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 June 30, 2005

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

Commission file number 1-13926

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

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

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

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

Yes [X] No [ ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes [X] No [ ]

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

As of July 25, 2005 Common stock, $0.01 par value per 128,693,267shares
share

DIAMOND OFFSHORE DRILLING, INC.

TABLE OF CONTENTS FOR FORM 10-Q

QUARTER ENDED JUNE 30, 2005

PAGE NO.

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

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

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

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................... 18

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .................... 38

ITEM 4. CONTROLS AND PROCEDURES........................................................ 39

PART II. OTHER INFORMATION...................................................................... 40

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 40

ITEM 6. EXHIBITS....................................................................... 40

SIGNATURES....................................................................................... 41

EXHIBIT INDEX.................................................................................... 42

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

JUNE 30, DECEMBER 31,
2005 2004
-------------- --------------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 687,879 $ 266,007
Investments and marketable securities............................ 302,335 661,849
Accounts receivable.............................................. 263,227 187,558
Rig inventory and supplies....................................... 47,631 47,590
Prepaid expenses and other....................................... 37,682 32,677
-------------- --------------
Total current assets..................................... 1,338,754 1,195,681
DRILLING AND OTHER PROPERTY AND EQUIPMENT, NET OF
ACCUMULATED DEPRECIATION......................................... 2,191,437 2,154,593
OTHER ASSETS....................................................... 24,333 29,112
-------------- --------------
Total assets............................................. $ 3,554,524 $ 3,379,386
============== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt................................ $ 12,818 $ 484,102
Accounts payable................................................. 33,472 27,530
Payable for securities purchased................................. 299,633 --
Accrued liabilities.............................................. 82,184 87,614
Taxes payable.................................................... 10,469 14,661
-------------- --------------
Total current liabilities................................ 438,576 613,907
LONG-TERM DEBT..................................................... 977,300 709,413
DEFERRED TAX LIABILITY............................................. 392,278 369,722
OTHER LIABILITIES.................................................. 62,006 60,516
-------------- --------------
Total liabilities........................................ 1,870,160 1,753,558
-------------- --------------

COMMITMENTS AND CONTINGENCIES (NOTE 8) -- --

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,
133,607,005 shares issued and 128,690,205 shares outstanding
at June 30, 2005; 133,483,820 shares issued and 128,567,020
shares outstanding at December 31, 2004)........................ 1,336 1,335
Additional paid-in capital....................................... 1,268,188 1,264,512
Retained earnings................................................ 531,711 476,382
Accumulated other comprehensive losses........................... (2,458) (1,988)
Treasury stock, at cost (4,916,800 shares at June 30, 2005 and
December 31, 2004).............................................. (114,413) (114,413)
-------------- --------------
Total stockholders' equity............................... 1,684,364 1,625,828
-------------- --------------
Total liabilities and stockholders' equity............... $ 3,554,524 $ 3,379,386
============== ==============

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

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

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

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
2005 2004 2005 2004
--------- ----------- ----------- -----------

REVENUES:
Contract drilling............................. $ 272,665 $ 176,685 $ 522,687 $ 353,925
Revenues related to reimbursable expenses..... 10,734 8,261 19,470 15,219
--------- ----------- ----------- -----------
Total revenues............................. 283,399 184,946 542,157 369,144
--------- ----------- ----------- -----------

OPERATING EXPENSES:
Contract drilling............................. 162,489 133,483 310,703 268,161
Reimbursable expenses......................... 9,099 7,519 16,434 13,753
Depreciation and amortization................. 45,978 44,554 91,450 89,074
General and administrative.................... 9,186 8,760 18,659 17,549
(Gain) loss on sale of assets................. (8,250) 130 (7,992) (195)
--------- ----------- ----------- -----------
Total operating expenses................... 218,502 194,446 429,254 388,342
--------- ----------- ----------- -----------

OPERATING INCOME (LOSS)............................. 64,897 (9,500) 112,903 (19,198)

OTHER INCOME (EXPENSE):
Interest income............................... 6,128 3,114 11,896 4,682
Interest expense.............................. (15,756) (6,373) (25,323) (12,727)
Gain (loss) on sale of marketable securities.. 77 283 (1,197) 258
Other, net.................................... 445 (257) 870 (411)
--------- ----------- ----------- -----------

INCOME (LOSS) BEFORE INCOME TAX (EXPENSE) BENEFIT... 55,791 (12,733) 99,149 (27,396)

INCOME TAX (EXPENSE) BENEFIT........................ (14,509) 2,238 (27,749) 5,929
--------- ----------- ----------- -----------
NET INCOME (LOSS)................................... $ 41,282 $ (10,495) $ 71,400 $ (21,467)
========= =========== =========== ===========

INCOME (LOSS) PER SHARE:
BASIC......................................... $ 0.32 $ (0.08) $ 0.56 $ (0.17)
========= =========== =========== ===========
DILUTED....................................... $ 0.31 $ (0.08) $ 0.53 $ (0.17)
========= =========== =========== ===========

WEIGHTED AVERAGE SHARES OUTSTANDING:
Shares of common stock........................ 128,590 129,322 128,582 129,322
Dilutive potential shares of common stock..... 9,544 - 9,550 -
--------- ----------- ----------- -----------
Total weighted average shares
outstanding.............................. 138,134 129,322 138,132 129,322
========= =========== =========== ===========

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)

SIX MONTHS ENDED
JUNE 30,
------------------------------
2005 2004
------------ ------------

OPERATING ACTIVITIES:
Net income (loss)............................................. $ 71,400 $ (21,467)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation................................................ 91,450 89,074
Gain on sale of assets...................................... (7,992) (195)
Loss (gain) on sale of marketable securities, net........... 1,197 (258)
Deferred tax provision (benefit)............................ 22,366 (450)
Accretion of discounts on marketable securities............. (4,523) (1,618)
Amortization of debt issuance costs......................... 7,370 534
Amortization of debt discounts.............................. 7,156 7,966
Changes in operating assets and liabilities:
Accounts receivable......................................... (76,276) 7,077
Rig inventory and supplies and other current assets......... (10,737) (10,028)
Accounts payable and accrued liabilities.................... (139) 3,189
Taxes payable............................................... (4,192) (3,817)
Other items, net............................................ (1,435) (745)
------------ ------------
Net cash provided by operating activities............... 95,645 69,262
------------ ------------

INVESTING ACTIVITIES:
Capital expenditures.......................................... (129,459) (52,588)
Proceeds from sale of assets.................................. 16,055 1,076
Proceeds from sale and maturities of marketable securities.... 4,063,503 1,949,247
Purchases of marketable securities............................ (3,412,724) (1,895,603)
Purchases of Australian dollar time deposits.................. -- (42,073)
Proceeds from maturities of Australian dollar time deposits... 11,761 9,163
Proceeds from settlement of forward contracts................. 273 --
------------ ------------
Net cash provided (used) by investing activities........ 549,409 (30,778)
------------ ------------

FINANCING ACTIVITIES:
Debt issue costs - 5.15% senior unsecured notes............... (79) --
Debt issue costs - 4.875% senior unsecured notes.............. (1,350) --
Issuance of 4.875% senior unsecured notes..................... 249,462 --
Redemption of zero coupon debentures.......................... (460,015) --
Payment of dividends.......................................... (16,071) (16,166)
Proceeds from stock options exercised......................... 4,935 --
------------ ------------
Net cash used in financing activities................... (223,118) (16,166)
------------ ------------

EFFECT OF EXCHANGE RATE CHANGES ON CASH............................. (64) 664
------------ ------------

NET CHANGE IN CASH AND CASH EQUIVALENTS............................. 421,872 22,982
Cash and cash equivalents, beginning of period................ 266,007 106,345
------------ ------------
Cash and cash equivalents, end of period...................... $ 687,879 $ 129,327
============ ============

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

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. GENERAL INFORMATION

The unaudited consolidated financial statements of Diamond Offshore
Drilling, Inc. and subsidiaries, which we refer to as "Diamond Offshore," "we,"
"us" or "our," should be read in conjunction with our Annual Report on Form 10-K
for the year ended December 31, 2004 (File No. 1-13926).

As of July 25, 2005 Loews Corporation, or Loews, owned 54.5% of our
outstanding shares of common stock.

Interim Financial Information

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

Cash and Cash Equivalents, Marketable Securities and Other Investments

We consider 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 to be cash equivalents.

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

"Investments and marketable securities" in our Consolidated Balance Sheet
at June 30, 2005 includes purchases of U.S. Treasury Bills totaling $299.6
million which did not settle until July 1, 2005. An accrued liability for these
purchases is presented as "Payable for securities purchased" in our Consolidated
Balance Sheet at June 30, 2005.

Derivative Financial Instruments

Our derivative financial instruments include forward currency exchange
contracts and a contingent interest provision that is embedded in our 1.5%
Convertible Senior Debentures Due 2031, or the 1.5% Debentures, issued on April
11, 2001. See Note 4.

Supplementary Cash Flow Information

We paid interest on long-term debt totaling $83.4 million for the six
months ended June 30, 2005, which included $73.3 million in accreted interest
paid in connection with the June 2005 partial redemption of our Zero Coupon
Convertible Debentures due 2020, or Zero Coupon Debentures. (See Note 7.) During
the six months ended June 30, 2004, we paid interest on long-term debt of $3.5
million.

We paid $4.6 million and $0.3 million in foreign income taxes, net of
foreign tax refunds, during the six months ended June 30, 2005 and 2004,
respectively. We received refunds of U.S. income taxes during the six months
ended June 30, 2005 and 2004 of $7.7 million and $0.4 million, respectively.

Capitalized Interest

Interest cost for construction and upgrade of qualifying assets is
capitalized. In April 2005, we began capitalizing interest on expenditures
related to our upgrade of the Ocean Endeavor for ultra-deepwater service. A
reconciliation of our total interest cost to "Interest expense" as reported in
our Consolidated Statements of Operations is as follows:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- ------------------
2005 2004 2005 2004
--------- -------- -------- --------
(IN THOUSANDS)

Total interest cost including amortization of
debt issuance costs............................. $ 15,843 $ 6,373 $ 25,410 $ 12,727
Capitalized interest............................... (87) -- (87) --
--------- -------- -------- --------
Total interest expense as reported............. $ 15,756 $ 6,373 $ 25,323 $ 12,727
========= ======== ======== ========

Debt Issuance Costs

Debt issuance costs are included in our Consolidated Balance Sheets in
"Other assets" and are amortized over the respective terms of the related debt.
Interest expense for the quarter and six months ended June 30, 2005 includes
$6.9 million in debt issuance costs that we wrote-off in connection with the
June 2005 redemption of approximately 96% of our outstanding Zero Coupon
Debentures.

Treasury Stock

Depending on market conditions, we may, from time to time, purchase shares
of our 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
our Consolidated Balance Sheets. We did not purchase any treasury stock during
the six months ended June 30, 2005 or 2004.

Comprehensive Income (Loss)

A reconciliation of net income (loss) to comprehensive income (loss) is as
follows:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------- --------
2005 2004 2005 2004
--------- -------- --------- --------
(IN THOUSANDS)

Net income (loss)................................. $ 41,282 $(10,495) $ 71,400 $(21,467)
Other comprehensive gains (losses), net of tax:
Foreign currency translation gain (loss)....... 47 (718) (410) (432)
Unrealized holding gain (loss) on
investments.................................. 4 (8) 25 452
Reclassification adjustment for (gain) loss
included in net income (loss)................ (40) 3 (85) (25)
--------- -------- --------- --------
Comprehensive income (loss)....................... $ 41,293 $(11,218) $ 70,930 $(21,472)
========= ======== ========= ========

Currency Translation

Our primary functional currency is the U.S. dollar. Certain of our
subsidiaries use the local currency in the country where they conduct operations
as their functional currency. These subsidiaries translate assets and
liabilities at period-end exchange rates while income and expense accounts are
translated at average exchange rates. Translation adjustments are reflected in
our Consolidated Balance Sheets in "Accumulated other comprehensive

losses." Currency transaction gains and losses are included in our Consolidated
Statements of Operations in "Other income (expense)." Re-measurement translation
gains and losses of subsidiaries operating in hyperinflationary economies, when
applicable, are included in our operating results.

Stock-Based Compensation

Our Second Amended and Restated 2000 Stock Option Plan is accounted for in
accordance with Accounting Principles Board, or APB, Opinion No. 25, "Accounting
for Stock Issued to Employees." Accordingly, no compensation expense has been
recognized for the options granted to our employees under the plan. If
compensation expense had been recognized for stock options granted to our
employees based on the fair value of the options at the grant dates, valued
using the Binomial Option pricing model, our net income (loss) and earnings
(loss) per share would have been as follows:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
2005 2004 2005 2004
-------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss) as reported................... $ 41,282 $(10,495) $ 71,400 $(21,467)
Add: Stock-based employee compensation
expense included in reported net income
(loss), net of related tax effects.......... -- -- -- --
Deduct: Total stock-based employee
compensation expense determined under fair
value based method, net of related tax
effects..................................... (330) (266) (641) (577)
-------- -------- --------- --------
Pro forma net income (loss)..................... $ 40,952 $(10,761) $ 70,759 $(22,044)
======== ======== ========= ========

Earnings (loss) per share of common stock:
As reported.................................. $ 0.32 $ (0.08) $ 0.56 $ (0.17)
Pro forma.................................... $ 0.32 $ (0.08) $ 0.55 $ (0.17)

Earnings (loss) per share of common stock -
assuming dilution:
As reported.................................. $ 0.31 $ (0.08) $ 0.53 $ (0.17)
Pro forma.................................... $ 0.30 $ (0.08) $ 0.53 $ (0.17)

Revenue Recognition

Revenue from our dayrate drilling contracts is recognized as services are
performed. In connection with such drilling contracts, we may receive lump-sum
fees for the mobilization of equipment. These fees are earned as services are
performed over the initial term of the related drilling contracts. We previously
accounted for the excess of mobilization fees received over costs incurred to
mobilize an offshore rig from one market to another as revenue over the term of
the related drilling contracts. Effective July 1, 2004 we changed our accounting
to defer mobilization fees received as well as direct and incremental
mobilization costs incurred and began to amortize each, on a straight line
basis, over the term of the related drilling contracts (which is the period
estimated to be benefited from the mobilization activity). Straight line
amortization of mobilization revenues and related costs over the term of the
related drilling contracts (which generally range from two to 60 months) is
consistent with the timing of net cash flows generated from the actual drilling
services performed. If we had used this method of accounting in periods prior to
July 1, 2004, previously reported operating income (loss) and net income (loss)
would not have changed and the impact on contract drilling revenues and expenses
would have been immaterial. Absent a contract, mobilization costs are recognized
currently.

We record reimbursements received for the purchase of supplies, equipment,
personnel services and other services provided at the request of our customers
in accordance with a contract or agreement, for the gross amount billed to the
customer, as "Revenues related to reimbursable expenses" in our Consolidated
Statements of Operations.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting
principles generally accepted in the

United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimated.

Reclassifications

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

Recent Accounting Pronouncements

In June 2005 the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 154, "Accounting
Changes and Error Corrections," or SFAS 154, a replacement of APB Opinion No. 20
and SFAS No. 3. SFAS 154 provides guidance on the accounting for and reporting
of accounting changes and error corrections and is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. We do not expect adoption of SFAS 154 to have a material impact on our
consolidated results of operations, financial position or cash flows.

In December 2004 the FASB revised SFAS No. 123, "Accounting for
Stock-Based Compensation," or SFAS 123 (R). This statement supersedes APB
Opinion No. 25 and its related implementation guidance. This statement requires
that the compensation cost relating to share-based payment transactions be
recognized in financial statements. That cost will be measured based on the fair
value of the equity or liability instruments issued. SFAS 123 (R) was originally
effective as of the first interim or annual reporting period beginning after
June 15, 2005. In April 2005, however, the Securities and Exchange Commission
adopted a rule that defers the required effective date of SFAS 123 (R) for
registrants such as us until the beginning of the first fiscal year beginning
after June 15, 2005. This statement applies to all awards granted after the
required effective date and to awards modified, repurchased or cancelled after
that date, as well as the unvested portion of awards granted prior to the
effective date of SFAS 123 (R). We do not expect adoption of SFAS 123 (R) to
have a material impact on our consolidated results of operations, financial
position or cash flows.

2. EARNINGS (LOSSES) PER SHARE

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

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
2005 2004 2005 2004
-------- ---------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)

Net income (loss) - basic (numerator): $ 41,282 $ (10,495) $ 71,400 $ (21,467)
Effect of dilutive potential shares
1.5% Debentures....................... 1,159 -- 2,329 --
Zero Coupon Debentures................ -- -- -- --
-------- ---------- -------- ---------
Net income (loss) including conversions -
diluted (numerator) $ 42,441 $ (10,495) $ 73,729 $ (21,467)
======== ========== ======== =========

Weighted average shares - basic
(denominator): 128,590 129,322 128,582 129,322
Effect of dilutive potential shares
1.5% Debentures....................... 9,383 -- 9,383 --
Zero Coupon Debentures................ -- -- -- --
Stock options......................... 161 -- 167 --
-------- ---------- -------- ---------
Weighted average shares including
conversions - diluted (denominator) 138,134 129,322 138,132 129,322
======== ========== ======== =========
Earnings (losses) per share:
Basic................................. $ 0.32 $ (0.08) $ 0.56 $ (0.17)
======== ========== ======== =========
Diluted............................... $ 0.31 $ (0.08) $ 0.53 $ (0.17)
======== ========== ======== =========

The computations of diluted earnings per share, or EPS, for the three and
six month periods ended June 30, 2005 exclude, respectively, approximately 5.1
million and 6.0 million potentially dilutive shares of common stock issuable
upon conversion of our Zero Coupon Debentures because the inclusion of such
potentially dilutive shares would have been antidilutive. For the quarter and
six months ended June 30, 2005, we also excluded stock options representing
3,000 shares of common stock from the computation of diluted EPS because the
options' exercise prices were higher than the average market price per share of
our common stock for the periods.

The computations of diluted EPS for the three and six month periods ended
June 30, 2004 exclude approximately 9.4 million and 6.9 million potentially
dilutive shares of common stock issuable upon conversion of our 1.5% Debentures
and our Zero Coupon Debentures, respectively. Such shares were not included in
the EPS computations for the three and six month periods ended June 30, 2004
because there was a net loss for the periods.

For the three and six month periods ended June 30, 2004, we excluded stock
options representing 340,650 shares and 339,400 shares of common stock,
respectively, from the computations of diluted EPS because the options' exercise
prices were higher than the average market price per share of our common stock.
We also excluded other stock options representing 297,025 shares and 276,638
shares of our common stock with an average market price in excess of their
exercise prices from the computations of diluted EPS for the three and six month
periods ended June 30, 2004, respectively, because potential shares of common
stock are not included in the computation when a loss from continuing operations
exists.

3. INVESTMENTS AND MARKETABLE SECURITIES

We report investments as current assets in our Consolidated Balance Sheets
in "Investments and marketable securities," representing our investment of cash
available for current operations. At December 31, 2004, "Investments and
marketable securities" also included $11.6 million of time deposits (converted
from 15.0 million Australian dollars) which matured through March 2005. These
securities did not meet the definition of debt securities under SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and were
therefore carried at cost, which we determined to approximate fair value.

Our investments in marketable securities are classified as available for
sale and are summarized as follows:

JUNE 30, 2005
---------------------------------
AMORTIZED UNREALIZED MARKET
COST GAIN (LOSS) VALUE
--------- ----------- ---------
(IN THOUSANDS)

Debt securities issued by the U.S. Treasury
and other U.S. government agencies:
Due within one year................................ $ 299,633 $ 7 $ 299,640
Mortgage-backed securities......................... 2,658 37 2,695
--------- ----------------------
Total.............................................. $ 302,291 $ 44 $ 302,335
========= =========== =========

DECEMBER 31, 2004
---------------------------------
AMORTIZED UNREALIZED MARKET
COST GAIN (LOSS) VALUE
--------- ----------- ---------
(IN THOUSANDS)

Debt securities issued by the U.S. Treasury and
other U.S. government agencies:
Due within one year................................ $ 498,011 $ 189 $ 498,200
Due within one year through five years............. 148,877 (119) 148,758
Mortgage-backed securities......................... 3,221 68 3,289
--------- ----------- ---------
Total.............................................. $ 650,109 $ 138 $ 650,247
========= =========== =========

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

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ -------------------------
2005 2004 2005 2004
---------- ----------- ----------- -----------
(IN THOUSANDS)

Proceeds from sales.................................. $1,245,500 $ 1,198,732 $ 2,613,503 $ 1,199,247
Proceeds from maturities............................. 1,400,000 125,000 1,450,000 750,000
Gross realized gains................................. 106 2,558 183 2,558
Gross realized losses................................ (29) (2,275) (1,380) (2,300)

4. DERIVATIVE FINANCIAL INSTRUMENTS

Forward Currency Exchange Contracts

Our international operations expose us to foreign exchange risk, primarily
associated with our costs payable in foreign currencies for employee
compensation and for purchases from foreign suppliers. From time to time, we may
use a foreign exchange forward contract to minimize the forward exchange risk. A
forward currency exchange contract obligates a contract holder to exchange
predetermined amounts of specified foreign currencies at specified foreign
exchange rates on specified dates.

During 2005, we entered into various foreign currency forward exchange
contracts which resulted in net realized gains totaling $0.2 million and $0.3
million for the three and six months ended June 30, 2005, respectively. As of
June 30, 2005, we had foreign currency forward exchange contracts outstanding
requiring us to purchase the

equivalent of $3.0 million in Mexican pesos on the first day of July 2005 and
August 2005 and the equivalent of $5.0 million in British pounds sterling in
July and August of 2005.

These forward contracts are derivatives as defined by SFAS No. 133,
"Accounting for Derivatives and Hedging Activities," or SFAS 133. The forward
contracts entered into in 2005 did not qualify for hedge accounting. In
accordance with SFAS 133, we recorded net pre-tax unrealized gains of $0.1
million and $0.2 million in our Consolidated Statement of Operations for the
three and six months ended June 30, 2005, respectively, in "Other income
(expense)" to adjust the carrying value of these derivative financial
instruments to their fair value.

Contingent Interest

Our 1.5% Debentures, of which an aggregate principal amount of $460.0
million are outstanding, contain a contingent interest provision. 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,
at December 31, 2004 or at June 30, 2005.

5. DRILLING AND OTHER PROPERTY AND EQUIPMENT

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

JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(IN THOUSANDS)

Drilling rigs and equipment....................................... $ 3,577,083 $ 3,529,593
Construction work-in-progress..................................... 79,656 --
Land and buildings................................................ 16,080 15,770
Office equipment and other........................................ 23,733 22,895
----------- ------------
Cost........................................................ 3,696,552 3,568,258
Less: accumulated depreciation.................................... (1,505,115) (1,413,665)
----------- ------------
Drilling and other property and equipment, net.............. $ 2,191,437 $ 2,154,593
=========== ============

Construction work-in-progress at June 30, 2005 consisted of $22.9 million
related to the major upgrade of the Ocean Endeavor to ultra-deepwater service,
which we expect to be completed in approximately two years, and shipyard
deposits of $56.8 million for the construction of two new jack-up drilling
units, which is scheduled to commence in the first quarter of 2006.

6. ACCRUED LIABILITIES

Accrued liabilities consist of the following:

JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(IN THOUSANDS)

Payroll and benefits.............................................. $ 27,266 $ 26,221
Personal injury and other claims.................................. 9,344 8,076
Interest payable.................................................. 6,794 5,938
Deferred revenue.................................................. 5,420 6,514
Accrued project expenses.......................................... 6,788 14,920
Other............................................................. 26,572 25,945
----------- ------------
Total....................................................... $ 82,184 $ 87,614
=========== ============

7. LONG-TERM DEBT

Long-term debt consists of the following:

JUNE 30, DECEMBER 31,
2005 2004
----------- ------------
(IN THOUSANDS)

Zero Coupon Debentures (due 2020)................................. $ 18,398 $ 471,284
1.5% Debentures (due 2031)........................................ 460,000 460,000
5.15% Senior Notes (due 2014)..................................... 249,438 249,413
4.875% Senior Notes (due 2015).................................... 249,464 --
Ocean Alliance lease-leaseback.................................... 12,818 12,818
----------- ------------
990,118 1,193,515
Less: Current maturities.......................................... (12,818) (484,102)
----------- ------------
Total....................................................... $ 977,300 $ 709,413
=========== ============

Payments of certain of our long-term debt may be accelerated due to
certain rights that the holders of our debt have to put the securities to us.
The holders of our outstanding 1.5% Debentures in the aggregate principal amount
of $460.0 million have the right to require us 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 debentures to be purchased.

The aggregate maturities of long-term debt for each of the five years
subsequent to June 30, 2005, are as follows:

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

2005 ...................... $ 12,818
2006 ...................... --
2007 ...................... --
2008....................... 460,000
2009....................... --
Thereafter ................ 517,300
--------
990,118
Less: Current
maturities................ (12,818)
--------
Total $977,300
========

4.875% SENIOR NOTES

On June 14, 2005, we issued $250.0 million aggregate principal amount of
4.875% Senior Notes Due July 1, 2015, or 4.875% Senior Notes, at an offering
price of 99.785% of the principal amount resulting in net proceeds to us of
$247.7 million, exclusive of accrued issuance costs.

The notes bear interest at 4.875% per year, payable semiannually in
arrears on January 1 and July 1 of each year, beginning January 1, 2006, and
mature on July 1, 2015. The 4.875% Senior Notes are unsecured and unsubordinated
obligations of Diamond Offshore Drilling, Inc., and they rank equal in right of
payment to our existing and future unsecured and unsubordinated indebtedness,
although the 4.875% Senior Notes will be effectively subordinated to all
existing and future obligations of our subsidiaries. We have the right to redeem
all or a portion of these notes for cash at any time or from time to time on at
least 15 days but not more than 60 days prior written notice, at the redemption
price specified in the governing indenture plus accrued and unpaid interest to
the date of redemption.

ZERO COUPON DEBENTURES

On June 7, 2005, we repurchased $460.0 million accreted value, or $774.1
million in aggregate principal amount at maturity, of our Zero Coupon Debentures
at a purchase price of $594.25 per $1,000 principal amount at maturity, which
represents approximately 96% of our then outstanding Zero Coupon Debentures. The
holders of our remaining outstanding Zero Coupon Debentures have the right to
require us to repurchase the Zero Coupon Debentures on June 6, 2010 and June 6,
2015 at their accreted value through the date of purchase. As of June 30,

2005, the aggregate accreted value of our Zero Coupon Debentures of $18.4
million is classified as long-term debt in our Consolidated Balance Sheet at
June 30, 2005.

Also in connection with the retirement of a portion of our Zero Coupon
Debentures, we expensed $6.9 million in debt issuance costs associated with the
retired debentures, which we have included in interest expense in our
Consolidated Statement of Operations.

8. COMMITMENTS AND CONTINGENCIES

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

Litigation. In January 2005, we were notified that we had been named as a
defendant in a lawsuit filed in the U.S. District Court for the Eastern District
of Louisiana on behalf of Total E&P USA, Inc. and several oil companies alleging
that the Ocean America had damaged a natural gas pipeline in the Gulf of Mexico
during Hurricane Ivan in September 2004. The lawsuit was formally served on us
May 16, 2005 and it alleges that on or about September 15, 2004 the Ocean
America broke free from its moorings and, as the rig drifted, its anchor, wire
cable and other parts struck and damaged various components of the Canyon
Express Common System curtailing its supply of natural gas to, and preventing
production from, several fields. The plaintiffs seek damages from us including,
but not limited to, loss of revenue, that are currently estimated to be in
excess of $100 million, together with interest, attorneys fees and costs. We do
not believe that ultimate liability, if any, resulting from this litigation will
have a material adverse effect on our financial condition, results of operations
or cash flows. In addition, we have given notice to our insurance underwriters
that a potential loss may exist with respect to this incident. Our deductible
for this type of loss is $2 million.

During the third quarter of 2004, we were notified that some of our
subsidiaries had been named, along with other defendants, in several complaints
that had been filed in the Circuit Courts of the State of Mississippi by
approximately 800 persons alleging that they were employed by some of the named
defendants between approximately 1965 and 1986. The complaints also named as
defendants over 25 other companies that are not affiliated with us. The
complaints alleged that the defendants manufactured, distributed or utilized
drilling mud containing asbestos and, in our case and the several other offshore
drilling companies named as defendants, that such defendants allowed such
drilling mud to have been utilized aboard their offshore drilling rigs. The
plaintiffs seek, among other things, an award of unspecified compensatory and
punitive damages. To date, we have been served with 29 complaints, of which 13
complaints were filed against Arethusa Off-Shore Company and 16 complaints were
filed against Diamond Offshore (USA), Inc. (now known as Diamond Offshore (USA)
L.L.C. and formerly known as Odeco Drilling, Inc.). We recently filed motions to
dismiss each of these cases based upon a number of legal grounds, including
naming improper parties. In April 2005 the plaintiffs agreed to dismiss, with
prejudice, all 13 complaints filed against Arethusa Off-Shore Company after we
demonstrated that the claims could not be maintained against us or any of our
subsidiaries. In addition, we expect to receive complete defense and indemnity
for the remaining 16 complaints from Murphy Exploration & Production Company
pursuant to the terms of our 1992 asset purchase agreement with them.
Accordingly, we are unable to estimate our potential exposure, if any, to these
lawsuits at this time but do not believe that ultimate liability, if any,
resulting from this litigation will have a material adverse effect on our
financial condition, results of operations or cash flows.

Various other claims have been filed against us in the ordinary course of
business. In the opinion of our management, no pending or known threatened
claims, actions or proceedings against us are expected to have a material
adverse effect on our consolidated financial position, results of operations or
cash flows.

Other. Our operations in Brazil have exposed us to various claims and
assessments related to our personnel, customs duties and municipal taxes, among
other things, that have arisen in the ordinary course of business. In accordance
with SFAS No. 5, "Accounting for Contingencies," we have assessed each claim or
exposure to determine the likelihood that the resolution of the matter might
ultimately result in an adverse effect on our financial condition, results of
operations or cash flows. When we determine that an unfavorable resolution of a
matter is probable and such amount of loss can be determined, we record a
reserve for the estimated loss at the time that both of these criteria are met.
At June 30, 2005, our loss reserves related to our Brazilian operations
aggregated $13.6 million, of which $0.6 million and $13.0 million were recorded
in "Accrued liabilities" and "Other liabilities,"

respectively, in our Consolidated Balance Sheets. Loss reserves related to our
Brazilian operations totaled $13.0 million at December 31, 2004, of which $0.9
million was recorded in "Accrued liabilities" and $12.1 million was recorded in
"Other liabilities" in our Consolidated Balance Sheets.

We intend to defend these matters vigorously; however, we cannot predict
with certainty the outcome or effect of any litigation matters specifically
described above or any other pending litigation or claims. There can be no
assurance as to the ultimate outcome of these lawsuits.

Personal Injury Claims. Our uninsured retention of liability for personal
injury claims, which primarily results from Jones Act liability in the Gulf of
Mexico, is $0.5 million per claim with an additional aggregate annual deductible
of $1.5 million. Our in-house claims department estimates the amount of our
liability for our retention. This department establishes a reserve for each of
our personal injury claims by evaluating the existing facts and circumstances of
each claim and comparing the circumstances of each claim to historical
experiences with similar past personal injury claims. Our claims department also
estimates our liability for claims that are incurred but not reported by using
historical data. Historically, our ultimate liability for personal injury claims
has not differed materially from our recorded estimates. At June 30, 2005, our
estimated liability for personal injury claims was $35.5 million, of which $9.3
million and $26.2 million were recorded in "Accrued liabilities" and "Other
liabilities," respectively, in our Consolidated Balance Sheets. At December 31,
2004, we had recorded loss reserves for personal injury claims aggregating $33.4
million, of which $8.0 million and $25.4 million were recorded in "Accrued
liabilities" and "Other liabilities," respectively, in our Consolidated Balance
Sheets. The eventual settlement or adjudication of these claims could differ
materially from our estimated amounts due to uncertainties such as:

- the severity of personal injuries claimed,

- significant changes in the volume of personal injury claims,

- the unpredictability of legal jurisdictions where the claims will
ultimately be litigated,

- inconsistent court decisions and

- the risks and lack of predictability inherent in personal injury
litigation.

9. SEGMENTS AND GEOGRAPHIC AREA ANALYSIS

We report our operations as one reportable segment, contract drilling of
offshore oil and gas wells. Although we provide contract drilling services from
different types of offshore drilling rigs and provide 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 for such services.

Contract Drilling Services

Revenues from customers for contract drilling and similar services by
equipment-type are listed below:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- --------- --------- ---------
(IN THOUSANDS)

High Specification Floaters......................... $ 97,579 $ 59,088 $ 191,690 $ 123,840
Other Semisubmersibles.............................. 112,359 75,128 207,342 146,263
Jack-ups............................................ 63,160 42,304 123,863 83,123
Other............................................... (433) 165 (208) 699
---------- --------- --------- ---------
Total contract drilling revenues................... 272,665 176,685 522,687 353,925
Revenues related to reimbursable expenses........... 10,734 8,261 19,470 15,219
---------- --------- --------- ---------
Total revenues.................................. $ 283,399 $ 184,946 $ 542,157 $ 369,144
========== ========= ========= =========

Geographic Areas

At June 30, 2005 our drilling rigs were located offshore nine countries
other than the United States. As a result, we are exposed to the risk of changes
in social, political, economic and other conditions inherent in foreign
operations and our results of operations and the value of our foreign assets are
affected by fluctuations in foreign currency exchange rates. Revenues by
geographic area are presented by attributing revenues to the individual country
or areas where the services were performed.

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- --------- --------- ---------
(IN THOUSANDS)

United States....................................... $ 156,839 $ 79,992 $ 288,129 $ 157,702

Foreign:
South America...................................... 25,567 26,287 53,137 57,767
Europe/Africa...................................... 26,373 17,539 44,648 31,438
Australia/Asia..................................... 51,671 40,059 112,240 79,795
Mexico............................................. 21,279 21,069 42,333 42,442
Middle East........................................ 1,670 -- 1,670 --
---------- --------- --------- ---------
Total revenues.................................. $ 283,399 $ 184,946 $ 542,157 $ 369,144
========== ========= ========= =========

10. INCOME TAXES

Our net income tax expense or benefit is a function of the mix between our
domestic and international pre-tax earnings or losses, respectively, as well as
the mix of international tax jurisdictions in which we operate. Certain of our
international rigs are owned and operated, directly or indirectly, by Diamond
Offshore International Limited, a Cayman Island company which is one of our
wholly owned subsidiaries. Earnings from this subsidiary are reinvested
internationally and remittance to the U.S. is indefinitely postponed.
Consequently, no U.S tax expense or benefits were recognized on these earnings
or losses during 2005 and 2004. Our estimated annual effective rate was 27.1% as
of June 30, 2005 and 24.8% as of June 30, 2004.

Tax expense for the six months ended June 30, 2005 also included expense
of $0.9 million related to finalizing prior year tax returns in the United
Kingdom, or U.K., $0.2 million related to a settlement of a tax dispute in East
Timor and $0.1 million related to an increase in the expected settlement of a
tax dispute in Brazil. Partially offsetting the higher tax expense was a $0.2
million reduction in our valuation allowance for prior year foreign tax credits
which primarily arose from our ability to carryback certain prior year foreign
tax credits to earlier years. These additional items of net expense are not
included in the current year estimated annual effective tax rate of 27.1% and
have resulted in an actual effective tax rate of 28.0% for the six months ended
June 30, 2005.

11. PENSION PLAN

The defined benefit pension plan established by Arethusa (Off-Shore)
Limited, or Arethusa, effective October 1, 1992 was frozen on April 30, 1996. At
that date all participants were deemed fully vested in the plan, which covered
substantially all U.S. citizens and U.S. permanent residents who were employed
by Arethusa.

As a result of freezing the plan, no service cost has been accrued for the
periods presented.

Components of net periodic benefit costs were as follows:

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2005 2004 2005 2004
---------- --------- --------- ---------
(IN THOUSANDS)

Interest cost....................................... $ 260 $ 255 $ 520 $ 510
Expected return on plan assets...................... (317) (297) (633) (594)
Amortization of unrecognized loss................... 77 77 153 154
---------- --------- --------- ---------
Net periodic pension expense........................ $ 20 $ 35 $ 40 $ 70
========== ========= ========= =========

During 2004 we made a voluntary contribution to the plan of $0.2 million.
We do not expect to make a contribution to our pension plan in 2005.

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

The following discussion should be read in conjunction with our unaudited
Consolidated Financial Statements (including the Notes thereto) included
elsewhere in this report. References to "Diamond Offshore," "we," "us" or "our"
mean Diamond Offshore Drilling, Inc., a Delaware corporation, and its
subsidiaries.

We are a leader in deep water drilling with a fleet of 44 offshore
drilling rigs. Our fleet currently consists of 29 semisubmersibles, 14 jack-ups
and one drillship. In June 2005, we completed the sale of the Ocean Liberator
and received net cash proceeds of $13.6 million after broker commissions.

OVERVIEW

RESULTS OF OPERATIONS AND INDUSTRY CONDITIONS

The overall market for our mid and deepwater semisubmersible rigs
continued to reflect steady improvement during the second quarter of 2005, as
did the market for our jack-up rigs. As a result, we currently have a total of
approximately 60 rig years of backlog contracted or committed on our fleet,
compared with approximately 26 rig years at the end of the second quarter of
2004. Solid demand for all classes of offshore drilling rigs in the face of
tight supply is continuing to lift dayrates and utilization rates around the
world; however, actual revenues received in future periods could be reduced by
various operating factors.

Gulf of Mexico. In the U.S. Gulf of Mexico, or GOM, commitments for one of
our high-specification rigs has reached as high as $280,000 per day for work
beginning early in the first quarter of 2006 and extending until the first
quarter of 2008. This contrasts with a dayrate of $175,000 that the unit is
currently earning. Five of our six high-specification semisubmersible rigs in
the U.S. GOM are currently contracted at higher dayrates than those earned at
the first quarter of 2005, and all six high-specification rigs have future
contracts at improved dayrates beginning in the third and fourth quarters of
2005 and early 2006. In late July, we entered into a letter of intent, or LOI,
to utilize the Ocean Endeavor in the Gulf of Mexico for a period of between two
and four years, commencing when the rig is expected to be delivered from the
shipyard in the first quarter of 2007. If a definitive agreement is reached, the
rig could earn approximate total revenue of between $198 million and $355
million, depending upon the length of the contract selected by the operator. The
Ocean Endeavor, a Victory-class semisubmersible rig, is currently being upgraded
in Singapore for ultra-deepwater service. In addition, the Company has received
an LOI to utilize the 3,500-ft semisubmersible Ocean Quest for a period of six
months, plus an option period, commencing in mid-October 2005. Under the LOI,
the rig could earn approximate total revenue of $42.2 million. The Ocean Quest
is currently operating with a four-month contract, under which the unit is
expected to earn approximate total revenue of $15 million. Each LOI is subject
to customary conditions, including execution of definitive agreements.

The dayrates for our four mid-water semisubmersibles operating in the U.S.
GOM have reached as high as $175,000 for a one-well contract beginning in the
fourth quarter of 2005. This contrasts with an average dayrate in the upper
$50,000 range earned during December 2004 by these four drilling units. We
continue to view the deepwater and mid-water market in the GOM as
under-supplied, and believe that additional improvement in utilization, backlog
and dayrates is likely in this market segment during 2005.

Our jack-up fleet in the GOM also continued to experience high utilization
and improving dayrates during the second quarter of 2005. We view the jack-up
market in the U.S. GOM as firm, with effective utilization near 100 percent and
demand sporadically exceeding supply. As a result, we believe the market and
dayrates for this class of equipment could improve further during 2005.

In the Mexican GOM, our four semisubmersible rigs remain under long-term
contracts that extend into late 2006 and early 2007. We believe that future work
for other of our semisubmersibles and jack-ups in this market is possible,
though limited. We view the market for the Mexican GOM as firm and expect it to
remain so during 2005.

Brazil. We have renewed contracts for our four rigs operating in Brazil
for terms of four years for each of our three semisubmersibles and five years
for our drillship, the Ocean Clipper, at dayrates that could generate total
revenues of over $880 million, excluding potential bonuses, assuming full
utilization over the term of the contracts. The new contracts will begin upon
current contract expirations in the third quarter of 2005 and first quarter of
2006. We view the Brazilian semisubmersible market as balanced and expect it to
remain so during 2005.

North Sea. Drilling activity in both the U.K. and Norwegian sectors of the
North Sea has mirrored that in the GOM since mid-2004. We have recently received
one-year extensions on three of our mid-water rigs currently operating in the
U.K. at dayrates ranging from $152,500 to $160,000 for work beginning in the
first quarter of 2006. The current dayrate for each of those three units is
$80,000. Effective industry utilization remains near 100 percent in the North
Sea, and pricing is continuing to increase. We believe this market will continue
to improve throughout the balance of 2005.

Australia/Asia/Middle East. We currently have five semisubmersible rigs
and one jack-up rig operating in the Australia/Asia market under contracts or
commitments for work extending well into 2006 at favorable and increasing
dayrates. One of our jack-up units, the Ocean Heritage, mobilized from Southeast
Asia to Qatar during the second quarter of 2005, where the unit is operating
under an approximately seven-month agreement at a dayrate of $71,000. We view
demand in the Australia/Asia and Middle Eastern markets as increasing, and with
high utilization. We believe continuing improvement in dayrates is probable.

GENERAL

Revenues. Our revenues vary based upon demand, which affects the number of
days our fleet is utilized and the dayrates earned. When a rig is idle, no
dayrate is earned and revenues will decrease as a result. Revenues can also be
affected as a result of the acquisition or disposal of rigs, required surveys
and shipyard upgrades. In order to improve utilization or realize higher
dayrates, we may mobilize our rigs from one market to another. However, during
periods of mobilization, revenues may be adversely affected. As a response to
changes in demand, we may withdraw a rig from the market by stacking it or may
reactivate a rig stacked previously, which may decrease or increase revenues,
respectively. The two most significant variables affecting revenues are dayrates
for rigs and rig utilization rates, each of which is a function of rig supply
and demand in the marketplace. As utilization rates increase, dayrates tend to
increase as well, reflecting the lower supply of available rigs, and vice versa.
The same factors, primarily demand for drilling services, which is dependent
upon the level of expenditures set by oil and gas companies for offshore
exploration and development as well as a variety of political and economic
factors, and availability of rigs in a particular geographical region, affect
both dayrates and utilization rates. These factors are not within our control
and are difficult to predict with any degree of specificity beyond broad market
trends.

Revenue from dayrate drilling contracts is recognized as services are
performed. In connection with such drilling contracts, we may receive lump-sum
fees for the mobilization of equipment. These fees are earned as services are
performed over the initial term of the related drilling contracts. We previously
accounted for the excess of mobilization fees received over costs incurred to
mobilize an offshore rig from one market to another as revenue over the term of
the related drilling contracts. Effective July 1, 2004 we changed our accounting
to defer mobilization fees received as well as direct and incremental
mobilization costs incurred and began to amortize each, on a straight line
basis, over the term of the related drilling contracts (which is the period
estimated to be benefited from the mobilization activity). Straight line
amortization of mobilization revenues and related costs over the term of the
related drilling contracts (which generally range from two to 60 months) is
consistent with the timing of net cash flows generated from the actual drilling
services performed. If we had used this method of accounting in periods prior to
July 1, 2004, previously reported operating income (loss) and net income (loss)
would not have changed and the impact on contract drilling revenues and expenses
would have been immaterial. Absent a contract, mobilization costs are recognized
currently.

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, few decreases in operating expenses
may actually occur since the rig is typically maintained in a prepared or "ready
stacked" state with a full crew. In addition, when a rig is idle, we are
responsible for certain operating expenses such as rig fuel and supply boat
costs, which are typically costs of the operator when a rig is under contract.
However, if the rig is to be idle for an extended period of time, we 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. We recognize, as
incurred, operating expenses such as inspections, painting projects and routine
overhauls that meet certain criteria and which maintain rather than upgrade our
rigs. These expenses vary from period to period. Costs of rig enhancements are
capitalized and depreciated over the expected useful lives of the enhancements.
Higher depreciation expense decreases operating

income in periods subsequent to capital upgrades.

Operating income is negatively impacted when we perform certain regulatory
inspections, which we refer to as a 5-year survey or special survey, that are
due every five years for all of our rigs. Operating revenue decreases because
these surveys are performed during scheduled down-time in a shipyard. Operating
expenses increase as a result of these surveys due to the cost to mobilize the
rigs to a shipyard, inspection costs incurred and repair and maintenance costs.
Repair and maintenance costs may be required resulting from the survey or may
have been previously planned to take place during this mandatory down-time. The
number of rigs undergoing a 5-year survey will vary from year to year.

In addition, operating income may be negatively impacted by intermediate
surveys, which are performed at interim periods between 5-year surveys.
Intermediate surveys are generally less extensive in duration and scope than a
5-year survey and require downtime for the drilling rig, but normally do not
require dry-docking or shipyard time.

We recently renewed our insurance policies for hull and machinery damage,
workers' compensation and general liability coverages, among other things, at an
aggregate annual cost of approximately $17 million, which represents
approximately a 15% increase in insurance costs compared to the previous policy
period. Insurance premiums will be amortized as expense over the applicable
policy periods which generally expire in April 2006.

CRITICAL ACCOUNTING ESTIMATES

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

Property, Plant and Equipment. Drilling and other property and equipment
is carried at cost. Maintenance and routine repairs are charged to income
currently while replacements and betterments, which meet certain criteria, are
capitalized. Depreciation is amortized up to applicable salvage values by
applying the straight-line method over the remaining estimated useful lives. Our
management makes judgments, assumptions and estimates regarding capitalization,
useful lives and salvage values. Changes in these judgments, assumptions and
estimates could produce results that differ from those reported.

We evaluate our property and equipment for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. We utilize a probability-weighted cash flow analysis in testing an
asset for potential impairment. The assumptions and estimates underlying this
analysis include:

- dayrate by rig,

- utilization rate by rig (expressed as the actual percentage of time
per year that the rig would be used),

- the per day operating cost for each rig if active, ready stacked or
cold stacked and

- salvage value for each rig.

Based on these assumptions and estimates a matrix is developed assigning
probabilities to various combinations of assumed utilization rates and dayrates.
The impact of a 5% reduction in assumed dayrates for the cold stacked rigs
(holding all other assumptions and estimates in the model constant), or
alternatively the impact of a 5% reduction in utilization (again holding all
other assumptions and estimates in the model constant) is also considered as
part of this analysis.

At June 30, 2005, there were no changes in circumstances that indicated
that the carrying value of our property and equipment, primarily drilling
equipment, may not be recoverable.

Management's assumptions are an inherent part of an asset impairment
evaluation and the use of different assumptions could produce results that
differ from those reported.

comparing the circumstances of each claim to historical experiences with similar
past personal injury claims. Our claims department also estimates our liability
for claims which are incurred but not reported by using historical data.
Historically, our ultimate liability for personal injury claims has not differed
materially from our recorded estimates. At June 30, 2005, our estimated
liability for personal injury claims was $35.5 million. The eventual settlement
or adjudication of these claims could differ materially from the estimated
amounts due to uncertainties such as:

- the severity of personal injuries claimed,

- significant changes in the volume of personal injury claims,

- the unpredictability of legal jurisdictions where the claims will
ultimately be litigated,

- inconsistent court decisions and

- the risks and lack of predictability inherent in personal injury
litigation.

Income Taxes. We account for income taxes in accordance with Statement of
Financial Accounting Standards, or SFAS, No. 109, "Accounting for Income Taxes,"
which requires the recognition of the amount of taxes payable or refundable for
the current year and an asset and liability approach in recognizing the amount
of deferred tax liabilities and assets for the future tax consequences of events
that have been currently recognized in our financial statements or tax returns.
In each of our tax jurisdictions we recognize a current tax liability or asset
for the estimated taxes payable or refundable on tax returns for the current
year and a deferred tax asset or liability for the estimated future tax effects
attributable to temporary differences and carryforwards. Deferred tax assets are
reduced by a valuation allowance, if necessary, which is determined by the
amount of any tax benefits that, based on available evidence, are not expected
to be realized under a "more likely than not" approach. For interim periods, we
estimate our annual effective tax rate by forecasting our annual income before
income tax, taxable income and tax expense in each of our tax jurisdictions. We
make judgments regarding future events and related estimates especially as they
pertain to forecasting of our effective tax rate, the potential realization of
deferred tax assets such as utilization of foreign tax credits, and exposure to
the disallowance of items deducted on tax returns upon audit.

THREE MONTHS ENDED JUNE 30, 2005 AND 2004

Comparative data relating to our revenues and operating expenses by
equipment type are listed below. Certain amounts applicable to the prior period
have been reclassified to conform to the classifications currently followed.
Such reclassifications do not affect earnings.

THREE MONTHS ENDED
JUNE 30,
--------------------- FAVORABLE/
2005 2004 (UNFAVORABLE)
--------- --------- -------------
(In thousands)

CONTRACT DRILLING REVENUE
High Specification Floaters.............. $ 97,579 $ 59,088 $ 38,491
Other Semisubmersibles................... 112,359 75,128 37,231
Jack-ups................................. 63,160 42,304 20,856
Other.................................... (433) 165 (598)
--------- --------- -------------
TOTAL CONTRACT DRILLING REVENUE.......... $ 272,665 $ 176,685 $ 95,980
========= ========= =============

REVENUES RELATED TO REIMBURSABLE EXPENSES $ 10,734 8,261 $ 2,473

CONTRACT DRILLING EXPENSE
High Specification Floaters.............. $ 46,011 $ 40,668 $ (5,343)
Other Semisubmersibles................... 80,873 67,960 (12,913)
Jack-ups................................. 32,751 24,082 (8,669)
Other.................................... 2,854 773 (2,081)
--------- --------- -------------
TOTAL CONTRACT DRILLING EXPENSE.......... $ 162,489 $ 133,483 $ (29,006)
========= ========= =============

REIMBURSABLE EXPENSES.................... $ 9,099 $ 7,519 (1,580)

OPERATING INCOME (LOSS)
High Specification Floaters.............. $ 51,568 $ 18,420 $ 33,148
Other Semisubmersibles................... 31,486 7,168 24,318
Jack-ups................................. 30,409 18,222 12,187
Other.................................... (3,287) (608) (2,679)
Reimbursable expenses, net 1,635 742 893
Depreciation............................. (45,978) (44,554) (1,424)
General and administrative expense....... (9,186) (8,760) (426)
Gain (loss) on sale of assets............ 8,250 (130) 8,380
--------- --------- -------------
TOTAL OPERATING INCOME (LOSS)............ $ 64,897 $ (9,500) $ 74,397
========= ========= =============

High Specification Floaters.

Revenues. Revenues generated by our high specification floaters (deepwater
semisubmersibles) increased $38.5 million during the quarter ended June 30, 2005
compared to the same period in 2004.

Average operating revenues per day for our rigs in this category rose to
$121,500 during the second quarter of 2005 from $97,800 during the second
quarter of 2004, which generated an additional $20.0 million in revenue in the
second quarter of 2005. All but two of our higher specification floaters
operated under contracts with higher operating dayrates during the second
quarter of 2005, as compared to the second quarter of 2004, as a result of an
improvement in the deepwater market which began in the third quarter of 2004.
Average operating dayrates earned by our entire fleet of high specification
floaters in the second quarter of 2005 increased 23% compared to average
operating dayrates earned during the second quarter of 2004.

In addition, utilization for our deepwater fleet improved to 88% during
the second quarter of 2005 from 66% during the same period in 2004. This
increase in utilization generated $18.5 million in additional revenues in the
second quarter of 2005, as compared to the second quarter of 2004. Utilization
improved in the second quarter of 2005 compared to the same quarter of 2004 for:

- the Ocean Star and the Ocean Victory, which were ready-stacked for
an aggregate of 69 rig days in the second quarter of 2004;

- the Ocean America, which was in a shipyard for nearly all of the
second quarter of 2004 for a 5-year survey and upgrade; and

- the Ocean Alliance, which was in a shipyard during the second
quarter of 2004 for repairs to sub-sea and electrical equipment.

All of these rigs operated under contract for all or most of the second
quarter of 2005.

Favorable utilization rates were partially offset by downtime for the
Ocean Baroness, which was stacked for almost half of the second quarter of 2005,
and the Ocean Clipper, which was in a shipyard for 19 days for thruster repairs,
compared to the same period in 2004 when both of these rigs were working. The
Ocean Baroness is currently in a shipyard in Singapore for an intermediate
survey and is awaiting its tow to the U.S. GOM, which is expected to commence in
August 2005.

Contract Drilling Expense. Contract drilling expense for our deepwater
semisubmersibles increased $5.3 million for the second quarter ended June 30,
2005 compared to the same period in 2004 primarily due to:

- higher overall costs for the Ocean Clipper during the second quarter
of 2005 while the rig was in a shipyard for repairs;

- higher normal operating expenses for the Ocean Star and Ocean
Victory, which worked the entire second quarter of 2005 compared to
being stacked for part of the second quarter of 2004;

- higher local labor costs for our rig-based and shore-based personnel
in Brazil due to 2005 wage increases;

- normal operating costs for the Ocean America during the second
quarter of 2005 compared to the second quarter of 2004, when the
majority of the rig's operating costs were capitalized in connection
with a major upgrade to make it more suitable for developmental
drilling; and

- higher repair and maintenance costs for the Ocean Rover during the
second quarter of 2005 compared to the same period in 2004, as a
result of reduced repair costs in 2004 due to the rig's recent
upgrade in 2003 and higher labor benefits costs in 2005 due to a
prior year Malaysian tax assessment.

Partially offsetting the higher contract drilling expenses were lower
major maintenance costs and non-reimbursable fuel charges for the Ocean Alliance
during the second quarter of 2005, as compared to the same period in 2004.

Other Semisubmersibles.

Revenues. Revenues generated by our other semisubmersibles in the
mid-water market during the quarter ended June 30, 2005 increased $37.2 million,
as compared to the same period in 2004. Average operating revenue per day for
our fleet of mid-water semisubmersibles increased from $53,900 in the second
quarter of 2004 to $72,800 in the second quarter of 2005 due to the continuing
improvement in the mid-water market. This favorable trend in revenues resulted
in $23.2 million in additional revenues in the second quarter of 2005, as
compared to the same period in 2004.

Average utilization for our rigs in the mid-water market increased from
79% in the second quarter of 2004 to 87% (excluding the Ocean Endeavor, which is
undergoing a major upgrade) for the second quarter of 2005. Improvements in
average utilization resulted in additional revenues of $12.8 million in the
second quarter of 2005, as compared to the second quarter of 2004. The most
significant improvement in utilization was achieved by the Ocean Voyager which
worked the entire second quarter of 2005 after being reactivated from cold-stack
status in the fourth quarter of 2004, contributing $9.1 million to the favorable
utilization variance discussed above. Other changes in utilization are primarily
reflective of the timing of surveys and maintenance activities between periods.

Our revenues for the second quarter of 2005 also included $1.7 million in
incremental mobilization fees over the comparable period in 2004, primarily
related to the Ocean Patriot's 2004 mobilization from South Africa to

New Zealand and the Bass Strait. In the second quarter of 2004, we recognized
$0.5 million in fees in connection with a rig move by the Ocean Nomad between
locations offshore western Africa.

Contract Drilling Expense. Contract drilling expense for our mid-water
semisubmersibles increased $12.9 million during the second quarter of 2005
compared to the same period in 2004. Significant factors impacting our operating
costs in the second quarter of 2005, as compared to the second quarter of 2004,
include:

- normal operating costs for the Ocean Voyager during the second
quarter of 2005, as compared to reduced costs during the comparable
period of 2004 when the rig was cold-stacked in the U.S. GOM; and

- amortization of $1.2 million in deferred mobilization costs during
the second quarter of 2005 for the Ocean Patriot related to its
relocation to New Zealand and the Bass Strait and the Ocean Nomad
related to its move from Gabon to the U.K. in late 2004.

Labor and related costs comprise a significant portion of our operating
expenses. During the second quarter of 2005, as compared to the same period in
2004, our operating costs were negatively impacted by increased labor and
related costs and shorebase support costs, primarily for:

- our operations in Norway, mostly due to Norwegian pay allowances and
additional personnel required to comply with Norwegian regulations
and for shipyard projects for the Ocean Vanguard in the second
quarter of 2005;

- 2005 Brazilian wage increases resulting from completion of a local
competency program for rig-based and shore-based personnel;

- the Ocean Patriot, which worked the entire second quarter of 2005
offshore Australia, as compared to operating offshore South Africa
for two months during the second quarter of 2004; and

- the Ocean Nomad, which incurred higher labor costs during the second
quarter of 2005 associated with its operations in the U.K., as
compared to the same period in 2004 when this drilling rig was
working offshore western Africa.

Partially offsetting these higher expenses were lower comparative expenses
during the second quarter of 2005 for:

- the Ocean Epoch, which had lower labor costs while working in
Malaysia compared to working in Australia the entire second quarter
of 2004;

- lower normal operating costs for the Ocean Yatzy in the second
quarter of 2005, compared to higher inspection, fuel and
mobilization costs incurred in connection with a 5-year survey
during the second quarter of 2004; and

- lower labor benefits costs for the Ocean Guardian and the Ocean
Princess due to our reversal of a prior period reserve for U.K.
mandated labor benefits in the second quarter of 2005 as a result of
our interpretation of a recent ruling by the U.K. Court of Appeals.

Jack-Ups.

Revenues. Revenues for our jack-up fleet increased $20.9 million during
the second quarter of 2005 compared to the same quarter in 2004.

Improvements in average operating dayrates contributed $19.6 million to
the overall revenue increase as average operating dayrates rose from $36,900
during the second quarter of 2004 to $51,700 during the same period of 2005. All
of our jack-up rigs experienced an increase in average operating dayrate
reflecting the continuing improvement in the jack-up market.

We also recognized $2.3 million in mobilization fees during the second
quarter of 2005, including a $2.0 million demobilization fee received by the
Ocean Sovereign in April 2005 related to the completion of its operations in
Bangladesh and relocation to Indonesia.

Utilization for our jack-up fleet fell from 97% (excluding the Ocean
Champion which was cold-stacked during the second quarter of 2004) to 92% during
the second quarter of 2005, which resulted in a decrease in revenues for the
second quarter of 2005 of $1.0 million, as compared to the same period in 2004.
Lower utilization in the second quarter of 2005, as compared to the second
quarter of 2004, is reflective of downtime for leg repairs to both the Ocean
Spur and the Ocean Heritage, as well as contract preparation work in connection
with the Ocean Heritage's contract in Qatar. This overall decline in utilization
in the second quarter of 2005 is partially offset by the Ocean Champion's
reactivation from cold-stack status in the third quarter of 2004.

Contract Drilling Expense. Contract drilling expense for our jack-up fleet
for the second quarter of 2005 increased $8.7 million compared to the same
period in 2004. In addition to higher overall routine maintenance and repair and
labor costs for all domestic jack-ups operating in the GOM, resulting from the
high, sustained utilization rates in the second quarter of 2005, our operating
costs for the period increased, as compared to the same period in 2004, due to:

- higher operating costs for the Ocean Champion in the second quarter
of 2005 compared to the same period in 2004 when the rig was
cold-stacked;

- higher well-to-well move costs for our rigs working in the U.S. GOM
and additional mobilization costs for the Ocean Sovereign due to its
second quarter 2005 move to locations offshore Bangladesh and
Indonesia;

- a $1.0 million insurance deductible for leg damage to the Ocean
Heritage; and

- higher maintenance and travel costs for the Ocean Heritage while in
a shipyard in Qatar for leg repairs and routine maintenance.

Reimbursable expenses, net.

Revenues related to reimbursable items, offset by the related expenditures
for these items, were $1.6 million and $0.7 million for the quarters ended June
30, 2005 and 2004, respectively. Reimbursable expenses include items that we
purchase, and/or services we perform, at the request of our customers. We charge
our customers for purchases and/or services performed on their behalf at cost,
plus a mark-up where applicable. Therefore, net reimbursables fluctuate based on
customer requirements, which vary.

Depreciation.

Depreciation expense increased $1.4 million to $46.0 million in the second
quarter of 2005 compared to $44.6 million in the second quarter of 2004
primarily due to depreciation associated with capital additions in 2004 and the
first half of 2005. Partially offsetting this increase was a reduction in
depreciation for the Ocean Liberator, which we removed from our
actively-marketed fleet in December 2004 and subsequently sold in June 2005.

General and Administrative Expense.

General and administrative expense for the three months ended June 30,
2005 of $9.2 million increased $0.4 million from $8.8 million for the same
period in 2004. This increase was primarily due to higher payroll costs and
higher external audit fees. Partially offsetting this increase were lower
engineering-related consulting fees and substantially lower legal fees during
the second quarter of 2005 compared to the same period in 2004 primarily due to
the settlement of litigation in December 2004.

Gain on Sale of Assets.

We recognized a net gain of $8.3 million on the sale of assets during the
second quarter of 2005 compared to a net loss on asset sales of $0.1 million
during the same quarter of 2004. Current quarter results include a pre-tax gain
of $8.0 million related to the June 2005 sale of the Ocean Liberator.

Interest Income.

We earned interest income of $6.1 million during the quarter ended June
30, 2005 compared to $3.1 million in the same period of 2004. The $3.0 million
increase in interest income is primarily the result of interest earned on

higher average cash and investment balances in 2005, as compared to the same
period in 2004. See " - Liquidity and Capital Requirements" and " - Historical
Cash Flows."

Interest Expense.

Interest expense of $15.8 million during the second quarter of 2005 was
$9.4 million higher than interest expense of $6.4 million in the same period in
2004. Our higher interest expense was primarily the result of our $6.9 million
write-off of debt issuance costs associated with our June 2005 repurchase of
approximately 96% of our then outstanding Zero Coupon Convertible Debentures due
2020, or Zero Coupon Debentures. In addition, our results for the second quarter
of 2005 included interest expense on our 4.875% Senior Notes Due July 1, 2015,
or 4.875% Senior Notes, and our 5.15% Senior Notes Due September 1, 2014, or
5.15% Senior Notes, all of which were issued subsequent to the second quarter of
2004. The increase was partially offset by lower interest expense on our Zero
Coupon Debentures, as a result of our partial repurchase in June 2005. See " -
Liquidity and Capital Requirements - Contractual Cash Obligations."

Income Tax (Expense) Benefit.

Our net income tax expense or benefit is a function of the mix between our
domestic and international pre-tax earnings or losses, respectively, as well as
the mix of international tax jurisdictions in which we operate. Income tax
expense of $14.5 million was recognized on pre-tax income of $55.8 million for
the three months ended June 30, 2005, compared to an income tax benefit of $2.2
million on a pre-tax loss of $12.7 million for the comparable period in 2004.

Certain of our international rigs are owned and operated, directly or
indirectly, by Diamond Offshore International Limited, a Cayman Island company
which is one of our wholly owned subsidiaries. Earnings from this subsidiary are
reinvested internationally and remittance to the U.S. is indefinitely postponed.
Consequently, no U.S. tax expense or benefits were recognized on these earnings
or losses during 2005 and 2004. Our estimated annual effective rate was 27.1% as
of June 30, 2005 and 24.8% as of June 30, 2004.

SIX MONTHS ENDED JUNE 30, 2005 AND 2004

Comparative data relating to the Company's revenues and operating expenses
by equipment type are listed below. Certain amounts applicable to the prior
periods have been reclassified to conform to the classifications currently
followed. Such reclassifications do not affect earnings.

SIX MONTHS ENDED
JUNE 30,
----------------------- FAVORABLE/
2005 2004 (UNFAVORABLE)
--------- --------- ---------------
(In thousands)

CONTRACT DRILLING REVENUE
High Specification Floaters ............. $ 191,690 $ 123,840 $ 67,850
Other Semisubmersibles .................. 207,342 146,263 61,079
Jack-ups ................................ 123,863 83,123 40,740
Other ................................... (208) 699 (907)
--------- --------- ---------------
TOTAL CONTRACT DRILLING REVENUE ......... $ 522,687 $ 353,925 $ 168,762
========= ========= ===============

REVENUES RELATED TO REIMBURSABLE EXPENSES $ 19,470 $ 15,219 $ 4,250

CONTRACT DRILLING EXPENSE
High Specification Floaters ............. $ 90,045 $ 83,138 $ (6,907)
Other Semisubmersibles .................. 155,966 130,952 (25,014)
Jack-ups ................................ 60,657 52,019 (8,638)
Other ................................... 4,035 2,052 (1,983)
--------- --------- ---------------
TOTAL CONTRACT DRILLING EXPENSE ......... $ 310,703 $ 268,161 $ (42,542)
========= ========= ===============

REIMBURSABLE EXPENSES ................... $ 16,434 $ 13,753 $ (2,681)

OPERATING INCOME (LOSS)
High Specification Floaters ............. $ 101,645 $ 40,702 $ 60,943
Other Semisubmersibles .................. 51,376 15,311 36,065
Jack-ups ................................ 63,206 31,104 32,102
Other ................................... (4,243) (1,353) (2,890)
Reimbursable expenses, net .............. 3,036 1,466 1,570
Depreciation ............................ (91,450) (89,074) (2,376)
General and administrative expense ...... (18,659) (17,549) (1,110)
Gain on sale and disposition of assets .. 7,992 195 7,797
--------- --------- ---------------
TOTAL OPERATING INCOME (LOSS) ........... $ 112,903 $ (19,198) $ 132,101
========= ========= ===============

High Specification Floaters.

Revenues. Revenues generated by our high specification floaters (deepwater
semisubmersibles) increased $67.9 million during the six months ended June 30,
2005 compared to the same period in 2004.

The average operating dayrate for our rigs in this market increased 21% to
$114,800 in the first six months of 2005 from $95,000 in the first half of 2004,
which reflects the continuing strength of the market for this class of rig.
Average operating revenue per day increased for all but one of our deepwater
semisubmersibles, generating an additional $36.4 million in revenues in the
first six months of 2005 compared to the same period in 2004.

In the first six months of 2005, average utilization for our rigs in the
deepwater market increased significantly over average utilization for the same
period in 2004. Average utilization increased to 92% during the first half of
2005 from 72% for the first six months of 2004, generating additional revenues
of $31.5 million in the 2005 period. Significant improvements in utilization
were achieved by:

- the Ocean Star, which operated the majority of the first half of
2005 compared to being ready-stacked for the first five months of
2004;

- the Ocean America, which worked the entire first six months of 2005
but was in a shipyard for nearly half of the first six months of
2004 for a 5-year survey and upgrade; and

- the Ocean Alliance, which worked the majority of the first half of
2005 but experienced unpaid downtime for nearly four months during
the first half of 2004 for repairs due to a series of sub-sea and
electrical problems, a 5-year survey and planned sub-sea equipment
upgrade.

Partially offsetting the overall increase in utilization for our rigs in
this market during the first six months of 2005, as compared to the same period
in 2004, was downtime for the Ocean Baroness which mobilized from Indonesia to a
shipyard in Singapore, as compared to 91% utilization during the first half of
2004. Other changes in utilization were primarily due to the timing of scheduled
surveys, related repairs and maintenance activities.

Contract Drilling Expense. Contract drilling expense for our deepwater
semisubmersibles increased $6.9 million during the first six months of 2005
compared to the same period in 2004, primarily due to $3.9 million in higher
labor and benefits costs. The increase in labor and benefits costs is reflective
of December 2004 pay increases, both domestically and in Brazil, as well as
additional staffing requirements resulting from the increased utilization of our
rigs. Additionally, increases in equipment rental costs in 2005 compared to
2004, primarily for replacement anchor chain on the Ocean America which was lost
during Hurricane Ivan in September 2004, was mostly offset by lower inspection
and other related costs in the first six months of 2005 for the Ocean Alliance
and the Ocean America which completed 5-year surveys in 2004.

Other Semisubmersibles.

Revenues. Revenues generated by our other (or mid-water) semisubmersibles
for the six months ended June 30, 2005 increased $61.1 million compared to the
same period in 2004.

Average operating revenue per day for our fleet of mid-water
semisubmersibles rose to $69,000 for the first half of 2005 from $54,300 for the
first half of 2004, contributing $35.8 million in additional revenues for the
first six months of 2005, as compared to the same period in 2004. The effect of
this upward trend in operating dayrates was first realized in the fourth quarter
of 2004 and has continued into 2005.

Utilization for our rigs in the mid-water market improved during the first
six months of 2005, compared to the same period in 2004, resulting in an
additional $23.6 million in revenue. Average utilization increased from 76% for
the first six months of 2004 to 85% (excluding the Ocean Endeavor, which is
undergoing a major upgrade) for the same period in 2005, as all of our
actively-marketed fleet of other semisubmersibles returned to service by the end
of 2004. Significant increases in utilization in the first half of 2005 compared
to the same period in 2004 were achieved by:

- the Ocean Voyager, which was cold-stacked the entire first half of
2004 and worked the entire first half of 2005;

- the Ocean Concord and the Ocean Winner, each of which spent part of
the first six months of 2004 in a shipyard for 5-year surveys; and

- the Ocean Patriot, which was stacked for nearly 90 days at various
points during the first half of 2004, compared to working the
majority of the first half of 2005.

Partially offsetting the increase in overall utilization was downtime for
the Ocean Epoch which mobilized during the first quarter of 2005 to a shipyard
in Singapore for a 5-year survey and contract preparation work, as compared to
the same period in 2004 when the rig worked the majority of the period.
Utilization in the first half of 2005 also decreased for the Ocean Lexington and
Ocean Nomad, as compared to the first half of 2004, due to downtime associated
with a steel renewal project and 5-year survey for the Ocean Lexington that
commenced late in the second quarter of 2005 and unpaid downtime for repairs to
the Ocean Nomad.

During the six months ended June 30, 2005, we also recognized in income
$5.3 million in deferred mobilization fees we received, of which $4.4 million
related to the Ocean Patriot's 2004 mobilization from South Africa to New
Zealand and the Bass Strait.

Contract Drilling Expense. Contract drilling expense for our mid-water
semisubmersibles increased $25.0 million during the first six months of 2005
compared to the same period in 2004 primarily due to:

- increased labor costs, both domestically and internationally,
primarily due to December 2004 salary increases for our rig-based
personnel and higher national labor and related costs in Australia,
Brazil, Norway and the U.K. as compared to other regions;

- normal operating costs for the Ocean Vanguard in Norway and the
Ocean Voyager during the first half of 2005, as compared to reduced
costs during the comparable period of 2004 when the Ocean Vanguard
was ready-stacked in the U.K. and the Ocean Voyager was cold-stacked
in the U.S. GOM until the fourth quarter of 2004, as well as
additional costs related to repair work on the Ocean Vanguard in
early 2005;

- the Ocean Patriot, which incurred normal operating costs while
working in Australia as compared to the first half of 2004 when this
rig was stacked for inspections and related repairs in South Africa;

- amortization of $3.6 million in deferred mobilization costs for the
Ocean Patriot and $1.0 million for the Ocean Nomad during the first
six months of 2005; and

- higher routine maintenance and repair and inspection costs for the
Ocean Epoch which was in a shipyard for part of the first six months
of 2005, as compared to normal operating costs during the same
period of 2004.

Partially offsetting these higher expenses were lower comparative expenses
during the first six months of 2005, as compared to the same period in 2004,
for:

- the Ocean Concord, which incurred additional mobilization and 5-year
survey costs during the first six months of 2004 compared to normal
operating costs during the first six months of 2005; and

- the Ocean Epoch, which had higher national labor costs during the
first half of 2004 while working in Australia compared to reduced
labor costs in the first half of 2005 when the rig mobilized to
Singapore.

Jack-Ups.

Revenues. Our jack-up fleet generated revenues of $123.9 million during
the six months ended June 30, 2005, or an increase of $40.7 million compared to
the same period in 2004.

The most significant factor contributing to the increase in revenues was
the improvement in average operating revenue per day during the first half of
2005, as compared to the first half of 2004. Increases in dayrates contributed
$35.2 million to the overall revenue increase as average operating revenue per
day rose from $36,900 during the first six months of 2004 to $50,900 during the
same period of 2005. Average operating dayrates for all of our jack-up rigs
increased in the first half of 2005, as compared to the same period in 2004,
reflecting the continuing improvement in the jack-up market.

Continuing improvements in the jack-up market were responsible for the
increase in overall utilization for our jack-up fleet to 94% during the first
half of 2005 from 87% during the first half of 2004. This increase in
utilization generated an additional $4.3 million in revenue during the six
months ended June 30, 2005 compared to the same period in 2004. The increase in
utilization is primarily the result of the reactivation from cold-stack status
of the Ocean Champion in the third quarter of 2004 and the nearly full
utilization of both the Ocean Columbia and the Ocean Nugget in the first half of
2005, which were in shipyards for all or part of the first half of 2004 for
inspections and related repairs. Favorable utilization trends in the first six
months of 2005 were partially offset by lower utilization for the Ocean Heritage
which experienced unpaid downtime for leg repairs and contract preparation work
during the second quarter of 2005 and the Ocean Warwick which was in a shipyard
for hurricane repairs during January 2005.

Contract Drilling Expense. Contract drilling expenses for our jack-up
fleet for the six months ended June 30, 2005 increased $8.6 million compared to
the same period in 2004, primarily due to:

- normal operating costs during the first half of 2005 for the Ocean
Champion subsequent to its reactivation in August 2004;

- higher normal operating costs for all of our jack-up rigs operating
in the U.S. GOM due to the increase in average utilization in the
first half of 2005 compared to the same period in 2004, including
the effect of December 2004 salary increases;

- higher mobilization costs associated with well-to-well rig moves
within the U.S. GOM and amortization of move costs associated with
the relocation of the Ocean Sovereign to various locations offshore
Southeast Asia late in the fourth quarter of 2004 and in the first
half of 2005; and

- a $1.0 million insurance deductible for leg damage to the Ocean
Heritage.

Partially offsetting these higher contract drilling expenses were lower
mobilization costs during the first half of 2005 for the Ocean Heritage compared
to the same period in 2004 when the rig incurred additional costs to mobilize to
Ecuador.

Reimbursable expenses, net.

Revenues related to reimbursable items, offset by the related expenditures
for these items, were $3.0 million and $1.5 million for the six months ended
June 30, 2005 and 2004, respectively. Reimbursable expenses include items that
we purchase, and/or services we perform, at the request of our customers. We
charge our customers for purchases and/or services performed on their behalf at
cost, plus a mark-up where applicable. Therefore, net reimbursables fluctuate
based on customer requirements, which vary.

Depreciation.

Depreciation expense increased $2.4 million to $91.5 million in the first
half of 2005 compared to $89.1 million in the first half of 2004 primarily due
to depreciation associated with capital additions in 2004 and the first half of
2005. Partially offsetting this increase was a reduction in depreciation for the
Ocean Liberator, which we removed from our actively-marketed fleet in December
2004 and subsequently sold in June 2005.

General and Administrative Expense.

We incurred general and administrative expense of $18.6 million during the
six months ended June 30, 2005 compared to $17.5 million for the same period in
2004. The $1.1 million increase in costs between the periods was primarily due
to higher payroll costs and external audit fees in the first half of 2005.
Partially offsetting were lower legal fees during the first half of 2005
compared to the same period in 2004 primarily due to the settlement of
litigation in December 2004.

Gain on Sale of Assets.

We recognized a net gain of $8.0 million on the sale of assets during the
first half of 2005 compared to a net gain of $0.2 million during the same period
of 2004. This current year gain was primarily due to the June 2005 sale of the
Ocean Liberator for a pre-tax gain of $8.0 million.

Interest Income.

We earned interest income of $11.9 million during the six months ended
June 30, 2005 compared to $4.7 million in the same period of 2004. The $7.2
million increase in interest income is primarily the result of interest earned
on higher average cash and investment balances in 2005, as compared to the same
period in 2004. See " - Liquidity and Capital Requirements" and " - Historical
Cash Flows."

Interest Expense.

Interest expense of $25.3 million during the first six months of 2005 was
$12.6 million higher than interest expense of $12.7 million in the same period
in 2004. This increase was primarily attributable to our write-off of $6.9
million in debt issuance costs associated with our June 2005 repurchase of
approximately 96% of our then outstanding Zero Coupon Debentures. In addition,
interest expense for the six months ended June 30, 2005 included interest
related to our 4.875% Senior Notes and our 5.15% Senior Notes. The increase was
partially offset by lower interest expense on our Zero Coupon Debentures as a
result of the partial repurchase in June 2005. See " - Liquidity and Capital
Requirements - Contractual Cash Obligations."

Income Tax (Expense) Benefit.

We recognized income tax expense of $27.7 million on pre-tax income of
$99.1 million for the six months ended June 30, 2005 compared to an income tax
benefit of $5.9 million on a pre-tax loss of $27.4 million for the comparable
period in 2004. Our estimated annual effective rate was 27.1% as of June 30,
2005 and 24.8% as of June 30, 2004.

Tax expense for the six months ended June 30, 2005 also included expense
of $0.9 million related to finalizing prior year tax returns in the U.K., $0.2
million related to a settlement of a tax dispute in East Timor and $0.1 million
related to an increase in the expected settlement of a tax dispute in Brazil.
Partially offsetting the higher tax expense was a $0.2 million reduction to the
valuation allowance for prior year foreign tax credits which arose primarily
from our ability to carryback certain prior year foreign tax credits to earlier
years. These additional items of net expense are not included in the current
year estimated annual effective tax rate of 27.1% and have resulted in actual
effective tax rate of 28.0% for the six months ended June 30, 2005.

The net tax benefit recognized for the six months ended June 30, 2004
included $0.9 million in expense related to the finalization of prior year tax
returns in two foreign jurisdictions. This additional expense is not included in
the calculation of our estimated annual effective tax rate for 2004 of 24.8% and
resulted in an actual effective tax rate of 21.6% for the six months ended June
30, 2004.

OPERATIONS OUTSIDE THE UNITED STATES

Our non-U.S. operations are subject to certain political, economic and
other uncertainties not normally encountered in U.S. operations, including risks
of war and civil disturbances (or other risks that may limit or disrupt
markets), expropriation and the general hazards associated with the assertion of
national sovereignty over certain areas in which operations are conducted. No
prediction can be made as to what governmental regulations may be enacted in the
future that could adversely affect our non-U.S. operations or the international
offshore contract drilling industry. Our operations outside the United States
may also face the additional risk of fluctuating currency values, hard currency
shortages, controls of currency exchange and repatriation of income or capital.

We operate four of our semisubmersible rigs offshore Mexico for
Pemex-Exploracion y Produccion, the national oil company of Mexico. The terms of
these contracts expose us to greater risks than we normally assume, such as
exposure to greater environmental liability. While we believe that the financial
terms of the contracts and our operating safeguards in place mitigate these
risks, there can be no assurance that our increased risk exposure will not have
a negative impact on our future operations or financial results.

SOURCES OF LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity and capital resources are our cash
flows from operations, proceeds from the issuance of debt securities and our
cash reserves. At June 30, 2005 we had $687.9 million in "Cash and cash
equivalents" and $302.3 million in "Investments and marketable securities"
(including accrued purchases of $299.6 million in U.S. Treasury Bills which did
not settle until July 1, 2005) representing our investment of cash available for
current operations. On July 1, 2005, we repaid the $299.6 million payable for
securities purchased out of our existing cash balances.

Cash Flows from Operations. We operate in an industry that has been, and
is expected to continue to be, extremely competitive and highly cyclical. Our
cash flows from operations are a function of the dayrates we receive for our
drilling rigs, as well as the utilization of these rigs. These factors are not
within our control and are difficult to predict with any degree of specificity.
For a description of other factors that could affect our cash flows from

operations, see " - Overview - Results of Operations and Industry Conditions"
and " - Forward-Looking Statements."

Shelf Registration. We have the ability to issue an aggregate of
approximately $117.5 million in debt, equity and other securities under a shelf
registration statement. In addition, we may issue, from time to time, up to
eight million shares of common stock, shares which are registered under an
acquisition shelf registration statement (upon effectiveness of any required
amendment thereto), in connection with one or more acquisitions by us of
securities or assets of other businesses.

LIQUIDITY AND CAPITAL REQUIREMENTS

Our liquidity and capital requirements are primarily a function of our
working capital needs, capital expenditures and debt service requirements. Cash
required to meet our capital commitments is determined by evaluating the need to
upgrade rigs to meet specific customer requirements and by evaluating our
ongoing rig equipment replacement and enhancement programs, including water
depth and drilling capability upgrades. It is the opinion of our management that
our operating cash flows and cash reserves will be sufficient to meet these
capital commitments; however, we will continue to make periodic assessments
based on industry conditions. In addition, we 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. Our
ability to effect any such issuance will be dependent on the results of our
operations, our current financial condition, current market conditions and other
factors which are beyond our control.

We believe that we have the financial resources needed to meet our
business requirements in the foreseeable future, including capital expenditures
for rig upgrades and continuing rig enhancements, and working capital
requirements.

Contractual Cash Obligations.

Purchase Obligations and Capital Commitments. As of June 30, 2005, we had
purchase obligations aggregating approximately $193 million and $227.2 million
related to the major upgrade of the Ocean Endeavor and construction of two new
jack-up rigs, respectively. We had no other purchase obligations for major rig
upgrades or any other significant obligations at June 30, 2005, except for those
that arise during the normal course of business and are related to our direct
rig operations.

In April 2005, we signed a definitive purchase agreement to purchase the
Enserch Garden Banks and related equipment for $20.0 million, which we expect to
complete in September 2005. See " - Capital Expenditures."

4.875% Senior Notes. On June 14, 2005, we issued $250.0 million aggregate
principal amount of 4.875% Senior Notes at an offering price of 99.785% of the
principal amount, resulting in net proceeds to us of $247.7 million, exclusive
of accrued issuance costs. We expect to use the proceeds from this offering for
general corporate purposes.

Our 4.875% Senior Notes bear interest at 4.875% per year, payable
semiannually in arrears on January 1 and July 1 of each year, beginning January
1, 2006, and mature on July 1, 2015. The 4.875% Senior Notes are unsecured and
unsubordinated obligations of Diamond Offshore Drilling, Inc., and they rank
equal in right of payment to our existing and future unsecured and
unsubordinated indebtedness, although the 4.875% Senior Notes will be
effectively subordinated to all existing and future obligations of our
subsidiaries. We have the right to redeem all or a portion of these notes for
cash at any time or from time to time on at least 15 days but not more than 60
days prior written notice, at the redemption price specified in the governing
indenture plus accrued and unpaid interest to the date of redemption.

Zero Coupon Debentures. On June 7, 2005, we repurchased $460.0 million
accreted value, or $774.1 million in aggregate principal amount at maturity, of
our Zero Coupon Debentures at a purchase price of $594.25 per $1,000 principal
amount at maturity, which represents approximately 96% of our then outstanding
Zero Coupon Debentures. The holders of our remaining outstanding Zero Coupon
Debentures have the right to require us to repurchase the Zero Coupon Debentures
on June 6, 2010 and June 6, 2015 at the accreted value through the date of
repurchase. We may pay such repurchase price with either cash or shares of our
common stock or a combination of cash and shares of common stock.

As of June 30, 2005, the aggregate accreted value of our Zero Coupon
Debentures then outstanding of $18.4 million is classified as long-term debt in
our Consolidated Balance Sheet. The aggregate principal amount at maturity will
be $30.9 million assuming no additional conversions or redemptions occur prior
to the maturity date.

Dividends. In July 2005, we declared a cash dividend of $0.125 per share
of our common stock payable on September 1, 2005 to stockholders of record on
August 1, 2005 which represents an increase from the cash dividend of $0.0625
per share of our common stock that we paid in previous quarters.

Our Board of Directors will consider declaring a special cash dividend in
the first quarter of 2006. The amount of the special cash dividend, if any, will
be determined by our Board. Any future determination as to the payment of
dividends will be made at the discretion of our Board of Directors and will
depend upon our operating results, financial condition, capital requirements,
general business conditions and such other factors that our Board of Directors
deems relevant.

Letters of Credit.

We are contingently liable as of June 30, 2005 in the amount of $77.2
million under certain performance, bid, supersedeas and custom bonds and letters
of credit. Agreements related to approximately $34.0 million of multi-year
performance bonds can require cash collateral for the full line at any time for
any reason. Holders of agreements related to another $4.2 million currently have
the option to require cash collateral due to the lowering of our credit rating
in 2004. As of June 30, 2005 we have not been required to make any cash
collateral deposits with respect to these agreements. The remaining agreements
cannot require cash collateral except in events of default. On our behalf, banks
have issued letters of credit securing certain of these bonds.

Capital Expenditures.

In the second quarter of 2005, we entered into agreements with Keppel FELS
Limited to construct two high-performance, premium jack-up rigs. The two new
drilling units, the Ocean Scepter and the Ocean Shield, will be constructed in
Brownsville, Texas and in Singapore, respectively, at an aggregate expected cost
of approximately $300 million. We paid shipyard deposits totaling $56.8 million
in the second quarter of 2005 related to the new construction. We expect
delivery of both units in the first quarter of 2008.

In May 2005, we began a major upgrade of the Ocean Endeavor for
ultra-deepwater service. The modernized rig will be designed to operate in up to
10,000 feet of water at an estimated upgrade cost of approximately $250 million,
of which approximately $21.6 million had been spent as of June 30, 2005 and an
additional $87 million is anticipated to be spent in the remainder of 2005. We
expect delivery of the upgraded rig in mid-2007.

We have budgeted an additional $115 million in capital expenditures in
2005 associated with our ongoing rig equipment replacement and enhancement
programs, and other corporate requirements. As of June 30, 2005, we had spent
approximately $51 million for capital additions, excluding upgrade costs for the
Ocean Endeavor and the construction of the two new jack-up rigs.

In the second quarter of 2005, we signed a definitive agreement to
purchase the Enserch Garden Banks, a Victory-class semi-submersible drilling
rig, and related equipment for $20.0 million, primarily for its upgrade
potential. We expect to close this transaction in September 2005.

We expect to finance our 2005 capital expenditures through the use of
existing cash balances or internally generated funds.

Reactivation Costs.

We have recently committed to reactivate our remaining cold-stacked rig,
the Ocean New Era, commencing in the third quarter of 2005. We expect the
reactivation of this rig to be completed in the fourth quarter of 2005 and to
cost approximately $12 million, of which approximately one-half of the costs
will be expensed in the second half of 2005 and the remaining one-half will be
capitalized and amortized to expense over the estimated life of the rig.

Off-Balance Sheet Arrangements.

At June 30, 2005 and December 31, 2004, we had no off-balance sheet debt.

HISTORICAL CASH FLOWS

The following is a discussion of our historical cash flows from operating,
investing and financing activities for the six months ended June 30, 2005
compared to the same period in 2004.

Net Cash Provided by Operating Activities.

SIX MONTHS ENDED JUNE 30,
-----------------------------
2005 2004 CHANGE
------------ ------------ --------
(IN THOUSANDS)

Net income (loss) ............................. $ 71,400 $ (21,467) $ 92,867
Net changes in operating assets and liabilities (92,779) (4,324) (88,455)
Loss (gain) on sale of marketable securities .. 1,197 (258) 1,455
Depreciation and other non-cash items, net .... 115,827 95,311 20,516
------------ ------------ ---------
$ 95,645 $ 69,262 $ 26,383
============ ============ =========

Cash flow from our operations in the first six months of 2005 increased
$26.4 million or 38%, as compared to the same period in 2004. The increase in
cash flow from our operations in the first half of 2005 is the result of higher
utilization and higher average dayrates earned by our offshore drilling units as
a result of an increase in overall demand for offshore contract drilling
services, as compared to the first half of 2004. These favorable trends were
negatively impacted by an increase in cash required to satisfy our working
capital requirements, including a temporary increase in our trade receivables
account, which will generate cash as the billing cycle is completed.

Net Cash Used in Investing Activities.

SIX MONTHS ENDED JUNE 30,
---------------------------
2005 2004 CHANGE
----------- ----------- -----------
(IN THOUSANDS)

Purchase of marketable securities ........... $(3,412,724) $(1,895,603) $(1,517,121)
Proceeds from sales and maturities of
marketable securities ..................... 4,063,503 1,949,247 2,114,256
Capital expenditures ........................ (129,459) (52,588) (76,871)
Proceeds from sale of assets ................ 16,055 1,076 14,979
Proceeds from maturities of Australian dollar
time deposits .............................. 11,761 9,163 2,598
Purchase of Australian dollar time deposits.. -- (42,073) 42,073
Other ....................................... 273 -- 273
----------- ----------- -----------
$ 549,409 $ (30,778) $ 580,187
=========== =========== ===========

Our investing activities generated $549.4 million in the six months ended
June 30, 2005, compared to a usage of $30.8 million in the same period in 2004.
In the first six months of 2005, we sold marketable securities, net of
purchases, of $650.8 million compared to $53.6 million during the same period of
2004. This increase in net sales activity is primarily the result of increased
cash requirements in the second quarter of 2005 to partially fund the repurchase
of $460.0 million accreted value of our Zero Coupon Debentures in June 2005.

In the first half of 2005, we spent $51.1 million on projects associated
with our ongoing rig equipment replacement and enhancement programs and other
corporate requirements. We spent an additional $78.4 million in connection with
the Ocean Endeavor upgrade and the Ocean Scepter and Ocean Shield construction
projects during the six months ended June 30, 2005. In the same period in 2004,
we spent $39.2 million on projects in connection with our ongoing replacement
and enhancement programs and other corporate requirements and an additional
$13.4 million to complete a two-year enhancement program for six of our jack-up
rigs and an upgrade of the Ocean America to make it more suitable for
developmental drilling. In June 2005, we sold one of our semisubmersible rigs,
the Ocean Liberator, for net cash proceeds of $13.6 million. Proceeds from the
sale of miscellaneous assets in the first six months of 2004 were not
significant.

In the second quarter of 2004, based on the expectation that higher
interest rates could be achieved by investing in Australian dollar-based
securities, we invested $42.1 million in Australian dollar time deposits
(equivalent of 60 million Australian dollars) with expirations ranging from May
2004 to March 2005. $11.8 million and $9.2 million of these investments matured
in the six months ended June 30, 2005 and 2004, respectively. From

time to time, we may utilize forward exchange contracts to hedge our exposure to
changes in exchange rates between U.S. dollars and the local currencies of the
countries in which we operate. During the first six months of 2005, we entered
into various foreign currency forward exchange contracts which resulted in net
realized gains totaling $0.3 million.

As of June 30, 2005, we had foreign currency forward exchange contracts
outstanding requiring us to purchase the equivalent of $3.0 million in Mexican
pesos on the first day of July 2005 and August 2005 and the equivalent of $5.0
million in British pounds sterling in July and August of 2005. Subsequent to
June 30, 2005, we entered into an additional contract to purchase the equivalent
of $5.0 million in British pounds sterling in September 2005 and two contracts
to purchase the equivalent of $5.0 million in Australian dollars in August 2005
and September 2005.

Net Cash Used in Financing Activities.

SIX MONTHS ENDED JUNE 30,
-------------------------
2005 2004 CHANGE
--------- ----------- ---------
(IN THOUSANDS)

Proceeds from issuance of 4.875% Senior Notes $ 249,462 $ -- $ 249,462
Payment of debt issuance costs .............. (1,429) -- (1,429)
Redemption of Zero Coupon Debentures ........ (460,015) -- (460,015)
Payment of dividends ........................ (16,071) (16,166) 95
Proceeds from stock options exercised ....... 4,935 -- 4,935
--------- ----------- ---------
$(223,118) $ (16,166) $(206,952)
========= =========== =========

On June 7, 2005, we repurchased $460.0 million accreted value, or
approximately 96%, of our then outstanding Zero Coupon Debentures for cash.

We received net cash proceeds of $248.1 million ($247.7 million, exclusive
of accrued issuance costs) from the issuance of $250.0 million aggregate
principal amount of our 4.875% Senior Notes, at an offering price of 99.785% of
the principal amount in June 2005.

During the six months ended June 30, 2005, we received $4.9 million in
proceeds from the exercise of stock options to purchase shares of our common
stock.

Depending on market conditions, we may, from time to time, purchase shares
of our common stock or issue put options in the open market or otherwise.
However, during the six months ended June 30, 2005 and 2004, we did not
repurchase any shares of our outstanding common stock or issue any put options.

OTHER

Currency Risk. Certain of our subsidiaries use the local currency in the
country where they conduct operations as their functional currency. Currency
environments in which we have material business operations include Mexico,
Brazil, the U.K., Australia, Indonesia and Malaysia. When possible, we attempt
to minimize our currency exchange risk by seeking international contracts
payable in local currency in amounts equal to our estimated operating costs
payable in local currency with the balance of the contract payable in U.S.
dollars. At present, however, only a limited number of our contracts are payable
both in U.S. dollars and the local currency.

Currency translation adjustments are generally accumulated in a separate
section of stockholders' equity. If we were to cease our operations in a
currency environment, the accumulated adjustments would be recognized currently
in our results of operations. The effect on our results of operations from these
translation gains and losses has not been material and we do not expect them to
have a significant effect in the future.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2005 the Financial Accounting Standards Board, or FASB, issued
SFAS No. 154, "Accounting Changes and Error Corrections," or SFAS 154, a
replacement of Accounting Principles Board Opinion No. 20 and SFAS No. 3. SFAS
154 provides guidance on the accounting for and reporting of accounting changes
and error corrections and is effective for accounting changes and corrections of
errors made in fiscal years beginning after December 15, 2005. We do not expect
adoption of SFAS 154 to have a material impact on our consolidated results of
operations, financial position or cash flows.

In December 2004 the FASB revised SFAS No. 123, "Accounting for
Stock-Based Compensation," or SFAS 123 (R). This statement supersedes Accounting
Principles Board Opinion No. 25 and its related implementation guidance. This
statement requires that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. SFAS 123
(R) was originally effective as of the first interim or annual reporting period
beginning after June 15, 2005. In April 2005, however, the Securities and
Exchange Commission adopted a rule that defers the required effective date of
SFAS 123 (R) for registrants such as us until the beginning of the first fiscal
year beginning after June 15, 2005. This statement applies to all awards granted
after the required effective date and to awards modified, repurchased or
cancelled after that date, as well as the unvested portion of awards granted
prior to the effective date of SFAS 123(R). We do not expect our adoption of
SFAS 123 (R) to have a material impact on our consolidated results of
operations, financial position or cash flows.

FORWARD-LOOKING STATEMENTS

We or our representatives may, from time to time, make or incorporate by
reference certain written or oral statements that are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, or the Securities Act, and Section 21E of the Securities Exchange Act
of 1934, as amended, or the Exchange Act. All statements other than statements
of historical fact are, or may be deemed to be, forward-looking statements.
Forward-looking statements include, without limitation, any statement that may
project, indicate or imply future results, events, performance or achievements,
and may contain or be identified by the words "expect," "intend," "plan,"
"predict," "anticipate," "estimate," "believe," "should," "could," "may,"
"might," "will," "will be," "will continue," "will likely result," "project,"
"forecast," "budget" and similar expressions. Statements made by us in this
report that contain forward-looking statements include, but are not limited to,
information concerning our possible or assumed future results of operations and
statements about the following subjects:

- future market conditions and the effect of such conditions on our
future results of operations (see " - Overview-Results of Operations
and Industry Conditions");

- future uses of and requirements for financial resources (see " -
Liquidity and Capital Requirements" and " - Sources of Liquidity and
Capital Resources");

- interest rate and foreign exchange risk (see "Quantitative and
Qualitative Disclosures About Market Risk");

- future contractual obligations (see " -- Overview -- Results of
Operations and Industry Conditions" and " - Liquidity and Capital
Requirements");

- future operations outside the United States including, without
limitation, our operations in Mexico (see " -- Overview -- Results
of Operations and Industry Conditions");

- business strategy;

- growth opportunities;

- competitive position;

- expected financial position;

- future cash flows;

- future quarterly or special dividends;

- financing plans;

- tax planning (See " -- Overview -- General--Critical Accounting
Estimates -- Income Taxes," " -- Three Months Ended June 30, 2005
and 2004" and " -- Six Months Ended June 30, 2005 and 2004");

- budgets for capital and other expenditures (see " - Liquidity and
Capital Requirements");

- timing and cost of completion of rig upgrades and other capital
projects (see " - Liquidity and Capital Requirements");

- delivery dates and drilling contracts related to rig conversion and
upgrade projects (see " -- Liquidity and Capital Requirements");

- plans and objectives of management;

- performance of contracts (see " -- Overview -- Results of Operations
and Industry Conditions");

- outcomes of legal proceedings;

- compliance with applicable laws; and

- adequacy of insurance or indemnification.

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

- general economic and business conditions;

- worldwide demand for oil and natural gas;

- changes in foreign and domestic oil and gas exploration, development
and production activity;

- oil and natural gas price fluctuations and related market
expectations;

- the ability of the Organization of Petroleum Exporting Countries,
commonly called OPEC, to set and maintain production levels and
pricing, and the level of production in non-OPEC countries;

- policies of the various governments regarding exploration and
development of oil and gas reserves;

- advances in exploration and development technology;

- the political environment of oil-producing regions;

- casualty losses;

- operating hazards inherent in drilling for oil and gas offshore;

- industry fleet capacity;

- market conditions in the offshore contract drilling industry,
including dayrates and utilization levels;

- competition;

- changes in foreign, political, social and economic conditions;

- risks of international operations, compliance with foreign laws and
taxation policies and expropriation or nationalization of equipment
and assets;

- risks of potential contractual liabilities pursuant to our various
drilling contracts in effect from time to time;

- foreign exchange and currency fluctuations and regulations, and the
inability to repatriate income or capital;

- risks of war, military operations, other armed hostilities,
terrorist acts and embargoes;

- changes in offshore drilling technology, which could require
significant capital expenditures in order to maintain
competitiveness;

- regulatory initiatives and compliance with governmental regulations;

- compliance with environmental laws and regulations;

- customer preferences;

- effects of litigation;

- cost, availability and adequacy of insurance;

- adequacy of our sources of liquidity;

- the availability of qualified personnel to operate and service our
drilling rigs; and

- various other matters, many of which are beyond our control.

The risks included here are not exhaustive. Other sections of this report
and our other filings with the Securities and Exchange Commission include
additional factors that could adversely affect our business, results of
operations and financial performance. Given these risks and uncertainties,
investors should not place undue reliance on forward-looking statements.
Forward-looking statements included in this report speak only as of the date of
this report. We expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statement to reflect
any change in our expectations with regard to the statement 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 3 is considered to constitute
"forward-looking statements" for purposes of the statutory safe harbor provided
in Section 27A of the Securities Act and Section 21E of the Exchange Act. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements" in Item 2 of Part I of this report.

Our measure of market risk exposure represents an estimate of the change
in fair value of our financial instruments. Market risk exposure is presented
for each class of financial instrument held by us at June 30, 2005 and December
31, 2004 assuming immediate adverse market movements of the magnitude described
below. We believe that the various rates of adverse market movements represent a
measure of exposure to loss under hypothetically assumed adverse conditions. The
estimated market risk exposure represents the hypothetical loss to future
earnings and does not represent the maximum possible loss or any expected actual
loss, even under adverse conditions, because actual adverse fluctuations would
likely differ. In addition, since our investment portfolio is subject to change
based on our portfolio management strategy as well as in response to changes in
the market, these estimates are not necessarily indicative of the actual results
which may occur.

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

Interest Rate Risk

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

The sensitivity analysis estimates the change in the market value of our
interest sensitive assets and liabilities that were held on June 30, 2005 and
December 31, 2004, due to instantaneous parallel shifts in the yield curve of
100 basis points, with all other variables held constant.

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

Our long-term debt as of June 30, 2005 and December 31, 2004 is
denominated in U.S. dollars. Our debt has been primarily issued at fixed rates,
and as such, interest expense would not be impacted by interest rate shifts. The
impact of a 100-basis point increase in interest rates on fixed rate debt would
result in a decrease in market value of $136.5 million and $149.2 million,
respectively. A 100 basis point decrease would result in an increase in market
value of $167.8 million and $184.4 million, respectively.

Foreign Exchange Risk

Foreign exchange risk arises from the possibility that changes in foreign
currency exchange rates will impact the value of financial instruments. During
2004, we invested in Australian dollar time deposits and at December 31, 2004,
15.0 million Australian dollars (equivalent to $11.6 million) of time deposits
were included in "Investments and marketable securities" in our Consolidated
Balance Sheet at December 31, 2004. These time deposits matured during the first
quarter of 2005.

During the first half of 2005, we entered into various forward exchange
contracts requiring us to purchase predetermined amounts of foreign currencies
at predetermined dates. As of June 30, 2005, we had forward

exchange contracts outstanding that require us to purchase the equivalent of
approximately $5.0 million in British pounds sterling in July and August of 2005
and the equivalent of approximately $3.0 million in Mexican pesos on July 1,
2005 and August 1, 2005. These forward exchange contracts were included in
"Other assets" in our Consolidated Balance Sheet at June 30, 2005 at fair value
in accordance with SFAS No. 133, "Accounting for Derivatives and Hedging
Activities."

The sensitivity analysis below assumes an instantaneous 20% change in
foreign currency exchange rates versus the U.S. dollar from their levels at June
30, 2005 and December 31, 2004.

The following table presents our market risk by category (interest rates
and foreign currency exchange rates):

FAIR VALUE ASSET (LIABILITY) MARKET RISK
------------------------------ ---------------------------
JUNE 30, DECEMBER 31, JUNE 30, DECEMBER 31,
CATEGORY OF RISK EXPOSURE: 2005 2004 2005 2004
- --------------------------------- ---------- ------------ -------- ------------
(IN THOUSANDS)

Interest rate:
Marketable securities ........... $ 302,335(a) $ 650,247 (a) 400(c) $ 2,100(c)
Long-term debt .................. 1,039,784(b) (1,213,820)(b) -- --
Foreign Exchange:
Australian dollar time deposits... -- 11,602 (d) -- 2,300(d)
Forward exchange contracts........ 200(d) -- 2,900(d) --

(a) The fair market value of our investment in marketable securities is
based on the quoted closing market prices on June 30, 2005 and December 31,
2004.

(b) The fair values of our 4.875% Senior Notes, 5.15% Senior Notes, 1.5%
convertible senior debentures due 2031 and Zero Coupon Debentures are based on
the quoted closing market prices on June 30, 2005 and December 31, 2004. The
fair value of our Ocean Alliance lease-leaseback agreement is based on the
present value of estimated future cash flows using a discount rate of 4.84% for
June 30, 2005 and 4.27% for December 31, 2004.

(c) The calculation of estimated market risk exposure is based on assumed
adverse changes in the underlying reference price or index of an increase in
interest rates of 100 basis points at June 30, 2005 and December 31, 2004.

(d) The calculation of estimated foreign exchange risk is based on assumed
adverse changes in the underlying reference price or index of an increase in
foreign exchange rates of 20% at June 30, 2005 and a decrease in foreign
exchange rates of 20% at December 31, 2004.

ITEM 4. CONTROLS AND PROCEDURES.

Our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO,
participated in an evaluation by our management of the effectiveness of our
disclosure controls and procedures as of the end of our last fiscal quarter that
ended on June 30, 2005. Based on their participation in that evaluation, our CEO
and CFO concluded that our disclosure controls and procedures were effective as
of June 30, 2005 to ensure that required information is disclosed on a timely
basis in our reports filed or furnished under the Exchange Act.

There was no change in our internal control over financial reporting that
occurred during the second fiscal quarter of 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.

PART II. OTHER INFORMATION

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

We held our Annual Meeting of Stockholders, or Annual Meeting, on May 23,
2005 in Houston, Texas. At the Annual Meeting, the holders of 124,435,529 shares
of common stock out of 128,579,668 shares entitled to vote as of the record date
were represented in person or by proxy, constituting a quorum. The following
matters were voted on and adopted by the margins indicated:

a. To elect eight directors to serve until the 2006 annual meeting of
stockholders.

NUMBER OF SHARES
---------------------------------------
BROKER
FOR WITHHELD NON-VOTE
----------- ---------- --------

James S. Tisch 112,676,166 11,759,363 0
Lawrence R. Dickerson 112,692,547 11,742,982 0
Alan R. Batkin 123,725,007 710,522 0
Charles L. Fabrikant 123,881,386 554,143 0
Paul G. Gaffney, II 123,512,384 923,145 0
Herbert C. Hofmann 113,111,247 11,324,282 0
Arthur L. Rebell 113,036,830 11,396,699 0
Raymond S. Troubh 122,773,882 1,661,647 0

b. To consider and act upon a proposal to approve the Second Amended
and Restated Diamond Offshore Drilling, Inc. 2000 Stock Option Plan.

For 106,617,213
Against 7,793,265
Abstain 428,924
Broker Non-Vote 9,596,127

c. To consider and act upon a proposal to approve the Diamond Offshore
Drilling, Inc. Incentive Compensation Plan for Executive Officers.

For 112,390,572
Against 2,015,647
Abstain 433,105
Broker Non-Vote 9,596,205

d. To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for fiscal year 2005.

For 124,201,571
Against 189,631
Abstain 44,327
Broker Non-Vote 0

ITEM 6. EXHIBITS.

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

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 29-July-2005 By: \s\ Gary T. Krenek
---------------------------------------------
Gary T. Krenek
Vice President and Chief Financial Officer

Date 29-July-2005 \s\ Beth G. Gordon
---------------------------------------------
Beth G. Gordon
Controller (Chief Accounting Officer)

EXHIBIT INDEX

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

3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2003).

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).

4.1 Indenture, dated as of February 4, 1997, between the Company and The
Chase Manhattan Bank, as Trustee (incorporated by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2001).

4.2 Fifth Supplemental Indenture, dated as of June 14, 2005, between the
Company and JPMorgan Chase Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to the Company's Current
Report on Form 8-K filed June 16, 2005).

4.3 Exchange and Registration Rights Agreement, dated June 14, 2005,
between the Company and the initial purchaser of the 4.875% Senior
Notes (incorporated by reference to Exhibit 4.3 to the Company's
Current Report on Form 8-K filed June 16, 2005).

10.1 Second Amended and Restated Diamond Offshore Drilling, Inc. 2000
Stock Option Plan (incorporated by reference to Exhibit A attached
to the Company's definitive proxy statement on Schedule 14A filed on
March 31, 2005).

10.2 Diamond Offshore Drilling, Inc. Incentive Compensation Plan for
Executive Officers (incorporated by reference to Exhibit B attached
to the Company's definitive proxy statement on Schedule 14A filed on
March 31, 2005).

31.1* Rule 13a-14(a) Certification of the Chief Executive Officer.

31.2* Rule 13a-14(a) Certification of the Chief Financial Officer.

32.1* Section 1350 Certification of the Chief Executive Officer and Chief
Financial Officer.

* Filed or furnished herewith.