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

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

The Company is a leader in deep water drilling with a fleet of 47 offshore drilling rigs. The fleet consists of 32 semisubmersibles, 14 jack-ups and one drillship.

GENERAL

Revenues. The Company's revenues vary based upon demand, which affects the number of days the fleet is utilized and the dayrates earned. When a rig is idle, no dayrate is earned and revenues will decrease as a result. Revenues can also increase or decrease as a result of the acquisition or disposal of rigs. In order to improve utilization or realize higher dayrates, the Company may mobilize its rigs from one market to another. However, during periods of mobilization revenues may be adversely affected. As a response to changes in demand, the Company may withdraw a rig from the market by stacking it or may reactivate a rig stacked previously, which may decrease or increase revenues, respectively.

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

Revenues from offshore turnkey drilling contracts are accrued to the extent of costs until the specified turnkey depth and other contract requirements are met. Income is recognized on the completed contract method. Provisions for future losses on turnkey contracts are recognized when it becomes apparent that expenses to be incurred on a specific contract will exceed the revenue from that contract. During the quarter ended June 30, 2003, the Company elected not to pursue contracts for integrated services, which includes turnkey contracts, except in very limited circumstances.

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

Operating Income. Operating income is primarily affected by revenue factors, but is also a function of varying levels of operating expenses. Operating expenses generally are not affected by changes in dayrates and may not be significantly affected by fluctuations in utilization. For instance, if a rig is to be idle for a short period of time, the Company may realize few decreases in operating expenses since the rig is typically maintained in a prepared state with a full crew. In addition, when a rig is idle, the Company is responsible for certain operating expenses such as rig fuel and supply boat costs, which are typically a cost of the operator under a drilling contract. However, if the rig is to be idle for an extended period of time, the Company may reduce the size of a rig's crew and take steps to "cold stack" the rig, which lowers expenses and partially offsets the impact on operating income. The Company recognizes as operating expenses activities such as inspections, painting projects and routine overhauls, meeting certain criteria, which maintain rather than upgrade its rigs. These expenses vary from period to period. Costs of rig enhancements are capitalized and depreciated over the expected useful lives of the enhancements. Higher depreciation expense decreases operating income in periods subsequent to capital upgrades.

CRITICAL ACCOUNTING ESTIMATES

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

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

In April 2003 the Company commissioned a study from an independent appraiser to evaluate the economic lives of its drilling rigs. As a result of this independent study the Company recorded changes in accounting estimates by increasing the estimated service lives and salvage values for most of the Company's drilling rigs to better reflect their remaining economic lives and value. The effect of this change in accounting estimate resulted in an increase to net income (after-tax) for the quarter and six months ended June 30, 2003 of $5.8 million, or $0.04 per share. Prior periods were not affected. Management makes judgments, assumptions and estimates regarding capitalization, useful lives and salvage values. Changes in these assumptions could produce results that differ from those reported.

The Company evaluates its property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management's assumptions are an inherent part of an asset impairment evaluation and the use of different assumptions could produce results that differ from those reported.

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

                                                     THREE MONTHS ENDED
                                                          JUNE 30,
                                                          --------               FAVORABLE/
                                                    2003            2002       (UNFAVORABLE)
                                                    ----            ----       -------------
                                                               (in thousands)
CONTRACT DRILLING REVENUE
  High Specification Floaters .............      $  72,660       $  75,748       $  (3,088)
  Other Semisubmersibles ..................         61,265          73,977         (12,712)
  Jack-ups ................................         23,116          26,839          (3,723)
  Integrated Services .....................             --           4,406          (4,406)
  Other ...................................             (3)           (436)            433
  Eliminations ............................             --            (860)            860
                                                 ---------       ---------       ---------
  TOTAL CONTRACT DRILLING REVENUE .........      $ 157,038       $ 179,674       $ (22,636)
                                                 =========       =========       =========
  REVENUES RELATED TO REIMBURSABLE EXPENSES      $   6,162       $   8,113       $  (1,951)

CONTRACT DRILLING EXPENSE
  High Specification Floaters .............      $  38,555       $  39,545       $     990
  Other Semisubmersibles ..................         57,810          53,445          (4,365)
  Jack-ups ................................         27,012          22,735          (4,277)
  Integrated Services .....................            841           4,689           3,848
  Other ...................................            388             700             312
  Eliminations ............................             --            (860)           (860)
                                                 ---------       ---------       ---------
  TOTAL CONTRACT DRILLING EXPENSE .........      $ 124,606       $ 120,254       $  (4,352)
                                                 =========       =========       =========
  REIMBURSABLE EXPENSES ...................      $   5,525       $   7,343       $  (1,818)

OPERATING INCOME (LOSS)
  High Specification Floaters .............      $  34,105       $  36,203       $  (2,098)
  Other Semisubmersibles ..................          3,455          20,532         (17,077)
  Jack-ups ................................         (3,896)          4,104          (8,000)
  Integrated Services .....................           (841)           (283)           (558)
  Other ...................................           (391)         (1,136)            745
  Reimbursable expenses, net ..............            637             770            (133)
  Depreciation ............................        (41,553)        (44,585)          3,032
  General and Administrative Expense ......         (8,214)         (7,440)           (774)
  Gain on Sale of Assets ..................             57              33              24
                                                 ---------       ---------       ---------
  TOTAL OPERATING INCOME (LOSS) ...........      $ (16,641)      $   8,198       $ (24,839)
                                                 =========       =========       =========

High Specification Floaters.

Revenues. Revenues from high specification floaters decreased $3.1 million during the quarter ended June 30, 2003 compared to the same quarter in 2002. Lower average operating dayrates contributed $9.7 million to the overall decrease as the average dayrate fell from $115,000 per day in the second quarter of 2002 to $96,300 per day in the second quarter of 2003. There were significant changes in the average operating dayrates of the Ocean Baroness ($120,200 from $177,400), the Ocean Valiant ($42,300 from $82,600) and the Ocean Victory ($70,200 from $97,400).

An improvement in utilization for high specification floaters, from 80% during the second quarter of 2002 to 92% in the second quarter of 2003, contributed $6.6 million to revenues and partially offset the negative effect of lower average dayrates. The Ocean America and the Ocean Star worked the entire second quarter of 2003 but both rigs were stacked during part of the second quarter of 2002. Utilization also improved for the Ocean Baroness which worked a majority of the second quarter of 2003 compared to the same period in 2002 when the rig was down for approximately one month due to the parting of its marine riser. The improvement in utilization was partially offset as a result of downtime incurred by the Ocean Alliance for repairs and by the Ocean Valiant for its five-year special survey. These rigs were stacked approximately three weeks longer during the second quarter of 2003 compared to the second quarter of 2002.

Contract Drilling Expense. Contract drilling expense for high specification floaters for the quarter ended June 30, 2003 decreased $1.0 million from the same period in 2002. The Ocean Baroness incurred higher contract drilling expenses during the second quarter of 2002 due to costs incurred in connection with the recovery of its marine riser, net of costs charged to an associated insurance claim, although the expenses were partially offset by lower operating expenses during the riser recovery period. In addition, various maintenance projects performed on the Ocean America while the rig was stacked during the second quarter of 2002 and mobilization costs incurred to return the rig to work contributed to higher contract drilling expenses in the second quarter of 2002 compared to the same period in 2003. Partially offsetting the lower contract drilling expenses in the second quarter of 2003 were higher costs from maintenance projects for the Ocean Quest and Ocean Valiant.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles for the quarter ended June 30, 2003 decreased $12.7 million from the same period in 2002. Average operating dayrates dropped to $57,600 (excluding the Ocean Vanguard and the Ocean Patriot) during the second quarter of 2003 from $71,500 during the second quarter of 2002, resulting in a decline in revenues of $10.0 million. The largest decreases in average operating dayrate were experienced by the rigs working in the North Sea where average operating dayrates declined for the Ocean Guardian ($93,300 to $49,900), the Ocean Princess ($74,800 to $40,000) and the Ocean Nomad ($70,300 to $43,100).

Lower utilization resulted in $8.1 million of the overall revenue decline as utilization fell from 54% during the second quarter of 2002 to 51% (excluding the Ocean Vanguard and the Ocean Patriot) during the same quarter of 2003. The Ocean Epoch and the Ocean Whittington were stacked the entire second quarter of 2003 while the Ocean Bounty was in the shipyard undergoing a special survey for approximately one-half of the second quarter of 2003. Each of these rigs worked all of the same period in 2002. Partially offsetting the utilization decline were improvements from the Ocean Lexington and the Ocean Saratoga. Both of these rigs worked the entire second quarter of 2003 but were stacked the majority of the second quarter of 2002. In addition, the Ocean General was working the entire second quarter of 2003 compared to the same period in 2002 when the rig was in a shipyard undergoing a special survey for approximately one-half of the quarter.

Partially offsetting the overall decrease in revenues was $5.4 million generated by the Ocean Patriot and the Ocean Vanguard, which the Company acquired in March 2003 and December 2002, respectively.

Contract Drilling Expense. Contract drilling expense for other semisubmersibles during the second quarter of 2003 increased $4.4 million compared to the same period in 2002 primarily due to operating expenses for the Ocean Patriot and the Ocean Vanguard. Contract drilling expenses were also higher during the quarter ended June 30, 2003 due to costs associated with the special surveys of the Ocean Nomad and Ocean Bounty and increased maintenance projects on the Ocean Guardian and the Ocean Princess. Partially offsetting the overall higher operating expenses were lower costs for the Ocean Liberator and the Ocean New Era. These rigs were cold stacked during the second quarter of 2003 but were partially crewed and actively marketed in the same period of 2002.

Jack-Ups.

Revenues. Revenues from jack-ups decreased $3.7 million during the second quarter of 2003 compared to the same quarter in 2002. Lower utilization resulted in $2.2 million of the overall revenue decline as utilization fell from 74% during the second quarter of 2002 to 68% during the second quarter of 2003. The Ocean Sovereign spent all of the second quarter of 2003 in a shipyard primarily completing its leg extension upgrade. The Ocean Tower spent approximately one-half of the second quarter of 2003 completing additional shipyard projects subsequent to its cantilever upgrade that was completed in March 2003. The Ocean Titan spent approximately one-half of the second quarter of 2003 in a shipyard beginning its cantilever upgrade. Partially offsetting the overall lower utilization

during the second quarter of 2003 were increased operating days from the Ocean Spartan and Ocean Spur, which were undergoing leg extension upgrades during the three months ended June 30, 2002. Both of these rigs worked most of the second quarter of 2003.

Average operating dayrates dropped to $26,700 per day during the second quarter of 2003, from $28,700 per day during the second quarter of 2002, resulting in a $1.5 million reduction in revenue. The Ocean Heritage experienced the largest average dayrate decrease from $97,600 to $47,300.

Contract Drilling Expense. Contract drilling expense for jack-ups during the second quarter of 2003 rose $4.3 million from the same period in 2002. Operating costs increased for the Ocean Spartan and Ocean Spur as these rigs worked most of the second quarter of 2003 compared to the same period in 2002 when these rigs were undergoing leg extension upgrades. In addition, the Ocean Tower experienced higher contract drilling expenses for the quarter ended June 30, 2003 due to various shipyard projects and its mobilization out of the shipyard. Partially offsetting was a reduction in expenses for the Ocean Titan due to the capitalization of a majority of its costs when it began its cantilever upgrade in the second quarter of 2003.

Integrated Services.

During the second quarter of 2003 integrated services had an $0.8 million loss. The loss was comprised of project income of $0.1 million from the completion of one turnkey plug and abandonment project in the Gulf of Mexico during the first quarter of 2003 which was more than offset by operating overhead costs and insurance premiums. During the same period in 2002, an integrated services' operating loss of $0.3 million resulted from a turnkey well in the Gulf of Mexico.

Reimbursable expenses, net.

Reimbursable expenses include items that the Company purchases, and/or services it performs, at the request of its customers. Revenues related to reimbursable items, offset by the related expenditures for these items, were $0.6 million and $0.8 million for the quarters ended June 30, 2003 and 2002, respectively.

Depreciation.

Depreciation expense decreased $3.0 million to $41.6 million in the second quarter of 2003 compared to $44.6 million in the second quarter of 2002. This decrease resulted from increasing the estimated service lives and salvage values of most of the Company's drilling rigs to better reflect their remaining economic lives. The effect of these changes in accounting estimates was a $6.9 million reduction in depreciation expense. This reduction was partially offset by depreciation of the Ocean Vanguard and the Ocean Patriot, which the Company acquired in December 2002 and March 2003, respectively, and additional depreciation for five of the Company's recently upgraded jack-up rigs.

General and Administrative Expense.

General and administrative expense for the quarter ended June 30, 2003 of $8.2 million increased $0.8 million over $7.4 million for the same period in 2002. This increase was primarily due to severance pay associated with the elimination of certain positions in the Company as part of a cost reduction program and higher professional expenses for legal fees and tax planning for foreign operations. Partially offsetting was a reduction in other personnel costs.

Interest Income.

Interest income of $3.3 million earned during the quarter ended June 30, 2003 declined $4.4 million, from $7.7 million earned during the same period in 2002. These earnings were lower primarily due to less cash investment in the second quarter of 2003 in addition to lower interest rates earned on cash and marketable securities compared to the same period in 2002.

Gain (Loss) on Sale of Marketable Securities.

A loss on the sale of marketable securities of $1.1 million occurred in the quarter ended June 30, 2003 compared to an $8.7 million gain on the sale of marketable securities during the same period in 2002.

Income Tax Benefit (Expense).

An income tax benefit of $1.8 million was recognized on a pre-tax loss of $18.5 million in the second quarter of 2003 compared to tax expense of $6.6 million which was recognized on pre-tax income of $18.6 million in the second quarter of 2002.

In 2002 the Company formed a Cayman Island corporation, Diamond Offshore International Limited, which is a wholly-owned subsidiary of the Company. Certain of the Company's rigs that operate internationally are now owned and operated, directly or indirectly, by the Cayman Island subsidiary. Effective January 1, 2003 the Company began to postpone remittance of the earnings from this subsidiary to the U.S. and indefinitely reinvest these earnings internationally. Consequently, no U.S. taxes were provided on these earnings and no U.S. tax benefits were recognized on losses in the second quarter of 2003. The 9.6% effective tax rate for the three months ended June 30, 2003 resulted from a revision of the estimated annual effective tax rate from 21.5% in the first quarter of 2003 to 16.7% in the second quarter of 2003.

In 2002 a portion of the earnings from the Company's U.K. subsidiaries was considered to be indefinitely reinvested. No U.S. taxes were provided on these earnings in the second quarter of 2002 and the estimated annual effective tax rate as of June 30, 2002 was 32.4%. The effective rate of 35.6% for the three months ended June 30, 2002 resulted from a revision of the estimated annual effective tax rate from 30.6% in the first quarter of 2002 to 32.4% in the second quarter of 2002. These U.K. subsidiaries are now owned, directly or indirectly, by Diamond Offshore International Limited. Consequently, earnings and losses from the U.K. subsidiaries for the three month period ended June 30, 2003 are part of the earnings and losses of the Cayman Island subsidiary on which no U.S. taxes are provided.

                                                     SIX MONTHS ENDED
                                                         JUNE 30,
                                                         --------               FAVORABLE/
                                                    2003            2002       (UNFAVORABLE)
                                                    ----            ----       -------------
                                                              (in thousands)
CONTRACT DRILLING REVENUE
  High Specification Floaters .............      $ 136,294       $ 150,395       $ (14,101)
  Other Semisubmersibles ..................        112,968         162,057         (49,089)
  Jack-ups ................................         46,682          56,339          (9,657)
  Integrated Services .....................          1,189           6,229          (5,040)
  Other ...................................             (3)           (436)            433
  Eliminations ............................           (233)         (1,242)          1,009
                                                 ---------       ---------       ---------
  TOTAL CONTRACT DRILLING REVENUE .........      $ 296,897       $ 373,342       $ (76,445)
                                                 =========       =========       =========
  REVENUES RELATED TO REIMBURSABLE EXPENSES      $  12,452       $  15,995       $  (3,543)

CONTRACT DRILLING EXPENSE
  High Specification Floaters .............      $  76,831       $  75,073       $  (1,758)
  Other Semisubmersibles ..................        107,527         110,317           2,790
  Jack-ups ................................         51,263          48,417          (2,846)
  Integrated Services .....................          2,090           7,530           5,440
  Other ...................................            798           1,105             307
  Eliminations ............................           (233)         (1,242)         (1,009)
                                                 ---------       ---------       ---------
  TOTAL CONTRACT DRILLING EXPENSE .........      $ 238,276       $ 241,200       $   2,924
                                                 =========       =========       =========
  REIMBURSABLE EXPENSES ...................      $  11,263       $  14,555       $  (3,292)

OPERATING INCOME (LOSS)
  High Specification Floaters .............      $  59,463       $  75,322       $ (15,859)
  Other Semisubmersibles ..................          5,441          51,740         (46,299)
  Jack-ups ................................         (4,581)          7,922         (12,503)
  Integrated Services .....................           (901)         (1,301)            400
  Other ...................................           (801)         (1,541)            740
  Reimbursable expenses, net ..............          1,189           1,440            (251)
  Depreciation ............................        (88,830)        (87,282)         (1,548)
  General and Administrative Expense ......        (15,414)        (14,088)         (1,326)
  Gain on Sale of Assets ..................             58              65              (7)
                                                 ---------       ---------       ---------
  TOTAL OPERATING INCOME (LOSS) ...........      $ (44,376)      $  32,277       $ (76,653)
                                                 =========       =========       =========

High Specification Floaters.

Revenues. Revenues from high specification floaters decreased $14.1 million in the first half of 2003 compared to the same period in 2002. Lower average operating dayrates for most of the rigs in this classification resulted in a $20.5 million reduction in revenue. Average operating dayrates fell from $111,500 during the first half of 2002 to $105,600 during the first half of 2003 (excluding the Ocean Baroness).

An overall improvement in utilization for high specification floaters in the first half of 2003 contributed $7.9 million to revenues and partially offset the negative effect of lower average operating dayrates. Utilization improved to 89% for the six months ended June 30, 2003 from 85% for the same period in 2002 (excluding the Ocean Baroness). Utilization improved significantly for the Ocean America and the Ocean Star as both rigs worked the entire first half of 2003. During the first half of 2002 the Ocean America was stacked approximately four months and the Ocean Star was stacked approximately three months in a shipyard for inspection and repairs.

The Ocean Baroness contributed less revenue in the first half of 2003 than in the first half of 2002 primarily due to a significant drop in its average operating dayrate from $175,000 to $88,700. Partially offsetting was an improvement in utilization in 2003 compared to the same period in 2002 when the rig spent most of the first quarter completing its upgrade to high specification capabilities.

Contract Drilling Expense. Contract drilling expense for high specification floaters for the six months ended June 30, 2003 increased $1.8 million from the same period in 2002. Operating expenses for the Ocean Baroness were higher in the first half of 2003 as the rig worked most of the period compared to the same period in 2002 when the rig began operations late in the first quarter upon completion of its upgrade. Higher operating expenses for the Ocean Baroness during the six months ended June 30, 2003 compared to the same period in 2002 were partially offset by costs incurred during 2002 for the recovery of its marine riser, net of costs charged to an associated insurance claim. In addition, operating expenses were higher in the first half of 2003 due to the mobilization, inspection and repair of the Ocean Valiant. The increased contract drilling expense was partially offset by lower operating costs in 2003 for the Ocean Star which incurred mobilization, inspection and repair costs during the first half of 2002.

Other Semisubmersibles.

Revenues. Revenues from other semisubmersibles for the six months ended June 30, 2003 decreased $49.1 million from the same period in 2002. A decline in utilization reduced revenues $31.7 million as utilization rates fell from 61% during the first half of 2002 to 48% during the first half of 2003 (excluding the Ocean Vanguard and the Ocean Patriot). The Ocean Whittington was stacked and the Ocean Liberator was cold stacked the entire first half of 2003 while the Ocean Epoch and Ocean Princess were stacked most of the first half of 2003. The Ocean Guardian and the Ocean Bounty spent three months and two months, respectively, of the six months ended June 30, 2003 in a shipyard for inspection and repairs. Each of these rigs worked most of the same period in 2002. Partially offsetting was an increase in revenue in 2003 from the Ocean General which was idle for two months during the first half of 2002 and the Ocean Saratoga which was in a shipyard undergoing a special survey during the same period.

Lower average operating dayrates for other semisubmersibles resulted in a $23.7 million revenue reduction as average operating dayrates fell from $69,400 in the first half of 2002 to $58,800 in the same period of 2003 (excluding the Ocean Vanguard and the Ocean Patriot). The most significant decreases in dayrates were to the Ocean Princess ($72,900 to $40,000), the Ocean Nomad ($72,200 to $41,700), and the Ocean Winner ($77,700 to $49,600).

Partially offsetting the overall decrease in revenues was $6.3 million generated by the Ocean Vanguard and the Ocean Patriot, which the Company acquired in December 2002 and March 2003, respectively.

Contract Drilling Expense. Contract drilling expense for other semisubmersibles during the first half of 2003 was lower by $2.8 million compared to the same period in 2002. Cost savings were realized from four rigs (the Ocean Voyager, Ocean Liberator, Ocean Endeavor and Ocean New Era) which were cold stacked the entire first half of 2003. All of these rigs, except the Ocean New Era, worked part of the first half of 2002. Also, contract drilling expenses for the Ocean Worker were lower in first half of 2003 compared to the same period in 2002, when costs were incurred for the rig's mobilization, inspection and repairs. Partially offsetting the lower contract drilling expenses were operating costs generated by the Ocean Patriot and Ocean Vanguard and costs associated with the special surveys of the Ocean Nomad, Ocean Ambassador and the Ocean Bounty during 2003.

Jack-Ups.

Revenues. Revenues from jack-ups decreased $9.7 million during the first half of 2003 compared to the same period in 2002. Lower utilization resulted in $5.9 million of the overall revenue decline as utilization fell from 82% during the first half of 2002 to 68% during the same period of 2003. The Ocean Sovereign spent most of the first

half of 2003 in a shipyard completing its leg extension upgrade. The Ocean Tower spent most of the first half of 2003 in a shipyard undergoing a cantilever upgrade and various other projects. In comparison these rigs operated throughout most of the first half of 2002. Partially offsetting, utilization improved for the Ocean Spartan and Ocean Spur, as both of these rigs worked most of the first half of 2003 but spent approximately three months of the first half of 2002 undergoing leg extension upgrades.

Lower average operating dayrates resulted in a $3.8 million revenue reduction. Average dayrates dropped to $27,200 during the first half of 2003 from $29,300 during the first half of 2002. The Ocean Heritage experienced the largest decrease from $83,600 to $47,000.

Contract Drilling Expense. Contract drilling expense for jack-ups during the first half of 2003 rose $2.8 million from the same period in 2002. Higher costs for the Ocean Spartan and the Ocean Spur for the six months ended June 30, 2003 occurred because a majority of costs for these rigs were capitalized in connection with their leg extension upgrades during the comparable period in 2002. In addition, higher costs were incurred by the Ocean Warwick during the first half of 2003 in conjunction with its mobilization to a shipyard for its special survey and repairs. Costs were reduced on the Ocean Champion which was cold stacked all of the first half of 2003 compared to only part of the first half of 2002.

Integrated Services.

During the first half of 2003 integrated services had a loss of $0.9 million. The loss was comprised of project income of $0.4 million from the completion of one turnkey plug and abandonment project in the Gulf of Mexico during the first quarter of 2003 which was more than offset by operating overhead costs and insurance premiums. During the first half of 2002, an operating loss of $1.3 million resulted from two turnkey projects in the Gulf of Mexico.

Reimbursable expenses, net.

Reimbursable expenses include items that the Company purchases, and/or services it performs, at the request of its customers. Revenues related to reimbursable items, offset by the related expenditures for these items, were $1.2 million and $1.4 million for the six months ended June 30, 2003 and 2002, respectively.

Depreciation.

Depreciation expense increased $1.5 million to $88.8 million in the first half of 2003 compared to $87.3 million in the same period of 2002. This increase resulted, in part, from depreciation of the Ocean Vanguard and the Ocean Patriot, which the Company acquired in December 2002 and March 2003, respectively. Depreciation also rose from additional depreciation for five of the Company's recently upgraded jack-up rigs and additional depreciation for the Ocean Baroness which completed its upgrade in March 2002. These higher depreciation expenses were partially offset when the Company increased the estimated service lives and salvage values of most its drilling rigs effective April 1, 2003 to better reflect their remaining economic lives. The effect of these changes in accounting estimates was a $6.9 million reduction in depreciation expense.

General and Administrative Expense.

General and administrative expense of $15.4 million was $1.3 million higher in the first half of 2003 than the $14.1 million incurred during the first half of 2002. This increase was primarily due to severance pay associated with the elimination of certain positions in the Company as part of a cost reduction program and higher professional expenses for legal fees. Partially offsetting was a reduction in other personnel costs.

Interest Income.

Interest income of $7.5 million earned during the first half of 2003 declined $9.7 million, from $17.2 million earned during the same period in 2002. These earnings were lower primarily due to less cash investment during the first six months of 2003 in addition to lower interest rates earned on cash and marketable securities compared to the same period in 2002.

Gain (Loss) on Sale of Marketable Securities.

A loss on the sale of marketable securities of $1.1 million occurred in the first half of 2003 compared to a $12.2 million gain on the sale of marketable securities for the same period in 2002.

Income Tax Benefit (Expense).

An income tax benefit of $7.7 million was recognized on a pre-tax loss of $45.9 million in the first half of 2003 compared to tax expense of $16.6 million which was recognized on pre-tax income of $51.1 million in the first half of 2002.

The Company's estimated aggregate annual effective income tax rate for the six months ended June 30, 2003 was 16.7%. In 2002 the Company formed a Cayman Island corporation, Diamond Offshore International Limited, which is a wholly owned subsidiary of the Company. Certain of the Company's rigs that operate internationally are now owned and operated, directly or indirectly, by the Cayman Island subsidiary. Effective January 1, 2003 the Company began to postpone remittance of the earnings from this subsidiary to the U.S. and to indefinitely reinvest these earnings internationally. Consequently, no U.S. taxes were provided on these earnings and no U.S. tax benefits were recognized on losses in the first half of 2003.

The Company's estimated effective income tax rate for the first half of 2002 was 32.4%. In the first quarter of 2002, a portion of the earnings from the Company's U.K. subsidiaries was considered to be indefinitely reinvested and no U.S. taxes were provided on those earnings. These U.K. subsidiaries are now owned, directly or indirectly, by Diamond Offshore International Limited. Consequently, earnings and losses from the U.K. subsidiaries for the six months ended June 30, 2003 are part of the earnings and losses of the Cayman Island subsidiary on which no U.S. taxes are provided.

INDUSTRY CONDITIONS

Demand for offshore contract drilling services continues to be soft. In the U.S. Gulf of Mexico, deepwater semisubmersibles are rolling off of long-term contracts and are exerting downward pressure on dayrates as these rigs compete for short term jobs. Utilization for the Company's deepwater semisubmersible fleet is steady but average dayrates have declined recently. Well-to-well contracts persist for the Company's deepwater semisubmersible, mid-water semisubmersible and jack-up fleets in the U.S. Gulf of Mexico with a limited backlog of work. The Company believes that this well-to-well environment will persist at least for the short-term. However, rates have recently increased for heavy duty 350 ft. jack-up rigs, as higher natural gas prices have encouraged an increasing number of operators to begin exploring for deep shelf natural gas reserves. The Company believes that, over time, this improved activity combined with lower specification jack-up rigs moving to work offshore Mexico may support better utilization and firming day rates across the entire jack-up market in the Gulf of Mexico, though there is no assurance that this will occur.

Increased activity offshore Mexico is attracting rigs from U.S. waters and abroad as Pemex-Exploracion Y Produccion ("Pemex"), Mexico's state-owned oil company works to increase its natural gas production. The Company has participated in this growing market by securing long-term contracts for three of its semisubmersible rigs, the Ocean Ambassador, the Ocean Whittington and the Ocean Worker. Additional tenders have been announced for both semisubmersible and jack-up rigs for work beginning in late 2003, and more tenders are anticipated in 2004, though there is no assurance that the Company will elect to bid on these jobs or that it will be successful in the bidding process. The Company is hopeful that the repositioning of rigs from the U.S. Gulf of Mexico and other markets will improve demand for its services worldwide as the supply of rigs tightens up though it makes no assurances that this will occur.

Other International markets are expected to remain relatively unchanged with little improvement in utilization or dayrates expected in the near term. However, the Company believes there is potential for increased activity offshore West Africa and India, though there is no assurance that the Company would elect to participate in future contract tenders or that it would be successful in the bidding process. The recently upgraded semisubmersible rig, Ocean Rover, has begun a three well program offshore Malaysia. However, the Ocean Yorktown, a semisubmersible rig that has worked offshore Brazil for many years, is mobilizing back to the U.S. Gulf of Mexico without a current contract.

OPERATIONS OUTSIDE THE UNITED STATES

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

During the quarter ended June 30, 2003, the Company entered into contracts to operate three of its semisubmersible rigs offshore Mexico for the national oil company of Mexico. The terms of these contracts expose the Company to greater risks than it normally assumes such as exposure to greater environmental liability. While the Company believes that the financial terms of the contracts and the Company's operating safeguards in place mitigate these risks, there can be no assurance that the increased risk exposure will not have a negative impact on future operations or financial results.

                                                           SIX MONTHS ENDED
                                                               JUNE 30,
                                                               --------
                                                          2003            2002          CHANGE
                                                          ----            ----          ------
                                                                    (IN THOUSANDS)
NET CASH PROVIDED BY OPERATING ACTIVITIES
  Net income (loss) .............................      $ (38,253)      $  34,520       $ (72,773)
  Depreciation ..................................         88,830          87,282           1,548
  Deferred tax provision ........................         (9,666)         10,414         (20,080)
  Other non-cash items, net .....................          7,985          (6,169)         14,154
  Net changes in operating assets and liabilities        (12,488)         39,544         (52,032)
                                                       ---------       ---------       ---------
                                                       $  36,408       $ 165,591       $(129,183)
                                                       =========       =========       =========

Cash generated by a net loss adjusted for non-cash items, including depreciation, for the six months ended June 30, 2003 decreased $129.2 million compared to the same period in 2002 primarily due to a decline in the results of operations in 2003.

                                                                SIX MONTHS ENDED
                                                                   JUNE 30,
                                                                   --------
                                                             2003              2002            CHANGE
                                                             ----              ----            ------
                                                                         (IN THOUSANDS)
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
  Capital expenditures (excluding rig acquisition)       $  (134,114)      $  (117,823)      $   (16,291)
  Rig acquisition .................................          (63,500)               --           (63,500)
  Proceeds from sale of assets ....................              388             1,348              (960)
  Proceeds from sale of marketable securities .....        1,603,006         2,218,678          (615,672)
  Purchase of marketable securities ...............       (1,374,768)       (2,217,939)          843,171
  Securities sold under repurchase agreements, net                --            53,126           (53,126)
  Proceeds from settlement of forward contracts ...            2,015               912             1,103
                                                         -----------       -----------       -----------
                                                         $    33,027       $   (61,698)      $    94,725
                                                         ===========       ===========       ===========

Net cash provided by investing activities increased $94.7 million in the first half of 2003 compared to the first half of 2002. During the six months ended June 30, 2003 cash was provided by the net sale of certain of the Company's investments in marketable securities, the settlement of forward contracts at favorable exchange rates and the sale of miscellaneous equipment. Cash used during the first half of 2003 was for the purchase of the

semisubmersible rig, Omega, renamed the Ocean Patriot, and higher capital expenditures primarily for the upgrade of the Ocean Rover and the upgrades of three of the Company's jack-up rigs compared to similar purchases in the same period of 2002. During the six months ended June 30, 2002, $53.1 million was provided by the return of loaned debt securities that were outstanding at December 31, 2001. There were no outstanding loaned debt securities at June 30, 2003.

                                              SIX MONTHS ENDED
                                                   JUNE 30,
                                                   --------
                                             2003           2002          CHANGE
                                             ----           ----          ------
                                                       (IN THOUSANDS)
NET CASH USED IN FINANCING ACTIVITIES
  Payment of dividends ..............      $(32,584)      $(32,951)      $    367
  Acquisition of treasury stock .....            --        (20,000)        20,000
  Settlement of put options .........            --         (1,193)         1,193
                                           --------       --------       --------
                                           $(32,584)      $(54,144)      $ 21,560
                                           ========       ========       ========

The Company paid cash dividends of $32.6 million to stockholders in the first half of 2003 compared to $33.0 million in the same period of 2002. The lower dividends for the six months ended June 30, 2003 reflect the Company's purchase of shares of its common stock during 2002.

During the six months ended June 30, 2002, the Company purchased 500,000 shares of its common stock at an aggregate cost of $20.0 million, or $40.00 per share, upon the exercise of put options sold in February 2001. See " -- Treasury Stock and Common Equity Put Options" in Note 1 to the Company's Consolidated Financial Statements in Item 1 of Part I of this report. Depending on market conditions, the Company may, from time to time, purchase shares of its common stock or issue put options in the open market or otherwise.

Cash was also used during the first half of 2002 for payments totaling $1.2 million for the settlement of put options which covered 1,000,000 shares of the Company's common stock. The options gave the holders the right to require the Company to repurchase up to the contracted number of shares of its common stock at the stated exercise price per share at any time prior to their expiration. The Company had the option to settle in cash or shares of its common stock. See "--Treasury Stock and Common Equity Put Options" in Note 1 to the Company's Consolidated Financial Statements in Item 1 of Part I of this report.

Contractual Cash Obligations.

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

The Company is contingently liable as of June 30, 2003 in the amount of $69.2 million under certain performance, bid, customs and export bonds. Banks have issued letters of credit securing certain of these bonds. All of these obligations expire in less than one year.

Other.

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

At June 30, 2003 and December 31, 2002, the Company had no off-balance sheet debt.

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

CAPITAL RESOURCES

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

During the first half of 2003, the Company spent $81.4 million, including capitalized interest expense, for rig upgrades, of which $56.1 million was for the deepwater upgrade of the Ocean Rover and $25.2 million was for the upgrade of six of the Company's jack-up rigs. The Company expects to spend a total of approximately $115 million for rig upgrade capital expenditures during 2003 ($70 million to complete the Ocean Rover upgrade and $45 million to complete the upgrades to three of the Company's jack-up rigs).

The upgrade of the Ocean Rover, which began in January 2002, was completed early in July 2003 on time and under budget. The project was completed for approximately $189 million, below management's original estimated cost of $200 million. The rig commenced its contract with Murphy Sabah Oil Company, Ltd. on July 10, 2003 for a minimum three well drilling program offshore Malaysia.

The Company's two year program to expand the capabilities of its jack-up fleet by significantly upgrading six of its 14 jack-up rigs is now more than 80% complete. Three of these upgrades were completed in 2002 and two have been completed in 2003. The Ocean Sovereign, a 250-foot water depth independent-leg cantilever rig prior to the upgrade, completed leg extension installations in May 2003 allowing the rig to work in water depths up to 300 feet. The cost of this upgrade was approximately $11 million. The Ocean Tower, a 350-foot water depth capability independent-leg slot rig prior to its upgrade, completed its cantilever upgrade in March 2003 for approximately $27 million. The installation of a cantilever package on the Ocean Titan began in May 2003 and is scheduled for completion in the fourth quarter of 2003.

During the six months ended June 30, 2003, the Company spent $52.7 million on its continuing rig enhancement program and to meet other corporate capital expenditure requirements. In addition, the Company spent $65.0 million ($63.5 million capitalized to rig equipment) for the purchase of the third-generation semisubmersible drilling rig, Omega, renamed the Ocean Patriot. The Company expects to spend a total of approximately $100 to $110 million in 2003 for capital expenditures associated with its continuing rig enhancement program (other than rig upgrades) and other corporate requirements.

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

INTEGRATED SERVICES

The Company's wholly owned subsidiary, Diamond Offshore Team Solutions, Inc. ("DOTS"), from time to time, selectively engages in drilling services pursuant to turnkey or modified-turnkey contracts under which DOTS agrees to drill a well to a specified depth for a fixed price. In such cases, DOTS generally is not entitled to payment unless the well is drilled to the specified depth and other contract requirements are met. Profitability of the contract is dependent upon its ability to keep expenses within the estimates used in determining the contract price. Drilling a well under a turnkey contract therefore typically requires a greater cash commitment by the Company and exposes the Company to risks of potential financial losses that generally are substantially greater than those that would ordinarily exist when drilling under a conventional dayrate contract. During the six months ended June 30, 2003 integrated services had project income of $0.4 million from the completion of one turnkey plug and abandonment project in the Gulf of Mexico during the first quarter of 2003 which was more than offset by operating overhead costs and insurance premiums. During the six months ended June 30, 2002 an operating loss of $1.3 million resulted primarily from two turnkey projects, also in the Gulf of Mexico. It is the Company's intent not to pursue contracts for integrated services, which includes turnkey contracts, except in very limited circumstances.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003 the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This statement requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of SFAS No. 150 and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The Company's adoption of SFAS No. 150 is not expected to have an impact on the Company's consolidated results of operations, financial position or cash flows.

In April 2003 the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies financial accounting and reporting for derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is to be applied prospectively for contracts entered into or modified after June 30, 2003. For contracts involving hedging relationships, SFAS No. 149 should be applied to both existing contracts and new contracts entered into after June 30, 2003. The Company's adoption of SFAS No. 149 is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows.

In December 2002 the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for financial statements for fiscal years ending after December 15, 2002. The Company accounts for stock-based employee compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted the provisions of SFAS No. 148 which require prominent disclosure regarding the method of accounting for stock-based employee compensation in its annual and interim financial statements. See "-Stock-Based Compensation" in Note 1 to the Company's Consolidated Financial Statements in Item 1 of Part 1 of this report.

In July 2002 the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company's adoption of SFAS No. 146 has not had a material impact on the Company's consolidated results of operations, financial position or cash flows.

FORWARD-LOOKING STATEMENTS

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

- future market conditions and the effect of such conditions on the Company's future results of operations (see " - Industry Conditions");

- future uses of and requirements for financial resources, including, but not limited to, expenditures related to the upgrade of the Ocean Titan, one of the Company's jack-up rigs (see " - Liquidity" and " - Capital Resources");

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

- future contractual obligations (see " - Liquidity - Contractual Cash Obligations");

- business strategy;

- growth opportunities;

- competitive position;

- expected financial position;

- future cash flows;

- future dividends;

- financing plans;

- tax planning;

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

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

- delivery dates and drilling contracts related to rig conversion and upgrade projects (see " -- Industry Conditions" and "--Capital Resources");

- plans and objectives of management;

- performance of contracts (see " -- Operations Outside the United States);

- outcomes of legal proceedings;

- compliance with applicable laws; and

- adequacy of insurance or indemnification.

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

- general economic and business conditions;

- worldwide demand for oil and natural gas;

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

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

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

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

- advances in exploration and development technology;

- the political environment of oil-producing regions;

- casualty losses;

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

- industry fleet capacity;

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

- competition;

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

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

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

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

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

- regulatory initiatives and compliance with governmental regulations;

- compliance with environmental laws and regulations;

- customer preferences;

- effects of litigation;

- cost, availability and adequacy of insurance;

- adequacy of the Company's sources of liquidity;

- risks inherent in turnkey operations, including the risk of failure to complete a well and cost overruns;

- the availability of qualified personnel to operate and service the Company's drilling rigs; and

- various other matters, many of which are beyond the Company's control.

The risks included here are not exhaustive. Other sections of this report and the Company's other filings with the Securities and Exchange Commission include additional factors that could adversely affect the Company's business, results of operations and financial performance. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements. Forward-looking statements included in this report speak only as of the date of this report. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based.