization decreased to 84% for the nine months ended September 30, 2001
from 89% for the same period of 2000 primarily due to the Ocean Nugget which was
stacked for over one-half of the current year due to repairs, a special survey,
and idle time and the Ocean Sovereign which spent most of the first nine months
of 2001 in a shipyard for repairs. In addition, inspection and repairs to the
Ocean Summit and the Ocean Crusader during 2001 contributed to the overall
decline in utilization for the Company's jack-up fleet. Each of these rigs
worked during most of the same period in 2000. Utilization improvements resulted
from the Ocean Tower, the Ocean Champion and the Ocean Heritage. The Ocean Tower
and the Ocean Champion both worked during most of 2001 but were cold stacked for
part of 2000. The Ocean Heritage, which worked all of the first nine months of
2001, spent part of 2000 in a shipyard for repairs.

Contract Drilling Expense. Contract drilling expense increased for
jack-ups during the nine months ended September 30, 2001 compared to the same
period in 2000. Operating costs were higher in 2001 for the Ocean Nugget and the
Ocean Summit due to inspections and repairs. In addition, contract drilling
expenses were higher in 2001 for the Ocean Tower and the Ocean Champion. Both of
these rigs operated during most of 2001, but were cold stacked during part of
the first nine months of 2000.

Integrated Services.

Operating income for integrated services increased as a result of the
difference in number, type and magnitude of projects during the nine months
ended September 30, 2001 compared to the nine months ended September 30, 2000.
During 2001, integrated services contributed operating income of $0.4 million to
the Company's consolidated results of operations primarily due to the completion
of one international turnkey project, which started in the last quarter of 2000.
During the same period in 2000, Diamond Offshore Team Solutions, Inc. ("DOTS")
provided turnkey and integrated services and incurred an operating loss of $1.2
million primarily from a turnkey project in the Gulf of Mexico that took longer
than expected to complete.

Depreciation and Amortization Expense.

Depreciation and amortization expense for the nine months ended September
30, 2001 increased $16.4 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.

General and Administrative Expense.

General and administrative expense increased $1.2 million in the first
nine months of 2001 compared to the same period in 2000 primarily due to the
final payment of Phase III costs for the Company's participation in the Subsea
Mudlift Drilling Joint Industry Project.

Gain on Sale of Assets.

Gain on sale of assets of $0.3 million for the nine months ended September
30, 2001 decreased $13.9 million from $14.2 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 $36.4 million for the nine months ended September 30,
2001 increased $1.2 million from $35.2 million for the same period in 2000. This
increase resulted primarily from the investment of higher cash balances
generated by the sale of the 1.5% Debentures on April 11, 2001, the sale of the
Company's Zero Coupon Convertible Debentures due 2020 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% Notes on April 6, 2001. See " --Liquidity."

Interest Expense.

Interest expense of $20.4 million for the nine months ended September 30,
2001 increased $13.7 million from $6.7 million for the same period in 2000
primarily as a result of less interest being capitalized due to the completion
of the Ocean Confidence conversion, 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 $16.4 million for the nine months ended September 30, 2001
increased $17.1 million from other expense of $0.7 million for the same period
in 2000. This increase resulted primarily from a $19.6 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.

Income Tax Expense.

Income tax expense of $69.4 million for the nine months ended September 30,
2001 increased $45.8 million from $23.6 million for the same period in 2000
primarily as a result of the increase in "Income before income taxes and
extraordinary loss" of $144.0 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 the
earnings of its UK 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
Statements in Item 1 of Part I of this report.

OUTLOOK

There has historically been a strong correlation between the price of oil
and natural gas and the demand for offshore drilling services. The recent
uncertainty surrounding these product prices has begun to temper the outlook for
the offshore drilling industry and for the Company. Demand for the Company's
jack-up fleet in the Gulf of Mexico, which began to soften during the second
quarter of 2001 as natural gas prices started to decline, continued to weaken in
the third quarter of 2001. The backlog of work for the Company's intermediate
semisubmersible fleet in the Gulf of Mexico decreased in the third quarter of
2001 and dayrates for contract renewals declined. The Company does not
anticipate a revival in these markets until oil and gas prices stabilize.

The Company believes that the market for its high specification floaters is
stable and expects it to remain so through year-end despite product price
uncertainty. Likewise, the Company anticipates demand for its equipment in the
international markets in which it competes to continue to be steady in the near
future. However, the lack of product price stability could also have a negative
impact on dayrates and utilization in these markets.

LIQUIDITY

Operating Activities.

At September 30, 2001, the Company's cash and marketable securities totaled
$989.1 million, up from $862.1 million at December 31, 2000. Cash provided by
operating activities for the nine months ended September 30, 2001 increased by
$151.9 million to $264.5 million, compared to $112.6 million for the same period
of the prior year. 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 $139.7 million. Cash usage due to changes in
net working capital components was $12.2 million higher for the nine months
ended September 30, 2001.

Investing Activities.

Investing activities used $143.7 million of cash during the nine months
ended September 30, 2001, compared to cash usage of $433.0 million during the
same period in 2000. The $289.3 million decrease in cash usage was primarily due
to $225.1 million less cash used for the Company's investments in marketable
securities in the first nine months of 2001 than the same period in 2000. Cash
used for capital expenditures in 2001 also decreased $95.3 million as a result
of the completion of the conversion of the Ocean Confidence. Proceeds from the
sale of assets were lower by $31.1 million primarily due to the sale of the
Ocean Scotian in January 2000.

Financing Activities.

Financing activities used $21.2 million of cash during the nine months
ended September 30, 2001 compared to $334.0 million of cash provided in the same
period of 2000. Sources of financing for the nine months ended September 30,
2000 consisted primarily of the Company's issuance of the Zero Coupon Debentures
in June 2000, which resulted in net proceeds of approximately $392.9 million.

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 Statements of Income.

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
September 30, 2001.

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 nine months ended
September 30, 2001 included $81.0 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 the first nine months of 2001, the Company purchased 1,363,900 shares of
its common stock at an aggregate cost of $36.8 million, or at an average cost of
$26.99 per share. In October 2001, the Company purchased 40,000 shares of its
common stock at an aggregate cost of $1.0 million, or at an average cost of
$25.00 per share.

Cash used in financing activities was partially offset by premiums of $6.3
million received for the sale of put options covering 1,500,000 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 September 30, 2001. See Note 1 to the
Company's Consolidated Financial Statements "--Common Equity Put Options" in
Item 1 of Part I of this report.

In October 2001, the Company received premiums of $0.5 million for the
sale of put options covering 163,721 shares of common stock. The options give
the holders the right to require the Company to repurchase shares of its common
stock at an exercise price of $24.99 per share at any time prior to their
expiration in March 2002. The Company has the option to settle in cash or shares
of common stock.

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.

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, many of which are beyond its control.

The Company expects to spend $175.0 million for rig upgrade capital
expenditures during 2001 with $110.0 million projected for the deepwater upgrade
of the Ocean Baroness. During the nine months ended September 30, 2001, the
Company spent approximately $88.5 million, including capitalized interest
expense, primarily for the Ocean Baroness and Ocean Nomad rig upgrades.
Accommodation and stability enhancement upgrades were completed on the Ocean
Nomad in April 2001.

The significant upgrade of the Company's semisubmersible rig, the Ocean
Baroness, to high specification capabilities is expected to result in an
enhanced version of the Company's previous Victory-class upgrades. The upgrade
includes the following enhancements: capability for operation in 6,500 feet
water depths; approximately 5,590 metric 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 feet by 90 feet moon pool will provide enhanced subsea
completion and development capabilities. Water depths in excess of 7,000 feet
should be achievable utilizing preset taut-leg mooring systems on a case by case
basis. The rig is scheduled for delivery at the end of the first quarter of 2002
at a cost expected to be approximately $180.0 million. The Company spent $66.5
million for the deepwater upgrade of the Ocean Baroness during the first nine
months of 2001. The Company has received a letter of intent from Murphy Sabah
Oil Co., Ltd., a subsidiary of Murphy Oil Corporation, to contract the Ocean
Baroness to drill two deep water wells, with options for additional wells,
offshore Southeast Asia.

The Ocean Rover, one of the Company's Victory-class semisubmersibles, is
expected to begin its mobilization to a shipyard in Singapore for a major
upgrade in mid-November 2001. The rig will be upgraded to water depths and
specifications similar to the enhanced Ocean Baroness. It is estimated that this
upgrade will cost approximately $200.0 million with $25.0 million estimated to
be spent in 2001. The upgrade is expected to take approximately 19 months to
complete.

The Company also plans to spend approximately $100.0 million over the next
12-24 months to upgrade six of its jack-up rigs. The Company expects to spend
approximately $20.0 million on these upgrades in 2001. The Ocean Titan and the
Ocean Tower, both 350 feet water depth capability independent-leg slot rigs,
will be converted to 350 feet independent-leg cantilever rigs. The Ocean
Spartan, the Ocean Spur, the Ocean Sovereign and the Ocean Heritage, all 250
feet water depth capability independent-leg cantilever rigs, will be upgraded to
300 feet independent-leg cantilever rigs. The equipment necessary for these
upgrades will be 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 nine months ended September 30, 2001, the Company expended
approximately $73.9 million in association with its continuing rig enhancement
program and to meet other corporate requirements. These expenditures included
the upgrade of pre-load tanks and jacking systems, purchases of king-post
cranes, drill pipe, anchor chain, riser, and other drilling equipment. The
Company has budgeted $106.0 million for 2001 capital expenditures associated
with its continuing rig enhancement program and other corporate requirements.

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

INTEGRATED SERVICES

The Company's wholly owned subsidiary, DOTS, from time to time,

selectively engages in drilling services pursuant to turnkey or modified-turnkey
contracts under which DOTS agrees to drill a well to a specified depth for a
fixed price. In such cases, DOTS generally is not entitled to payment unless the
well is drilled to the specified depth and other contract requirements are met.
Profitability of the contract is dependent upon its ability to keep expenses
within the estimates used in determining the contract price. Drilling a well
under a turnkey contract therefore typically requires a greater cash commitment
by the Company and exposes the Company to risks of potential financial losses
that generally are substantially greater than those that would ordinarily exist
when drilling under a conventional dayrate contract. DOTS also offers a
portfolio of drilling services including overall project management, extended
well tests, and completion operations. During the nine months ended September
30, 2001, DOTS contributed operating income of $0.4 million to the Company's
consolidated results of operations, primarily from the completion of one
international turnkey project. During the same period in 2000, DOTS provided
turnkey and integrated services and incurred an operating loss of $1.2 million
primarily from a turnkey project in the Gulf of Mexico that took longer than
expected to complete.

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 Company has not
adopted SFAS No. 144 in its September 30, 2001 financial statements and is
currently evaluating its provisions.

In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 is effective for
fiscal years beginning after June 15, 2002 with early adoption encouraged. The
Company has not adopted SFAS No. 143 in its September 30, 2001 financial
statements and is currently evaluating its provisions.

In July 2001, the FASB issued two new pronouncements, SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. 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 expects to adopt SFAS No. 142 on
January 1, 2002 and to suspend amortization of goodwill at that time.

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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

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

INTEREST RATE RISK

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

At September 30, 2001, the fair value of the Company's 1.5% Debentures,
based on quoted market prices, was approximately $380.2 million, compared to a
carrying amount of $460.0 million. At September 30, 2001, the contingent
interest component of the Company's 1.5% Debentures was carried at its fair
value of zero.

At September 30, 2001, the fair value of the Company's Zero Coupon
Debentures, based on quoted market prices, was approximately $395.3 million,
compared to a carrying amount of $421.0 million.

At September 30, 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 7.48%, was approximately $55.6 million, compared
to a carrying amount of $56.1 million.

At September 30, 2001, the fair market value of the Company's investment in
debt securities issued by the U.S. Treasury and other U.S. government agencies,
excluding TIP's and CMO's, was approximately $339.3 million, which includes an
unrealized holding gain of $13.7 million. The securities bear interest at rates
ranging from 4.7% to 6.9%. 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 at September 30,
2001 was approximately $170.3 million, which includes an unrealized holding gain
of $8.8 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 at September 30,
2001 was approximately $235.4 million, which includes an unrealized holding gain
of $3.2 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 September 30, 2001, the Company entered into foreign exchange forward
contracts to purchase 3.5 million Australian dollars each month end through July
31, 2002. These forward contracts are recorded at their fair values determined
by discounting future cash flows at current forward rates. At September 30,
2001, a liability of $0.4 million, reflecting the fair value of the forward
contracts, was included with "Accrued liabilities" in the Consolidated Balance
Sheet. The associated unrealized loss of $0.4 million was included in "Other
income (expense)" in the Consolidated Statements of Income for the three and
nine months ended September 30, 2001.

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. No
class has been certified as of the date of this report. The lawsuit is seeking
money damages and injunctive relief as well as attorneys' 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 Statements 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. The stipulation, however, is subject to approval by the District
Court. On July 30, 2001 the Chief U.S. District Judge for the Southern District
of Texas issued a special order transferring this case to the U.S. District
Court for the Southern District of Texas, Houston Division. The lawsuit is now
styled Raymond Verdin, on behalf of himself and those similarly situated v.
Pride Offshore, Inc., et al; C.A. No. G-01-168. At that time all settings and
deadlines then in effect were cancelled, subject to further orders from the
Honorable Sim Lake, U.S. District Court Judge, Houston Division.

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.

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.

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

(a) Exhibits

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

(b) The Company filed the following reports on Form 8-K during the third
quarter of 2001:

<Table>
<Caption>
Date of Report Description of Report
-------------- ---------------------

July 17, 2001 Item 9 Regulation FD disclosure (Informational only)

August 20, 2001 Item 9 Regulation FD disclosure (Informational only)

September 13, 2001 Item 9 Regulation FD disclosure (Informational only)
</Table>

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 07-Nov-2001 By: /s/ Gary T. Krenek
-------------------------------------------
Gary T. Krenek
Vice President and Chief Financial Officer

Date 07-Nov-2001 /s/ Beth G. Gordon
-------------------------------------------
Beth G. Gordon
Controller (Chief Accounting Officer)

EXHIBIT INDEX

<Table>
<Caption>
Exhibit No. Description
----------- -----------

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

3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2001).
</Table>