The following discussion should be read in conjunction with our unaudited consolidated financial statements (including the notes thereto) included elsewhere in this report and our audited consolidated financial statements and the notes thereto, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 1A, "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2008 and Item 1A of Part II, "Risk Factors," included in our Quarterly Report on Form 10Q for the quarter ended March 31, 2009. References to "Diamond Offshore," "we," "us" or "our" mean Diamond Offshore Drilling, Inc., a Delaware corporation, and its subsidiaries.
We provide contract drilling services to the energy industry around the globe and are a leader in offshore drilling. With the addition of the 10,000 foot, dynamically positioned, semisubmersible Ocean Courage in June 2009, we now have a fleet of 46 offshore rigs currently consisting of 31 semisubmersibles, 14 jack-ups and one drillship.
Overview
Industry Conditions
The global economic recession continued to weigh on energy demand in the second quarter of 2009. Crude oil prices remained volatile, and our customers are continuing to defer new drilling programs until project economics improve. Against this background, demand and pricing for available drilling rigs is continuing to deteriorate, with customers actively seeking to farm-out time on many of the contracted rigs to other operators. In effect, farming out rigs creates additional supply against which we must compete. The decline in drilling activity is expected to be further exacerbated by the influx of new-build rigs over the next several years. We expect our extensive contract backlog to help mitigate the impact of the current market on us at least through the end of 2009 and into 2010; however, we have experienced negative effects of the current market such as customer credit problems, customers seeking bankruptcy protection, customers attempting to renegotiate or terminate contracts, a further slowing in the pace of new contracting activity, declines in dayrates for new contracts, declines in utilization, and the stacking of idle equipment. We would expect a prolonged decline in energy prices and the global economy to have a further negative impact on us.
Floaters
Approximately 86% of the time on our intermediate and high-specification floater rigs is committed for the remainder of 2009. Additionally, commitments for 69% of the time on our floating rigs extend at least through 2010, with 8% of our floating units having contracts extending into the 2014-2015 timeframe.
During the second quarter, we reached an agreement with a customer in Australia to mobilize the Ocean America from the U.S. Gulf of Mexico, or GOM, to Australia to commence a two-year agreement originally scheduled for the Ocean Bounty. A lengthy repair period had been planned for the Ocean Bounty, and the rig swap will allow our customer to begin work at an earlier date.
In the United Kingdom, or U.K., sector of the North Sea, we agreed to move time from the Ocean Nomad to the Ocean Princess for a customer that was employing both rigs. As a result, the Ocean Nomad will now become available for work during the third quarter of 2009, but the remaining Ocean Nomad work will be transferred to the Ocean Princess at the existing $339,000 dayrate. In addition, the Ocean Princess will receive a 120-day term extension at a dayrate of $275,000 in consideration for moving the Ocean Nomad time to the Ocean Princess.
The weak market allowed us to complete the opportunistic purchase of a newbuild, semi-submersible offshore drilling rig, formerly known as PetroRig I, from Jurong Shipyard Pte Ltd. in June 2009. The purchase price for the dynamically positioned rig, which has been renamed Ocean Courage, was $460.0 million exclusive of final commissioning and initial mobilization costs, drillstring and other necessary capital spares. We have received several inquires for the 10,000-ft. water depth rated rig from potential customers regarding availability of the unit. We estimate that the earliest the rig could commence work is the fourth quarter of 2009, allowing time to identify and secure a drilling contract and to subsequently mobilize the rig from Singapore to the contract location.
International Jack-ups
The industry's jack-up market is divided between an international sector and a U.S. sector, with the international sector historically characterized by contracts of longer duration and higher prices, compared to the generally shorter term and lower priced domestic sector. However, to date in 2009 demand and dayrates are also

continuing to soften internationally. Based on analyst reports to the effect that less than 20% of the industry's new-build jack-up order book is under contract, it is expected that an oversupply of jack-up rigs will have an increasingly negative impact on the international sector during 2009 and beyond.
GOM Jack-ups
In the domestic jack-up sector, rapidly declining energy prices (particularly natural gas prices) have negatively impacted both demand and dayrates. In response, where possible we are continuing to seek to move units out of the GOM and into markets with generally longer contract duration and higher prices. Two of our five jack-up rigs in the GOM are under contract. To reduce costs, the remaining three mat rigs have been stacked and are not being actively marketed. Absent a sustained improvement in energy prices, weakness in the GOM is likely to continue in 2009, with an increasing number of rigs being cold-stacked by the industry in an effort to help bring equipment supply and demand into equilibrium. The number of working jack-ups in the GOM remains at its lowest level since the early 1970's.
Contract Drilling Backlog
The following table reflects our contract drilling backlog as of July 20, 2009, February 5, 2009 (the date reported in our Annual Report on Form 10-K for the year ended December 31, 2008), and July 24, 2008 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2008). The 2008 period includes both firm commitments (typically represented by signed contracts), as well as previously-disclosed letters of intent, or LOIs, where indicated. An LOI is subject to customary conditions, including the execution of a definitive agreement, and as such may not result in a binding contract. Contract drilling backlog is calculated by multiplying the contracted operating dayrate by the firm contract period and adding one-half of any potential rig performance bonuses. Our calculation also assumes full utilization of our drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors. Utilization rates, which generally approach 95-98% during contracted periods, can be adversely impacted by downtime due to various operating factors including, but not limited to, weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. No revenue is generally earned during periods of downtime for regulatory surveys. Changes in our contract drilling backlog between periods are a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts.

                                                                                 February 5,
                                                         July 20, 2009               2009               July 24, 2008(1)
                                                                                (In thousands)
Contract Drilling Backlog
High-Specification Floaters                             $     4,016,000        $      4,346,000        $        4,535,000
Intermediate Semisubmersibles                                 4,391,000               5,567,000                 6,199,000
Jack-ups                                                        311,000                 346,000                   543,000

Total                                                   $     8,718,000        $     10,259,000        $       11,277,000

(1) Contract drilling backlog as of July 24, 2008 included an aggregate $1.0 billion in contract drilling revenue related to anticipated future work under LOIs of which $672.0 million and $351.0 million is expected to be earned by our high-specification floaters and intermediate semisubmersibles, respectively.

The following table reflects the amount of our contract drilling backlog by year as of July 20, 2009.

                                                                For the Years Ending December 31,
                                        Total             2009(1)             2010               2011            2012 - 2016
                                                                          (In thousands)
Contract Drilling Backlog
High-Specification Floaters          $ 4,016,000        $   723,000        $ 1,351,000        $ 1,031,000        $    911,000
Intermediate Semisubmersibles          4,391,000            795,000          1,269,000            876,000           1,451,000
Jack-ups                                 311,000            174,000            109,000             28,000                   -

Total                                $ 8,718,000        $ 1,692,000        $ 2,729,000        $ 1,935,000        $  2,362,000

(1) Represents a six-month period beginning July 1, 2009.

The following table reflects the percentage of rig days committed by year as of July 20, 2009. The percentage of rig days committed is calculated as the ratio of total days committed under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in our fleet to total available days (number of rigs multiplied by

the number of days in a particular year). Total available days have been calculated based on the expected final commissioning date for the Ocean Courage.

                                               For the Years Ending December 31,
                                     2009(1)         2010          2011       2012 - 2016

    Rig Days Committed (2)
    High-Specification Floaters          83 %          74 %          49 %            10 %
    Intermediate Semisubmersibles        88 %          67 %          46 %            15 %
    Jack-ups                             54 %          17 %           4 %             -

(1) Represents a six-month period beginning July 1, 2009.

(2) Includes approximately 477 and 520 scheduled shipyard, survey and mobilization days for 2009 and 2010, respectively.

General
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. Demand for drilling services 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. The availability of rigs in a particular geographical region also affects both dayrates and utilization rates. These factors are not within our control and are difficult to predict.
Demand affects the number of days our fleet is utilized and the dayrates earned. As utilization rates increase, dayrates tend to increase as well, reflecting the lower supply of available rigs. Conversely, as utilization rates decrease, dayrates tend to decrease as well, reflecting the excess supply of rigs. 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.
Operating Income. Our operating income is primarily affected by revenue factors, but is also a function of varying levels of operating expenses. Our operating expenses represent all direct and indirect costs associated with the operation and maintenance of our drilling equipment. The principal components of our operating costs are, among other things, direct and indirect costs of labor and benefits, repairs and maintenance, freight, regulatory inspections, boat and helicopter rentals and insurance. Labor and repair and maintenance costs represent the most significant components of our operating expenses. In general, our labor costs increase primarily due to higher salary levels, rig staffing requirements and costs associated with labor regulations in the geographic regions in which our rigs operate.
Costs to repair and maintain our equipment fluctuate depending upon the type of activity the drilling unit is performing, as well as the age and condition of the equipment and the regions in which our rigs are working.
Operating expenses generally are not affected by changes in dayrates, and short-term reductions in utilization do not necessarily result in lower operating expenses. 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 related to activities 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.
Our 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 each of our rigs. Operating revenue decreases because these surveys are performed during scheduled downtime 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 downtime. The number of rigs undergoing a 5-year survey will vary from year to year, as well as from quarter to quarter.

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. Although an intermediate survey may require some downtime for the drilling rig, it normally does not require dry-docking or shipyard time, except for rigs located in the U.K. and Norwegian sectors of the North Sea.
During the remaining half of 2009, we currently expect to spend approximately 394 rig days to complete a 5-year survey for the Ocean Yatzy, intermediate surveys, the mobilization of rigs, contractually required modifications for international contracts and extended maintenance projects. In addition, we expect the Ocean Bounty to be taken out of service at some time during the third quarter of 2009 for shipyard work yet to be determined; however, we currently expect the drilling rig to be out of service until at least the end of 2009. We can provide no assurance as to the exact timing and/or duration of downtime associated with regulatory inspections, planned rig mobilizations and other shipyard projects. See " -Contract Drilling Backlog." We have elected to self-insure for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico. If named windstorms in the U.S. Gulf of Mexico cause significant damage to our rigs, it could have a material adverse effect on our financial position, results of operations and cash flows. However, under our insurance policy that expires on May 1, 2010, we continue to carry physical damage insurance for certain losses other than those caused by named windstorms in the U.S. Gulf of Mexico, for which our deductible for physical damage is $25.0 million per occurrence. Critical Accounting Estimates
Our significant accounting policies are discussed in Note 1 of our notes to consolidated financial statements included in Item 1 of Part I of this report and in Note 1 of our notes to audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008. There were no material changes to these policies during the six months ended June 30, 2009.

Results of Operations
Although we perform contract drilling services with different types of drilling rigs and in many geographic locations, there is a similarity of economic characteristics among all our divisions and locations, including the nature of services provided and the type of customers for our services. We believe that the combination of our drilling rigs into one reportable segment is the appropriate aggregation in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information." However, for purposes of this discussion and analysis of our results of operations, we provide greater detail with respect to the types of rigs in our fleet and the geographic regions in which they operate to enhance the reader's understanding of our financial condition, changes in financial condition and results of operations.
Three Months Ended June 30, 2009 and 2008 Comparative data relating to our revenue and operating expenses by equipment type are listed below.

                                                 Three Months Ended
                                                      June 30,                Favorable/
                                                 2009           2008        (Unfavorable)
                                                             (In thousands)
 CONTRACT DRILLING REVENUE
 High-Specification Floaters                 $  334,527     $  354,218       $    (19,691 )
 Intermediate Semisubmersibles                  465,762        464,598              1,164
 Jack-ups                                       123,169        117,810              5,359

 Total Contract Drilling Revenue             $  923,458     $  936,626       $    (13,168 )


 Revenues Related to Reimbursable Expenses   $   22,949     $   17,746       $      5,203

 CONTRACT DRILLING EXPENSE
 High-Specification Floaters                 $   98,991     $   89,503       $     (9,488 )
 Intermediate Semisubmersibles                  132,696        131,539             (1,157 )
 Jack-ups                                        66,233         48,834            (17,399 )
 Other                                            6,933          3,560             (3,373 )

 Total Contract Drilling Expense             $  304,853     $  273,436       $    (31,417 )


 Reimbursable Expenses                       $   22,431     $   17,346       $     (5,085 )

 OPERATING INCOME
 High-Specification Floaters                 $  235,536     $  264,715       $    (29,179 )
 Intermediate Semisubmersibles                  333,066        333,059                  7
 Jack-ups                                        56,936         68,976            (12,040 )
 Other                                           (6,933 )       (3,560 )           (3,373 )
 Reimbursable expenses, net                         518            400                118
 Depreciation                                   (85,431 )      (70,803 )          (14,628 )
 General and administrative expense             (16,166 )      (15,768 )             (398 )
 Gain on disposition of assets                       93            226               (133 )

 Total Operating Income                      $  517,619     $  577,245       $    (59,626 )


 Other income (expense):
 Interest income                                  1,190          2,941             (1,751 )
 Interest expense                               (11,288 )       (1,895 )           (9,393 )
 Foreign currency transaction gain               13,733         12,574              1,159
 Other, net                                        (416 )          (86 )             (330 )

 Income before income tax expense               520,838        590,779            (69,941 )
 Income tax expense                            (133,398 )     (174,615 )           41,217

 NET INCOME                                  $  387,440     $  416,164       $    (28,724 )

During the second quarter of 2009, the global economic recession continued to impact our industry, resulting in reduced demand for energy and volatile crude oil prices. Despite our contracted revenue backlog, our results were negatively impacted by these market conditions during the second quarter of 2009. Revenues for the second quarter of 2009 decreased $13.2 million, or 1%, compared to revenues of $936.6 million in the second quarter of 2008. Floater revenues decreased $18.5 million due to an overall decline in utilization, partially offset by the inclusion of a full quarter of operating revenues for our recently upgraded Ocean Monarch and the impact of higher

dayrates earned by our floater fleet. However, this decrease in revenues was partially offset by $5.4 million in additional revenues generated by our jack-up fleet compared to the second quarter of 2008 due to the inclusion of a full quarter's operations for the Ocean Shieldand Ocean Scepter.
In many of our floater markets, average realized dayrates increased as our rigs operated under contracts at higher dayrates in the second quarter of 2009 than those earned during the second quarter of 2008, resulting in the generation of additional contract drilling revenues. Overall revenue for our floater fleet was negatively impacted by the effect of downtime associated with scheduled shipyard projects and mandatory inspections or surveys, as well as stacked time for rigs without work. In addition, the GOM jack-up market continued to experience reduced demand and dayrates during the second quarter of 2009 which resulted in our decision to cold stack three of our mat-supported rigs. The international jack-up market, which had been strong throughout the majority of 2008, was also impacted by softening demand and reduced dayrates during the second quarter of 2009.
Total contract drilling expenses increased $31.4 million, or 12%, during the second quarter of 2009 compared to the same period in 2008. Overall higher costs during the 2009 period reflect the inclusion of normal operating costs for the recently upgraded Ocean Monarch and our new jack-ups Ocean Shield and Ocean Scepter, as well as survey and related maintenance costs, contract preparation and mobilization costs.
Depreciation expense increased $14.6 million to $85.4 million during the second quarter of 2009, or 21% compared to the second quarter of 2008, due to a higher depreciable asset base.

High-Specification Floaters.

                                            Three Months Ended
                                                 June 30,               Favorable/
                                            2009          2008        (Unfavorable)
                                                        (In thousands)
       HIGH-SPECIFICATION FLOATERS:
       CONTRACT DRILLING REVENUE
       GOM                               $ 247,657     $ 282,074       $    (34,417 )
       Australia/Asia/Middle East           38,988        20,552             18,436
       South America                        47,882        51,592             (3,710 )

       Total Contract Drilling Revenue   $ 334,527     $ 354,218       $    (19,691 )


       CONTRACT DRILLING EXPENSE
       GOM                               $  68,857     $  50,394       $    (18,463 )
       Australia/Asia/Middle East            8,342         7,928               (414 )
       South America                        21,792        31,181              9,389

       Total Contract Drilling Expense   $  98,991     $  89,503       $     (9,488 )


       OPERATING INCOME                  $ 235,536     $ 264,715       $    (29,179 )

GOM. Revenues generated by our high-specification floaters operating in the GOM decreased $34.4 million during the second quarter of 2009 compared to the same period in 2008. Excluding the Ocean Monarch, which returned to service late in the first quarter of 2009, average utilization for our high-specification rigs operating in the GOM decreased from 99% in the second quarter of 2008 to 79% in the second quarter of 2009, resulting in an $85.8 million decrease in revenues. The decrease in utilization was primarily due to the relocation of the Ocean Quest to Brazil late in the first quarter of 2009 and a total of 89 stacked days for two of our rigs without contracts during the quarter.
Excluding the Ocean Monarch, average operating revenue per day for our high-specification floaters in this market increased to $421,900 during the second quarter of 2009 compared to $392,300 in the second quarter of 2008, resulting in additional revenues of $15.4 million. The Ocean Monarch generated revenues of $35.9 million during the second quarter of 2009.
Operating costs during the second quarter of 2009 for our high-specification floaters in the GOM increased $18.5 million compared to the second quarter of 2008. The overall increase in operating costs for the second quarter of 2009 compared to the same quarter of 2008 was primarily due to the inclusion of normal operating costs for the Ocean Monarch, which began operating under contract in mid-March 2009, as well as higher survey, repair and mobilization costs.

Australia/Asia/Middle East. During the second quarter of 2009, our high-specification rig operating offshore Malaysia, the Ocean Rover, generated $18.4 million in additional revenues compared to the second quarter of 2008, primarily due to an increase in the average operating dayrate from $233,800 during the second quarter of 2008 to $442,800 during the second quarter of 2009.
South America. Revenues earned by our high-specification floaters operating offshore Brazil in the second quarter of 2009 decreased $3.7 million compared to . . .