##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 
 FORM 20-F
 (Mark One) o
    
    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THESECURITIES EXCHANGE ACT OF 1934ORþ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2004ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
  OCEAN RIG ASA (Exact name of Registrant as specified in its charter)
 KINGDOM OF NORWAY
 (Jurisdiction of incorporation or organization)
 Koppholen 4
4313 Sandnes, Norway
 (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: None Securities registered or to be registered pursuant to Section 12(g) of the Securities Exchange Act of 1934: None Securities for which there is a reporting obligation pursuant to Section 15(d) of the Securities Exchange Act
of 1934: 10 1/4% senior secured notes due 2008 of Ocean Rig Norway AS and guarantees thereof
by each of Ocean Rig ASA, Ocean Rig 1 AS and Ocean Rig 2 AS. Number of outstanding shares of each of the Registrants classes of capital or common stock as of December 31, 2004,
the close of the period covered by the annual report: Common shares par value NOK 10 per share . . . . . . . . . . . . . . . . . . . . . . 83,506,423 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 þ                 No o Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 o                 Item 18 þ   1




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TABLE OF CONTENTS PART I
    
    
    4ITEM 1 IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
    
    
    4ITEM 2 OFFER STATISTICS AND EXPECTED TIMETABLE
    
    
    4ITEM 3 KEY INFORMATION
    
    
    4ITEM 4 INFORMATION ON OUR COMPANY
    
    
    16ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
    
    
    23ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
    
    
    39ITEM 7 MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
    
    
    45ITEM 8 FINANCIAL INFORMATION
    
    
    47ITEM 9 THE OFFER AND LISTENING
    
    
    47ITEM 10 ADDITIONAL INFORMATION
    
    
    49ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    51ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
    
    
    52PART II
    
    
    53ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
    
    
    53ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDER AND USE OF PROCEEDS
    
    
    53ITEM 15 CONTROLS AND PROCEDURES
    
    
    53ITEM 16 AUDIT COMMITTEE FINANCIAL EXPERT; CODE OF ETHICS; PRINCIPAL ACCOUNTANT FEES
    
    
    55PART III
    
    
    57ITEM 17 FINANCIAL STATEMENTS
    
    
    57ITEM 18 FINANCIAL STATEMENTS
    
    
    57ITEM 19 EXHIBITS
    
    
    F-55
 2




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NOTICE REGARDING FORWARD-LOOKING STATEMENTS This annual report includes and incorporates by reference forward-looking statements that
involve risks and uncertainties. These forward-looking statements are based on forecasts of future
results and estimates of amounts not yet determinable and also include statements about our market
opportunities, future prospects, expected activities, developments and business strategies. We
have based these forward-looking statements on our own information and on information from other
sources that we believe are reliable. Forward-looking statements are identified by their use of terms and phrases such as
anticipate, believe, could, estimate, expect, intend, may, plan, predict,
project, will and similar terms and phrases, including references to assumptions. Such
forward-looking statements are related to future events and the future financial performance of our
Company, and involve known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of our Company or of the industry to be materially
different from any results, performance or achievements projected or implied by such
forward-looking statements. These statements are contained in Item 4, Information on our Company
and Item 5, Operating and Financial Review and Prospects, and other sections of this annual
report. Forward-looking statements in this annual report include, among others, expectations regarding
the following:  
    our results of operations and financial conditions in the future;
    the prospects for the offshore drilling industry;
    our ability to generate sufficient cash-flow to meet our debt service requirements;
    our ability to retain existing contracts and secure future drilling contracts for our rigs at
attractive day rates;
    future competition; and
    our ability to develop our operations in accordance with our plans. Due to such uncertainties and risks, you should not place undue reliance on the
forward-looking statements included in this annual report. We do not undertake to update our
forward-looking statements or risk factors to reflect future events or circumstances.   We will provide, without charge, to each person to whom this report is delivered, upon written
or oral request, a copy of any or all of the documents incorporated by reference into this annual
report (other than exhibits, unless such exhibits are specifically incorporated by reference in
such documents). Written requests for copies of these documents should be directed to us at the
address given on the front cover of this annual report. 3




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PART I ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS Not applicable. ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE Not applicable. ITEM 3. KEY INFORMATION In this annual report on Form 20-F, where we refer to Ocean Rig,Company, we, us, our
and similar words, we mean Ocean Rig ASA and its subsidiaries as a group. When we refer to Ocean
Rig ASA or any of its subsidiaries individually, we use the full name of that entity. 3.1 Selected Financial Data The following table presents selected consolidated financial information for Ocean Rig ASA and
its consolidated subsidiaries. This information has been derived from, and should be read in
conjunction with, our consolidated accounts. Our consolidated accounts for 2003 and 2004 have been
audited by Ernst & Young AS, independent registered public accounting firm. Our consolidated
accounts for previous years have been audited by PricewaterhouseCoopers AS, registered public
accounting firm. Our consolidated accounts as of December 31, 2000, 2001, 2002, 2003 and 2004 and for the years
ended December 31, 2000, 2001, 2002, 2003 and 2004 have been prepared in accordance with generally
accepted accounting principles in Norway, or Norwegian GAAP. For a discussion of certain
differences between Norwegian GAAP, and US GAAP, see Note 25 to the consolidated accounts included
in Item 18. The data set forth below should be read in conjunction with Item 5, Operating and
Financial Review and Prospects. Since our inception in 1996 until 2002, our activities were primarily directed at the
development and construction of our drilling rigs. Since 2002, our activities have been primarily
directed at marketing, managing and operation of our semi-submersible rigs, Leiv Eiriksson and
Eirik Raude. 4




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Year ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD(amounts in thousands, except for per-share information)Norwegian GAAP(1)Income Statement Data:Operating revenues
    
    
    1,569
    
    
    
    1,170
    
    
    
    68,569
    
    
    
    103,010
    
    
    
    88,563Operating expenses:Salaries and other personnel expenses
    
    
    5,162
    
    
    
    12,392
    
    
    
    20 552
    
    
    
    17,063
    
    
    
    24,796Other operating and administrative expenses
    
    
    14,354
    
    
    
    38,943
    
    
    
    48 608
    
    
    
    35,997
    
    
    
    41,604Depreciation, amortization and asset
impairment write down
    
    
    432
    
    
    
    28,710
    
    
    
    20 561
    
    
    
    225,048
    
    
    
    48,119Exploration expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,005
    
    
    
    14,287Total operating expenses
    
    
    19,948
    
    
    
    80,045
    
    
    
    89,721
    
    
    
    286,113
    
    
    
    128,806Operating loss
    
    
    (18,379
    )
    
    
    (78,875
    )
    
    
    (21,152
    )
    
    
    (183,103
    )
    
    
    (40,243
    )Net financial income/ (expense)
    
    
    (20,343
    )
    
    
    (13,205
    )
    
    
    88,574
    
    
    
    (29,839
    )
    
    
    (60,778
    )Taxes
    
    
    (25
    )
    
    
    (37
    )
    
    
    (3
    )
    
    
    
    
    
    
    (1,266
    )Net income/ (loss)
    
    
    (38,747
    )
    
    
    (92,117
    )
    
    
    67,419
    
    
    
    (212,942
    )
    
    
    (102,287
    )Basic earnings/ (loss) per share (2), (7)
    
    
    (9.24
    )
    
    
    (17.81
    )
    
    
    3.53
    
    
    
    (3.90
    )
    
    
    (1.53
    )Diluted earnings/ (loss) per share (2), (7)
    
    
    (9.24
    )
    
    
    (17.81
    )
    
    
    2.48
    
    
    
    (3.90
    )
    
    
    (1.53
    )
 As of, or for the year ended December 31,2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD(amounts in thousands)Balance Sheet Data:Cash and cash equivalents
    
    
    69,347
    
    
    
    18,880
    
    
    
    19,721
    
    
    
    16,805
    
    
    
    44,145Restricted cash
    
    
    4,074
    
    
    
    28,135
    
    
    
    1,238
    
    
    
    5,089
    
    
    
    6,922Total assets
    
    
    776,379
    
    
    
    908,611
    
    
    
    1,319,925
    
    
    
    1,140,041
    
    
    
    1,150,691Total liabilities
    
    
    417,515
    
    
    
    597,548
    
    
    
    639,936
    
    
    
    621,710
    
    
    
    661,145Capital stock
    
    
    163,320
    
    
    
    201,414
    
    
    
    76,160
    
    
    
    97,565
    
    
    
    129,468Total shareholders equity
    
    
    358,864
    
    
    
    311,063
    
    
    
    679,989
    
    
    
    518,331
    
    
    
    489,546Other financial data:Capital expenditures
    
    
    139,034
    
    
    
    173,496
    
    
    
    273,139
    
    
    
    16,657
    
    
    
    39,380EBITDA (3)
    
    
    (17,947
    )
    
    
    (50,165
    )
    
    
    (591
    )
    
    
    49,950
    
    
    
    22,163Number of shares outstanding (4), (5), (7),
    
    
    44,455
    
    
    
    56,077
    
    
    
    492,887
    
    
    
    64,015
    
    
    
    83,506Dividends declared (6)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    US GAAP:Net income/ (loss)
    
    
    (37,665
    )
    
    
    (91,992
    )
    
    
    70,839
    
    
    
    (38,377
    )
    
    
    (119,740
    )Total shareholders equity
    
    
    358,864
    
    
    
    311,063
    
    
    
    683,792
    
    
    
    706,824
    
    
    
    675,814
   (1)
    
    Reporting and functional currency was changed to USD for the Company and most of its
entities January 1, 2004. See note 1 to the financial accounts. Translation of amounts from
Norwegian kroner (NOK) to United States dollars ($) has been done using the closing
exchange rate at balance sheet date for the balance sheet and quarterly average for the
profit & loss.(2)
    
    The weighted average number of shares outstanding has been retroactively restated to
reflect the reverse stock split (30:1) that took place in December 1999.(3)
    
    EBITDA is a non GAAP measure defined as earnings before interest, tax, depreciation,
amortization and exploration expenses. See the reconciliation to GAAP measure below.(4)
    
    As referenced in note (2) above, in December 1999, we carried out a reverse share split
(30:1) whereby the par value of our shares was increased from NOK 1.0 to NOK 30.0 per
share.(5)
    
    In February 2002, the nominal value of our shares was written down from NOK 30.0 per
share to NOK 1.0 per share. 5




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(6)
    
    No dividends were paid on our shares during these periods.(7)
    
    In May 2003 the Companys General Meeting approved a reverse share split of 10:1
effective as of May 21, 2003. All EPS calculations have been restated. Presented below is the Companys EBITDA, defined as earnings before interest, tax,
depreciation amortization and exploration expenses. The EBITDA figures are not intended to
represent cash flows from operations as defined by Norwegian GAAP, and should not be considered an
alternative to net income, as an indicator of the Companys operating performance or to cash flows
from operations as a measure of liquidity. The EBITDA figures should only be used as information
relating to the Companys operating activities and should be read in conjunction with comparable
GAAP financial information of the Company located in the Companys financial accounts and notes
thereto. The Company frequently uses the EBITDA figures to measure operating results from
operations before depreciation, interest items and taxes. The Company believes the EBITDA figures
provide a good measure to better understand the operating results from the variable activities
directly related to operations of the rigs such as utilization and operating regularity of the rigs
as well as income rate and operating cost situations. 2002 was the first year the Company had income from rig operating activities with Leiv
Eiriksson in operation for ten months and Eirik Raude in operations for the last two months of the
year, and 2003 marked the first full year of operations. Operating results for 2003 and 2004 are
therefore not directly comparable with operating results in previous years. Year ended December 31,(amounts in thousands)
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USDEBITDA
    
    
    (17,947
    )
    
    
    (50,165
    )
    
    
    (591
    )
    
    
    49,950
    
    
    
    22,163Depreciation,
amortization, exploration
    
    
    (432
    )
    
    
    (28,710
    )
    
    
    (20,561
    )
    
    
    (233,053
    )
    
    
    (62,406
    )Net financial income (loss)
    
    
    (20,343
    )
    
    
    (13,205
    )
    
    
    88,574
    
    
    
    (29,839
    )
    
    
    (60,778
    )Taxes
    
    
    (25
    )
    
    
    (37
    )
    
    
    (3
    )
    
    
    
    
    
    
    (1,266
    )Net income (loss)
    
    
    (38,747
    )
    
    
    (92,117
    )
    
    
    67,419
    
    
    
    (212,942
    )
    
    
    (102,287
    )
 Exchange Rate Information All entities in the group except for Ocean Rig ASA have changed their functional currency from
Norwegian kroner (NOK) to US dollars (USD) as of January 1, 2004. Beginning in 2004, the economic
circumstances for the operating entities have significantly changed with substantially all revenues
and a significantly increased proportion of expenses denominated in USD. In addition, material
assets are valued and mainly financed in USD. These changes in economic circumstances indicate that
the functional currency has changed. Ocean Rig ASA continues to use NOK as its functional currency.
The Ocean Rig group has also changed its reporting currency from NOK to USD with effect from
January 1, 2004. Accordingly, the accounts are reported in USD and all figures in this report are
stated in USD unless otherwise specified. Figures relating to previous periods have been converted
to USD for comparison purposes using the exchange rate at the balance sheet date for assets and
liabilities. Revenues and expenses have been converted from NOK to USD on a quarterly basis
applying the average exchange rate for the quarter. 3.2 Capitalization and Indebtedness Not applicable. 6




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3.3 Reasons for the Offer and Use of Proceeds Not applicable. 3.4 Risk Factors In evaluating our Company and our business, investors should consider carefully, in addition
to other information contained in this annual report, the following risk factors. We are subject to the volatility of the industry in which we operate. Our ability to obtain long- or short-term drilling contracts and the future financial
condition, results of operations and the value of our company will depend in part upon market
prices for oil and gas. Oil and gas prices have historically been volatile, and will likely
continue to be volatile in the future. The prices for oil and gas are subject to wide fluctuation
in response to a variety of factors beyond our control, including changes in the supply of and
demand for oil and gas, market uncertainty, worldwide economic conditions, adverse weather
conditions, political disturbances and/or war, especially in the Middle East, and actions taken by
OPEC and other oil and gas producing nations to influence global production levels. These factors
and the volatility of the energy markets make it impossible to predict future oil and gas price
movements with certainty. The Companys operations depend upon the conditions prevailing in the oil and gas industry
and, in particular, the exploration, development and production expenditures of oil and gas
companies. In addition to oil prices, the offshore drilling industry is influenced by many
factors, including:  
    the availability of competing offshore drilling vessels;
    the level of costs for associated offshore oilfield and construction services;
    oil and gas transportation costs;
    the discovery of new oil and gas reserves; and
    local and international political and economic conditions. Declines in oil and gas prices for an extended period of time could negatively affect our business.
Sustained periods of low oil prices typically result in reduced exploration and drilling because
oil and gas companies capital expenditure budgets are sensitive to changes in energy prices. We
cannot predict the future level of demand for our services or future conditions of the oil and gas
industry. Any decrease in exploration, development or production expenditures by oil and gas
companies could reduce our revenues and materially harm our business and results of operations. Our revenues depend on two drilling rigs, which are designed to operate in harsh environments and
could be damaged or destroyed. Our operations are dependent on two rigs. Eirik Raude is currently operating in the Barents
Sea and the North Sea and Leiv Eiriksson is currently operating offshore Angola. Both rigs may be
exposed to risks inherent in deepwater drilling and operating in harsh environments that may cause
damage or loss. The replacement or repair of a rig could take a significant amount of time, and we
may not have any right to compensation for lost revenues during that time, despite our
comprehensive loss of hire insurance policy. As long as we have only two rigs in operation, loss of
or serious damage to one of the rigs could materially reduce our revenues for the time that a rig
is out of operation. In light of the sophisticated design of the rigs, we may be unable to obtain a
replacement rig that could perform under the conditions that our rigs are expected to operate. 7




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Our operations are subject to numerous risks inherent in the offshore drilling industry. The
drilling of oil and gas wells, particularly exploratory wells where little is known of the
subsurface formations, involves the risks of extreme pressure and temperature, blowout, cratering
and fires that could result in reservoir damage, injury or death to personnel, substantial damage
to our rigs, pollution, suspension of drilling operations and loss of production. Our rigs are also
subject to the hazards inherent in marine operations, such as capsizing, grounding, collision,
damage from heavy weather or sea conditions and unsound location, both while on site and during
transport to site or for outfitting or repair. We also may be subject to liability for spills,
damage and other accidents. We and our independent registered public accounting firm have identified material weaknesses and
reportable conditions in our internal controls. As disclosed in this Report, we and our independent registered public accounting firm have
identified material weaknesses and our independent accounting firm has also identified certain
reportable conditions. A material weakness is a condition in which the design or operation of one
or more of the internal control components does not reduce, to a relatively low level, the risk
that misstatements caused by error or fraud, in amounts that would be material in relation to the
financial statements being audited, may occur and not be detected, within a timely period, by
employees in the normal course of performing their assigned functions. Reportable conditions are
matters coming to the auditors attention that in his judgement, should be communicated to the
audit committee because they represent significant deficiencies in the design or operation of
internal control, which could adversely affect the organizations ability to initiate, record,
process, and report financial data consistent with the assertions of management in the financial
statements. The material weaknesses as of December 31, 2004 related to the reconciliation and revaluation
of balance sheet accounts, documentation of transactions between group companies and the capacity
and segregation of duties in the accounting department. We are in the process of implementing changes to address each of the material weaknesses and
reportable conditions that we and our independent registered public accounting firm have previously
identified. If we are unable to correct these weaknesses in internal controls in a timely manner,
or if additional weaknesses are identified that are not corrected in a timely manner, our ability
to record, process, summarize and report financial information will be adversely affected. This
failure could materially and adversely impact our business, our financial condition and the market
value of our securities and expose us to litigation and scrutiny from our investors. Any contractual indemnification and insurance that we obtain may not be sufficient to cover the
cost of repairing or replacing a damaged or lost rig or to pay any liabilities that we may incur. In negotiating our agreements with customers, we generally request contractual indemnification
pursuant to which our customers would agree to protect and indemnify Ocean Rig to some degree from
liability for reservoir, pollution and environmental damages. Nonetheless, we have not always
received and we cannot guarantee that we will be able to obtain such indemnities in our contracts.
In fact, in many of our existing contracts, our customers indemnify us for
pollution occurring from blowouts, unless such pollution is due to our
negligence, willful misconduct or breach of such contract. In addition, in
many of these contracts, we indemnify our customers for such pollution due
to our negligence, willful misconduct or breach of contract, as well as
against costs and claims, including for personal injury or property damage,
arising from contamination caused by the leakage of any substances under
our control or discharged from our drilling units. Also, we cannot guarantee that the level of indemnification we have obtained or do obtain is or
will be meaningful, that the indemnification provisions will be enforceable or that our customers
will be financially able to comply with their indemnity obligations. We will always, to some
extent, be exposed to potential liabilities relating to oil and other types of pollution as a
result of our operations. Although we intend to seek to obtain adequate coverage under our
liability insurance and also to limit our exposure in our agreements with our customers there can
be no assurance that such attempts to limit, reduce or offset such liability will be sufficient. We maintain insurance in accordance with industry standards. Our insurance is intended to
cover normal risks in our current operations, including insurance against property damage, loss of
hire, war risk and third-party liability, including pollution liability. 8




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Although we have obtained insurance for the full assessed market value of our rigs, insurance
coverage may not under certain circumstances be available and if available it may not provide
sufficient funds to protect us from all losses and liabilities that could result from our
operations. The principal risks which may not be insurable are various environmental
liabilities and liabilities
resulting from reservoir damage caused by our negligence. Moreover, our insurance is subject to
substantial deductibles and aggregate recovery limits, in the case of
pollution liabilities, $100 million per event and in the case of
other claims, $150 million, and provides for premium adjustments based on claims, and our insurance
coverage may not protect fully, if at all, against losses resulting from
a required cessation of rig operations for environmental or other reasons, as recently occurred
with the Eirik Raude in the Barents Sea. The occurrence of a casualty, loss or liability against
which we may not be fully insured could significantly reduce our revenues, make it financially
impossible for us to obtain a replacement rig or to repair a damaged rig, cause us to pay fines or
damages which are generally not insurable and that may have priority over the payment obligations
under our indebtedness or otherwise impair our ability to meet our obligations under our
indebtedness and to operate profitably. In addition, we cannot guarantee that insurance will be
available to us at all or on terms acceptable to us, that we will maintain insurance or, if we are
so insured, that our policy will be adequate to cover our loss or liability in all cases. We may be unable to secure ongoing drilling contracts, and the contracts that we enter into may not
provide sufficient cash flow to meet our obligations with respect to our indebtedness. Our ability to meet our obligations under our indebtedness will depend on our ability to
consistently secure drilling contracts for our rigs at sufficiently high day rates. Leiv Eiriksson
is currently operating under a contract with Total and Eirik Raude is operating under a contract
with Statoil, both at attractive day rates. The Total contract is expected to expire at year-end
2005 while the Statoil contract is expected to expire during January 2006. Although negotiations
are ongoing for further contracts at increasingly attractive day rates for both rigs, we cannot
guarantee that we will be able to obtain these contracts or any alternative contracts for either
rig upon the expiration or termination of current backlog or that there will not be a gap in
employment between current contracts and subsequent contracts . In addition, delays under existing
contracts could cause us to lose future contracts if a rig is not available to start work at the
agreed date. Drilling contracts are traditionally awarded on a competitive bid basis. Intense price
competition is often the primary factor in the awarding of contracts, although rig availability as
well as quality and technical/operational capability of equipment are also major factors that are
considered. We cannot predict the future level of demand for our services or future conditions in
the oil and gas industry. If the oil and gas companies do not continue their recent increases in
exploration, development and production expenditures, we may have difficulty securing drilling
contracts, or we may be forced to enter into contracts at unattractive day rates. Either of these
events could impair our ability to generate sufficient cash flow to make principal and interest
payments under our indebtedness. In addition, we may be required to move our rigs from a region
where demand is low to another region where demand is higher or day rates are more attractive. We
would likely incur material expenses in connection with moving the rigs and the start-up of
drilling operations, and those expenses probably would not be reimbursed by our customers. Moreover, the recent improvement in the results of operations and prospects for the offshore
contract drilling industry as a whole may lead to increased drilling vessel construction and
enhancement programs by our competitors. A significant increase in the supply of competitive
drilling vessels could have an adverse effect on the average utilization, average day rates and
second-hand value of our vessels or any other assets we may acquire or lease in the future. Our
future profitability will depend upon the utilization of, and day rates for Eirik Raude and Leiv
Eiriksson, and any other assets we may acquire or lease in the future as well as our ability to
control operating costs. There can be no assurance that current utilization and day rates will not
decline, that current average operating costs will not escalate or that we will not experience
losses or negative cash flow in the future. 9




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##### 



Our customers could terminate or seek to renegotiate drilling contracts for our rigs for reasons
that are beyond our control, and we will not realize revenues from the rigs if they are not under
contract. Our customers could terminate or seek to renegotiate drilling contracts for a variety of
specific reasons relating to each individual contract including the following, which are largely
beyond our direct control:  
    the rigs may not function in accordance with their specifications or the needs
of the customer,
    the rigs may be damaged or destroyed by adverse weather, accidents or other
force majeure events,
    operation of the rigs may be interrupted as a result of breakdown,
unseaworthiness, failure in construction or other mechanical or technical failures, or
    operation of the rigs may be interrupted or terminated if situations of
conflict between drilling on the one hand and fishery or environmental interests, on
the other, should occur in any area in which we drill, particularly politically
sensitive areas like the Barents Sea. We are not likely to realize any material revenues for periods during which our rigs are not
under contract. However, we will continue to incur the expense of maintaining our rigs during idle
periods. In addition, it could be expensive and time consuming for us to repair a damaged rig, to
modify a rig to remedy failure in the construction or design of the rig or to replace faulty
equipment. We cannot guarantee that all such costs would be covered by our hull and machinery
insurance or loss of hire insurance or any other insurance policies, and we may not be entitled to
any compensation for lost revenues. We are substantially leveraged and cannot guarantee that we will be able to generate sufficient
cash flow or raise additional capital in amounts sufficient to meet required payments of principal
and interest on our debts. As of December 31, 2004, we have USD 595.4 million outstanding in aggregate principal amount
of indebtedness (including the 101/4% senior secured Notes issued by Ocean Rig Norway in 1998 (the
Notes), the floating rate senior secured loans incurred by Ocean Rig Norway in 1998 (the 1998
Loans), the Convertible Bonds issued by Ocean Rig ASA in 2000, the Fortis Facility incurred by
Ocean Rig 2 AS in 2002 (the Fortis Facility or the 2002 Loans), the Mandatory Convertible Bonds
issued by Ocean Rig ASA in 2002, the 7% Convertible Bonds issued by Ocean Rig ASA in 2004 and the
11% Unsecured Bonds with Call option issued by Ocean Rig ASA in 2004). Although the agreements
governing our indebtedness limit the incurrence of additional indebtedness, under certain
circumstances the amount of permitted additional indebtedness could be substantial. Our high degree
of leverage could have important negative consequences for holders of our shares and bonds,
including the possibility that:  
    we may be unable to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, debt service requirements, or other
general corporate purposes,
    we may be required to use a substantial portion of our cash flow from
operations to pay principal of and interest on our indebtedness, thereby reducing the
funds available for other purposes, including our operations, marketing activities,
future business opportunities and outfitting or construction of additional rigs,
    while the cash flow from our drilling rigs may be adequate to service the
obligations under the Notes, the 1998 Loans and the Fortis Facility, any residual cash
flow might not be sufficient to service our remaining debt obligations, including the
Convertible Bonds, the Mandatory Convertible Bonds and the Unsecured Bonds, or for
repayment of these obligations as they become due commencing in 2005, 10




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
    we may not have the flexibility to adjust to changing market conditions or the
ability to withstand competitive pressures as a result of our leveraged position and
the covenants contained in our debt instruments, thus putting the Company at a
competitive disadvantage,
    we may be more vulnerable to a downturn in general economic conditions or in
our business, or
    Ocean Rigs managements discretion with respect to certain business decisions
may be restricted by covenants contained in the documents governing its indebtedness. We are dependent on revenues from our operations in order to make scheduled payments on our
indebtedness. The success of our operations depends on many factors, including the level of drilling
activity in the oil and gas industry, the capacity utilization of deepwater rigs, the proper
functioning of our rigs, and numerous other factors that are beyond our control. We cannot
guarantee that we will be able to achieve and maintain a level of cash flow from operations
sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If we are unable to generate sufficient cash flow and cannot otherwise obtain funds necessary
to meet required payments of principal, premium, if any, and interest on our indebtedness, or if we
otherwise fail to comply with the covenants governing our indebtedness, we could be in default
under the terms of the agreements relating to our outstanding indebtedness, including the senior
debt agreements. Our senior debt agreements also include provisions that require us, upon the
occurrence of certain events, to offer to repurchase the senior secured debt. Certain of these
events could be beyond our control, such as the loss of a rig or a change of control in the event
that a person or group of persons (as such term is used under the Norwegian Securities Trading Act
of 1997) becomes the owner of more than 40% of our voting stock . Although the security interests
granted to secure the senior secured debt include any insurance proceeds obtained in connection
with the event requiring the offer to prepay such debt, we cannot guarantee if or when the amounts
would be received and, even if received, that the amounts would be sufficient to satisfy our
repurchase obligations. If these assets, together with our cash flow and capital resources, are
insufficient to fund our debt service or repurchase obligations, we may be forced to reduce or
delay capital expenditures, sell assets, seek to obtain additional equity capital or restructure or
refinance our debt. We cannot guarantee that any of these alternative measures would be successful
or would permit us to meet our scheduled debt service or repurchase obligations. In the event of
default, the holders of our debt instruments could elect to declare all debts to be due and payable
together with accrued and unpaid interest. As a result, we could be forced into bankruptcy or
liquidation. We may be unable to meet our future capital requirements in connection with the operation and
maintenance of our rigs. Our future capital requirements and level of expenses will depend on numerous factors,
including, among other things, the timing and terms on which drilling contracts can be negotiated,
the amount of cash generated from operations, the level of demand for our services and general
industry conditions. In the event that our existing resources and other committed funding are
insufficient to fund our operating and maintenance activities, we may need to raise additional
funds through public offerings or private placements of debt or equity securities. We cannot
guarantee that we will be able to obtain additional financing at all or on terms acceptable to
Ocean Rig. If adequate funds are not available, we may have to reduce expenditures for investments
in new projects, which could hinder the Companys growth and prevent us from realizing potential
revenues from prior investments. 11




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We may be unable to compete successfully with other companies in the offshore drilling industry,
many of which have superior resources, name recognition and experience. The number of participants in the offshore drilling industry is small and primarily consists
of a few large, experienced contractors that have greater financial resources than we have. Since
we are a relatively new participant in this field and have a limited operating history, we may not
be able to compete in the industry successfully. In addition, because of the relatively small size
of our Company, we are not able to take advantage of economies of scale to the same extent as our
larger competitors. In light of the high capital requirements inherent in the offshore drilling
industry, we also may be unable to make future investments in new technologies or fleet expansion
necessary for us to succeed in this industry, while our larger competitors superior financial
resources may enable them to respond more rapidly to changing market demands. The offshore contract drilling industry has historically been highly competitive and cyclical,
and a sustained period of low oil and gas prices, a deterioration in the economic conditions in a
major industrialized or developing region or a general downturn in the worlds industrialized
economies could curtail spending by oil and gas companies and, as a result, lower demand for
offshore contract drilling services. Therefore, we cannot predict whether market conditions will be
favourable for our rigs. Some of our competitors have significantly greater financial, marketing,
personnel and other resources than we have. As a result, our competitors may be better able to
withstand cyclical fluctuations in demand for offshore drilling and production and related services
and better positioned to compete for existing demand for such services. We cannot guarantee that our use of the Bingo rig design concept will not infringe on the rights of
others or that competitors will not duplicate our technology. Although we purchased the right to use the Bingo rig design concept for our rigs, neither we
nor the company that we bought those rights from has obtained or applied for any patents or other
intellectual property protection relating to the design. As a result, we cannot guarantee that
other parties will not challenge our right to use the Bingo concept or seek damages for alleged
infringement of rights that they claim to own. We may also lose the competitive advantage that we
sought to achieve through use of the Bingo design concept if our competitors duplicate key aspects
of the design without seeking our permission, and we may be unable to prevent competitors from
doing so. We may lose key personnel or be unable to secure the services of a sufficient number of qualified
workers for the operation of our rigs. Our success depends to a large extent upon the continued services of our senior management and
upon our ability to attract and retain key operating personnel. The loss of the services of any
such employee could have a negative effect on Ocean Rig. We do not maintain key man insurance
with respect to these individuals. While our success depends in part upon these personnel, we
believe that there are other qualified managers in the offshore drilling industry. However, we
cannot guarantee that we would be able to engage qualified managers and, if we were, on what terms. Our operations are subject to a number of risks that are inherent in doing business abroad. We derive, and expect to derive in the future, a substantial portion of our revenues from the
operation of our rigs outside such known jurisdictions as Norway, Canada and the United States, in
locations including offshore Brazil and/or West Africa, and are in fact currently operating Leiv
Eiriksson offshore Angola. As a result, we are likely to be subject to certain political, economic
and other risks inherent in doing business abroad, including the risk of war and civil
disturbances, expropriation and the general hazards associated with assertions of national
sovereignty over areas in which our rigs operate. Our operations abroad may face the additional
risks of fluctuating currency values, hard currency shortages, controls of currency exchange and
repatriation of income or capital, as well as liabilities related to taxes and import duties. 12




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We could be subject to significant environmental liabilities as a result of the nature of our
operations. We are subject to various foreign, federal, state and local environmental protection and
health and safety laws and regulations governing, among other things, the generation, storage,
handling, use and disposal of oil and other hazardous materials; the emission and discharge of oil
and other hazardous materials into water or air; and the health and safety of our employees. We are
also required to obtain environmental permits from governmental authorities for our operations. We
cannot assure you that we have been or will be at all times in complete compliance with such laws,
regulations and permits. If we violate or fail to comply with these laws, regulations or permits,
we could be fined or otherwise sanctioned by regulators. We could also be held liable for any and
all consequences arising out of human exposure to suchhazardous substances. The
environmental laws and regulations of the countries in which we currently or in the future may
operate generally have become more stringent in recent years. Such laws and regulations may expose
us to liability for the conduct of, or for conditions caused by, others, or for acts of Ocean Rig
that were in compliance with all applicable laws at the time such actions were taken. We cannot assure you that environmental laws to which we are subject will not change or become
more stringent in the future. Therefore, we cannot assure you that our costs of complying with
current and future environmental and health and safety laws, and our liabilities arising from past
or future releases of, or exposure to, hazardous substances will not adversely affect our business,
results of operations or financial condition. We could also be liable to our
customers under indemnities we grant to them for costs or claims arising from
environmental pollution arising from or in connection with our operations. During our operations, we have caused releases of oil and other pollutants or waste into the
sea, including into protected areas such as the Barents Sea. While we maintain our rigs in an
effort to prevent such releases, we cannot assure you that future releases will not occur, in
particular as our rigs become older, and that such releases will not be either large in quantity,
above our permitted limits or in protected or other areas in which public interest groups or
governmental authorities are interested. These releases could result in fines and other costs to
us, including costs to upgrade our rigs, to remediate pollution or to comply with more stringent
requirements in our discharge permits that may result from such releases. Moreover, releases may
result in our customers or governmental authorities suspending, or possibly terminating our
operations in the related area which could have a material adverse effect on our business, results
of operation and financial condition. Protection of the environment continues to be a high and visible priority of many governments
throughout the world. Offshore drilling in certain areas has been opposed by environmental groups
and, in some areas, has been legally restricted. Our operations would be restricted and adversely
impacted and our rigs could become more expensive to operate if new laws are enacted or other
governmental actions are taken that prohibit or restrict offshore drilling or impose additional
environmental protection requirements. Moreover, we may have no right to compensation from our
customers if our costs are increased through such governmental actions, and our operating margins
may fall as a result. Governmental regulation could hamper our operations and reduce demand for our services. Our operations are, and will be, subject to numerous international conventions as well as
national, state and local laws and regulations in force in the jurisdictions in which we conduct,
or will conduct, our business. These laws and regulations relate to the protection of the
environment, human health and safety, taxes, labour and wage standards and other requirements. 13




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The amendment or modification of existing laws and regulations or the adoption of new laws and
regulations curtailing or further regulating exploratory or development drilling and production for
oil and gas for political, economic or other reasons could harm our business, operating results or
financial condition. We cannot predict the extent to which our future cash flow and earnings may be
affected by mandatory compliance with any such new legislation or regulations. The operation of our rigs will require certain governmental approvals, the number and
requirements of which cannot be determined until we identify the jurisdictions in which Ocean Rig
will operate upon securing contracts for the rigs. Depending on the jurisdiction, these approvals
may involve public hearings and costly undertakings on our part. We cannot guarantee that we will
obtain such approvals or that such approvals will be obtained in a timely manner. If we fail to
secure needed approvals or permits within certain time limits, our customers may have the right to
terminate drilling contracts, or they may seek to renegotiate their contracts to Ocean Rigs
detriment. Changes in the laws, regulations and licensing policies regarding exploration for and
development of oil and gas reserves in the countries in whose territory our rigs may operate could

reduce the rate of development of oil and gas fields, which in turn would affect demand for our
rigs. The offshore drilling and floating production industry, of which we are a part, is dependent
on demand for services from the oil and gas exploration industry and, accordingly, is affected by
changing taxes, regulations and other laws or policies affecting the oil and gas industry
generally. Certain liens could supersede our lenders mortgages on Leiv Eiriksson and Eirik Raude. Ocean Rig 1 AS has mortgaged Leiv Eiriksson to secure the obligations of Ocean Rig Norway AS
in relation to the issuance of the Notes and the incurrence of the 1998 Loans, and Ocean Rig 2 AS
has mortgaged Eirik Raude to secure the obligations of Ocean Rig Norway AS in relation to the above
facilities, and on a first priority basis to secure the obligations of Ocean Rig 2 AS under the
2002 Loans. Both Leiv Eiriksson and Eirik Raude are permanently registered in the Bahamas.
Bahamian law provides that mortgages over permanently registered vessels may be enforced by
admiralty proceedings in rem by the mortgagee against the rigs. Under Norwegian law it is not possible to create a general security interest over all the
assets of a debtor. It is only possible to create security interests over assets if Norwegian law
specifically allows such interests. Security interests are created by the creation of security
documents specifically describing the asset or type of asset subject to the security interest and
by taking the necessary steps in order to perfect the security. The type of asset will determine
which steps are required to perfect such security interest. As Norwegian law does not provide for
the creation of a security interest over a contractual right or obligation, it is not possible to
create a security interest over a building contract or drilling contract as such. Furthermore,
under Norwegian bankruptcy law, the bankruptcy estate has the right to assume the contractual
rights and obligations of a debtor. It is not possible to deprive the bankruptcy estate of this
right by assigning the contract in question to a creditor. Rig mortgages are generally subordinate to certain maritime liens that arise by operation of
law. The types of claims that qualify for maritime laws are generally determined by, and vary in
accordance with, the jurisdiction in which the proceeding is brought. 14




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Relevant Bahamian law provides that the following liens and claims take priority over rig
mortgages registered in the Bahamas and no other claim takes priority over such mortgages: (1) any
sum awarded by a court as costs arising out of any proceedings in respect of the arrest of a rig or
the subsequent sale thereof; (2) wages and other sums due to the master, officers and other members
of the rigs complement in respect of their employment on the rig; (3) port, canal and other
waterway dues and any outstanding fees payable under the Bahamian Merchant Shipping Act in respect
of the rig; (4) claims against the owner in respect of loss of life or personal injury occurring,
whether on land or on water, in direct connection with the operation of the rig; (5) claims against
the rigs owner, based on tort and not capable of being based on contract, in respect of loss of or
damage to property occurring, whether on land or on water, in direct connection with the operation
of the rig; (6) claims for salvage, wreck removal and contribution in general average; and (7) any
lien exercisable by a rig builder or repairer over a rig in our possession prior to the date of the
mortgage. Leiv Eiriksson and Eirik Raude may be used and operated in international waters and
jurisdictions other than the Bahamas. In fact, Leiv Eiriksson is currently operating offshore
Angola, and Eirik Raude is currently operating in the Barents Sea. We cannot assure you that, if
enforcement proceedings are initiated against a particular rig, such rig will be located in a
jurisdiction having the same procedures and lien priorities as the Bahamas and that the relative
lien priority against other maritime liens will be as favourable as in the Bahamas. Other
jurisdictions may provide no legal remedy for the enforcement of the mortgages securing the Notes
or our other debt facilities, or a remedy dependent on court proceedings may be so expensive and
time consuming as to be impracticable. Furthermore, certain jurisdictions, may not permit either
rig to be sold prior to entry of a judgment, which could result in a lengthy delay that could lead
to increased custodial costs, deterioration in the condition of the rig and substantial reduction
in its value. Under Norwegian insolvency law a secured creditor may not enforce his security over
an asset such as a rig until 6 months has passed after the opening of insolvency proceedings in
respect of the debtor unless the bankruptcy estate gives its consent to such enforcement. It is
possible that these regulations may be applicable even if the rig is subject to a Bahamian mortgage
and proceedings are initiated in a jurisdiction other than Norway. Effective July 1, 2005, a
Norwegian bankruptcy estate may keep up to 5% of the value of the security in order to cover
certain necessary costs in connection with the bankruptcy. Each of Ocean Rig 1 AS and Ocean Rig 2 AS as a subsidiary guarantor has the right in our
discretion to change the registry and flag of Leiv Eiriksson or Eirik Raude subject to certain
conditions. You cannot be certain that the mortgage after such registry change will provide
protection under applicable law comparable to the protection provided by Bahamian maritime law. We are dependent on our operating subsidiaries for income. Ocean Rig ASA and Ocean Rig Norway AS are both holding companies. Ocean Rig ASA and Ocean
Rig Norway AS will derive a substantial part of their operating income from management fees from
their subsidiaries Ocean Rig 1 AS and Ocean Rig 2 AS. Accordingly, in paying the principal of,
premium, if any, interest on, and additional amounts, if any, with respect to our indebtedness, we
will rely on income from dividends and advances from our subsidiaries. Generally, under Norwegian
law, a company is able to pay out as dividends only 80% of its net income to its shareholders.
Also, the ability of these subsidiaries to pay such dividends or make such distributions may be
subject to, among other things, applicable laws and, under certain circumstances, restrictions
contained in joint venture agreements and debt instruments to be entered into in the future, which
may affect our ability to meet our obligations with respect to our indebtedness. In addition,
certain of our subsidiaries may in the future have covenants with respect to their outstanding debt
which may restrict their ability to pay dividends in the event such subsidiary is not in compliance
with covenants contained therein, including financial maintenance tests included in such debt
agreements. 15




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Our operations and financing plans may be adversely affected by war, other armed conflicts and
terrorist attacks. The war in Iraq, military tension involving North Korea, the terrorist attacks of 11 September
2001 and subsequent terrorist attacks and unrest have caused instability in the worlds financial
and commercial markets. This has in turn significantly increased political and economic instability
in some of the geographic areas in which we operate and contributed to high levels of volatility in
prices. This continuing instability as well as threats of war or armed conflicts elsewhere, may
cause further disruption to financial and commercial markets and contribute to even higher levels
of volatility in the prices, and impair our ability to secure future contracts or seek additional
financing. In addition, acts of terrorism and threats of armed conflicts in or around various areas in
which we operate could limit or disrupt our markets and operations, including disruptions from
evacuation of personnel, cancellation of contracts or the loss of personnel or assets. ITEM 4. INFORMATION ON OUR COMPANY 4.1 History and Development of the Company Ocean Rig ASA was incorporated as a limited liability company in the Kingdom of Norway in 1996
with registered offices in Oslo. As of January 1, 2003, the Company moved its head office and
registered offices to Koppholen 4, P.O. Box 409, 4067 Stavanger, Norway where operations were
already located. Our telephone number is (47) 51 96 90 00 and our website is www.ocean-rig.com. The
Company is governed by Norwegian jurisdiction and is listed on the Oslo Stock Exchange with ticker
OCR. From inception in 1996, our main activity was the design, engineering, construction and
outfitting of initially four 5th generation semi-submersible deepwater harsh environment drilling
rigs based on the proprietary Bingo 9000 design. The four units were built at a construction yard
in Dalian, China. On completion in 1998, two units were shipped to a yard in Pascagoula,
Mississippi for outfitting. One unit was completed in late 2001 while the second unit was
transferred to a yard in Halifax, Canada, for completion and delivery in late 2002. The two
remaining baredecks were laid up in China and were sold in March 2002. As Leiv Eiriksson (owned by Ocean Rig 1 AS) began drilling operations in February 2002 and our
second rig, Eirik Raude (owned by Ocean Rig 2 AS), was completed and commenced operations in
November 2002, 2003 was the first full year in which the Company received revenues from the
operation of rig drilling activities. Since completion and delivery, Leiv Eiriksson has operated
offshore Angola for ExxonMobil, Chevron, BP and TotalFinaElf. Eirik Raude has operated off the east
coast of Canada for EnCana Corporation, PetroCanada and Imperial, offshore Cuba for Repsol,
offshore the Shetlands for BG International and now operates offshore Norway for Statoil and Norsk
Hydro. 4.2 Business Overview We own and operate two of the worlds largest and most modern fifth-generation
semi-submersible drilling rigs, built for operation in ultra deepwater and extreme weather
conditions. We market our rigs to major oil and gas companies for exploration and development
drilling programs world wide, with a particular focus on oil and gas producing regions in ultra
deepwater and harsh environments. We focus our business strategy around improving our overall
profitability and cash flows by maximizing the benefits of our rigs specifications and unique
operating capabilities and 16




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aiming to secure firm contracts for the rigs, at or near the highest day rates available in
the business. We have the ability to operate in every offshore oil and gas producing region
throughout the world. 4.2.1 Rig Fleet Our two drilling rigs, the Leiv Eiriksson and the Eirik Raude, are two of the relatively few
fifth generation semi-submersible rigs and drillships capable of drilling in ultra-deepwater. Since
demand for drilling in ultra-deepwater and harsh environments has consistently been high relative
to the supply of assets capable of drilling in these areas utilization levels for ultra-deepwater
and harsh environments, utilization levels for ultra-deepwater drilling units have been relatively
firm and consistent during the last five years. We believe our two rigs represent a capable and
cost-effective solution for exploration and development drilling in ultra-deepwater and harsh
environments. Both units are designed to meet international maritime standards regarding discharge
and emissions, and the Eirik Raude is also equipped to meet the more stringent requirements for
operation in the Barents Sea offshore Norway. Main features of our Rigs:  
    Proprietary Bingo 9000 design,
    Water depth capacity of 7500 and 10 000 feet
    Variable deck load of 7 000 tons
    Dynamic positioning system  DP Class 3
    Total vessel power of 6 x 7 500 kilowatts
    Thruster capacity of 6 x 5 500 kilowatts 4.2.2 Rig Management and Operations We employ a core group of professionals with significant experience in the offshore drilling
industry to support the operation of our rigs. These employees work from our offices in Sandnes,
Norway, as well as in direct operational roles at our base offices in Luanda, Angola and Bergen and
Hammerfest, Norway. Although our rig crews are mainly Canadian, Norwegian and UK citizens while on
Leiv Eiriksson we also employ local Angolan citizens. We strive to maintain a high level of
competence among our crew and support staff. For the operation of Leiv Eiriksson offshore Angola, we entered into an agreement in 2000 with
Sonamer Management Company LTD. This company is a joint venture between Solangol, the Angolan
State Oil company, and the U.S. drilling company Pride International, Inc., one of the worlds
largest drilling contractors. Pursuant to this agreement, Sonamer Management Company provides us
with the local crew members and logistic support, including offices for the Ocean Rig base. Leiv
Eiriksson has drilled 16 exploration wells in Angola in water depth ranging from 1438 meter to 2017
meter and performed drill stem testing as required by our clients. For the operation of Eirik Raude in Canada, we entered into a partnership with EnCana
Corporation, the East Coast Drilling Partnership. The Ocean Rig onshore and offshore operation
personnel were seconded to the company during the Canadian drilling campaign. Although the
partnership still exists, we terminated the joint operation when Eirik Raude left Canada in May
2004. 17




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Eirik Raude started operations on the east coast of Canada and drilled five wells in water
depths ranging from 1,113 meters to 1,674 meters. Two of these wells were located in the Flemish
Pass and one of the wells offshore Nova Scotia was a high pressure high temperature well. The rig
was moved to Cuban waters for drilling of one well in water depth of 1,625 meters. After completion
of the well in Cuba Eirik Raude crossed the Atlantic Ocean and drilled one deep water well west of
Shetlands. After the west of Shetland well, the rig moved to a shipyard on the west coast of
Norway to be modified for Statoil and Hydros planned drilling campaign in the Barents Sea. While in the shipyard, the rig was fitted out with an eight-point chain mooring system and
third party cutting collection systems to comply with the zero discharge philosophy for this
extremely environmentally sensitive area. Eirik Raude is unique in being capable of operating in
water depths between in 60 to 3000 meters, as well as in harsh environments anywhere in the world. We monitor our performance by using a set of Key Performance Indicators (KPI). The KPI system
measures our overall performance towards key elements in our operation and is an excellent
indicator of our total service quality towards our customers. The system is linked to a monthly
bonus available to the majority of our employees offshore and onshore. It is also a dominant part
of the Service Quality Report that we are presenting to our Clients after each well. Ocean Rig drilling history Leiv EirikssonWell
    
    Water
    
    
    
    Days on
    
    DrillingNo:
    
    Depth:
    
    Period:
    
    Well:
    
    Dept:
    
    Operator:
    
    Location:
    
    Country:1
    
    
    1789
    
    
    07.02.02  -  15.04.02
    
    
    66
    
    
    4825m
    
    Exxon Mobil
    
    Funge 1 Block  -  33
    
    Angola2
    
    
    1438
    
    
    15.04.02  -  15.06.02
    
    
    61
    
    
    3798m
    
    Exxon Mobil
    
    Reco-Reco 1 Block  -  15
    
    Angola3
    
    
    2017
    
    
    15.06.02  -  30.08.02
    
    
    76
    
    
    4452m
    
    BP
    
    Plutao 1 Block  -  31
    
    Angola4
    
    
    1444
    
    
    30.08.02  -  20.10.02
    
    
    43
    
    
    3423m
    
    Chevron
    
    Negage 1 Block  -  14
    
    Angola5
    
    
    1445
    
    
    20.10.02  -  11.03.03
    
    
    142
    
    
    4776m
    
    Total
    
    Gindungo 1 Block  -  32
    
    Angola6
    
    
    1804
    
    
    11.03.03  -  06.05.03
    
    
    56
    
    
    3817m
    
    BP
    
    Saturno 1 Block  -  31
    
    Angola7
    
    
    1029
    
    
    06.05.03  -  22.06.03
    
    
    47
    
    
    2786m
    
    Exxon Mobil
    
    Kakocha 1 Block  -  15
    
    Angola8
    
    
    1978
    
    
    22.06.03  -  25.08.03
    
    
    64
    
    
    4193m
    
    BP
    
    Marte 1 Block  -  31
    
    Angola9
    
    
    1600
    
    
    25.08.03  -  31.08.03
    
    
    6
    
    
    2342m
    
    BP
    
    Chumbo 1 Block  -  18
    
    Angola10
    
    
    1602
    
    
    31.08.03  -  06.10.03
    
    
    36
    
    
    3010m
    
    BP
    
    Cesio 1 Block  -  18
    
    Angola11
    
    
    1600
    
    
    06.10.03  -  01.12.03
    
    
    56
    
    
    2978m
    
    BP
    
    Chumbo 1 Block  -  18
    
    Angola12
    
    
    2017
    
    
    01.12.03  -  06.02.04
    
    
    67
    
    
    4506m
    
    BP
    
    Venus 1 Block  -  31
    
    Angola13
    
    
    1990
    
    
    06.02.04  -  25.03.04
    
    
    48
    
    
    3600m
    
    Exxon Mobil
    
    Calulu 1 Block  -  33
    
    Angola14
    
    
    1983
    
    
    30.06.04  -  24.07.04
    
    
    25
    
    
    3432m
    
    Exxon Mobil
    
    Muteta 1 Block   -  33
    
    Angola15
    
    
    1602
    
    
    01.10.04  -  04.12.04
    
    
    62
    
    
    3770m
    
    BP
    
    Pallas 1 Block  -  31
    
    Angola16
    
    
    1632
    
    
    04.12.04  -  10.02.05
    
    
    65
    
    
    4955m
    
    BP
    
    Ceres 1 Block  -  31
    
    Angola17
    
    
    1959
    
    
    10.02.05  -   20.03.05
    
    
    34
    
    
    3739m
    
    Exxon Mobil
    
    Jinguinga 1 Block  -  33
    
    Angola18
    
    
    2134
    
    
    20.03.05  21.04.05
    
    
    33
    
    
    
    
    Exxon Mobil
    
    Muzongue 1 Block  -  33
    
    Angola19
    
    
    1695
    
    
    21.04.05  Present
    
    
    
    
    
    
    
    Total
    
    Gengibre 2  Block 32
    
    Angola
 18




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##### 



Eirik RaudeWell
    
    Water
    
    
    
    Days on
    
    DrillingNo:
    
    Depth:
    
    Period:
    
    Well:
    
    Dept:
    
    Operator:
    
    Location:
    
    Country:1
    
    
    1674
    
    
    13.11.02 - 31.01.03
    
    
    79
    
    
    3600m
    
    Encana
    
    Torbrook C - 15
    
    Canada2
    
    
    1153
    
    
    31.01.03 - 26.04.03
    
    
    86
    
    
    3823m
    
    Petro Canada
    
    Mizzen L - 11
    
    Canada3
    
    
    1133
    
    
    27.04.03 - 10.06.03
    
    
    44
    
    
    2903m
    
    Petro Canada
    
    Tuckamore B - 27
    
    Canada4
    
    
    1812
    
    
    04.07.03 - 07.09.03
    
    
    65
    
    
    4750m
    
    Imperial Oil
    
    Balvenie B - 79
    
    Canada5
    
    
    1689
    
    
    19.10.03 - 11.05.04
    
    
    205
    
    
    6520m
    
    Encana
    
    Weymouth P-44

    
    Canada6
    
    
    1625
    
    
    11.05.04 - 31.07.04
    
    
    81
    
    
    3400m
    
    Repsol YPF
    
    Yamagua
    
    Cuba7
    
    
    836
    
    
    31.07.04 - 26.09.04
    
    
    57
    
    
    3753m
    
    BG Int.
    
    West of Shetlands,
Bedlington
    
    United Kingdom8
    
    
    329
    
    
    03.12.04 - 10.01.05
    
    
    38
    
    
    802m
    
    Norsk Hydro
    
    Troll Field
    
    Norway9
    
    
    368
    
    
    18.01.05 - 30.03.05
    
    
    72
    
    
    
    
    Norsk Hydro
    
    Obelix, Barents Sea
    
    Norway10
    
    
    331
    
    
    30.03.05  18.05.05
    
    
    49
    
    
    
    
    Statoil
    
    Guovca, Barents Sea
    
    Norway11
    
    
    
    
    
    18.05.05  Present
    
    
    
    
    
    
    
    Statoil
    
    Tulipan, North Sea
    
    Norway
 Our current and past clients comprise most of the worlds leading oil and gas companies,
including ExxonMobil, BP, ChevronTexaco, Total, Encana, PetroCanada, Repsol, BG International,
Statoil and Norsk Hydro. We have built a strong reputation with these clients for high performance
drilling and safe operation of our equipment. Fundamental to all our activities is our commitment
to maintain an injury-free work environment. 4.2.3 Strategy We are focused on improving our overall profitability and cash flows through the following
strategies:  
    Maximize shareholder value. We remain committed to our long-held strategy of
creating maximum value for our shareholders. Recognizing the advantage of our position
as the owner and operator of the most modern and unique semi-submersible rigs in the
world, we strive to deliver excellent performance by doing what we do better, with
what we have, where we are, and to exceed client expectations. Our goal is to improve
profitability and cash flow to provide an adequate return on capital, service our debt
and maintain sufficient financial flexibility.
    Create a world class oil services company. Our mission is to become the preferred
offshore drilling contractor in the ultra-deepwater and harsh environment regions of
the world and to deliver excellent performance to our clients, exceeding their
expectations of operational efficiency and safety standards. We seek opportunities to
expand our business through low risk transactions and create a strong platform for
future strategic transactions.
    Capitalize on the unique operating capabilities of our rigs. We strive to
capitalize on the unique operating capabilities of our rigs by entering into attractive
contracts. The focus of our marketing effort is to maximize the benefits of the rigs
ability to operate in both ultra-deepwater and in harsh environments. We aim to secure
firm contracts for the rigs, at or near the highest available day rates available in
the industry. Additionally, we target appropriate contract lengths, in order to be in
a position to secure the most beneficial term in line with our expectations of the
developments in the market. The Leiv Eiriksson has operated in the ultra-deepwater
regions offshore Angola, West Africa to capitalize on the rigs deepwater rating, large
load carrying capacity and dynamic positioning capability. The Eirik Raude currently
operates in the North Sea and Barents Sea off the coast of Norway. 19




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##### 



The rigs harsh weather experience from its operations in Canada and its compliance with
the current requirements for operations in Norway, presented the opportunity to secure
the rig through the end of 2005 at favourable day rates.
    Reduce operating risk. We seek opportunities to increase capacity and operational
diversity through low risk transactions and to create a stronger platform for future
strategic and industrial transactions. We believe the industry is ready for
consolidation, especially amongst European operators and we will continue to evaluate
opportunities as they are presented.
    Continue to manage efficient, cost conscious and safe operations. Through the
continued use and implementation of our KPI system, we aim to further
improve our service
quality and continue to align the goals of our employees with our strategic goals. 4.2.4 Marketing and competition Drilling at water depths exceeding 400 feet normally requires the use of semi-submersible rigs
or drillships. Water depths between 7,000 and 10,000 feet are termed extreme depths and
drilling operations at the deeper water depths are pushing the limits of existing technology. Semi-submersible drilling rigs.Semi-submersible drilling rigs are floating platforms, which
feature a ballasting system that can lower parts of the hull to a predetermined depth (typically 50
- 80 feet). This reduces the rigs exposure to wave impacts and increases their stability and
improves their motion characteristics. Semi-submersible rigs retain their position above the
wellhead either by means of a conventional mooring system, consisting of anchors and chains, or
cables, or by a computerized Dynamic Positioning system (DP system). Drillships.Drillships are ships with on-board propulsion machinery, often constructed for
drilling in deep water. They are based on conventional ship hulls, but have certain modifications.
Drilling operations are conducted through openings in the hull
(moon pools). Drillships normally
have greater mobility and a higher load carrying capacity than semi-submersible rigs, but are less
stable in harsh conditions. Drillships are well suited to offshore drilling in remote areas due to
their mobility and high load carrying capacity. Like semi-submersible rigs, drillships can be
equipped with conventional mooring systems or DP systems. Marketsegment
    
    
    Water depth
    
    
    Rig typeShallow water
    
    
    less than 400 feet
    
    
    Jack-upsIntermediate water
    
    
    300-3,000 feet
    
    
    Second and third generation semi-submersible rigs and drillships,Deepwater
    
    
    3,000-7,000 feet
    
    
    Second, third, fourth and fifth generation semi-submersible rigs and drillships, including DPUltra-deepwater
    
    
    greater than 7,000 feet
    
    
    Fifth generation DP semi-submersible rigs and DP drillships
 The worldwide fleet of mobile drilling rigs totals 585 units. Leaving aside the 366 jack-ups
(most of which are only capable of drilling in water depths between 150 and 300 feet) there are 202
floating rigs. There are a total of 164 (working and idle) semi submersibles and 38 (working and
idle) drillships in the world today. 20




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##### 



During recent years , developments in the market have been positive for suppliers of
rigs, equipment and services. Despite setbacks in certain segments, the overall trend in
offshore drilling has been favourable in the last two years. Offshore drilling activity
has picked up and rig availability has tightened, resulting in increasing rates
and prices. The current drilling plans of the oil and gas companies supported by oil
service companies indicate a concern for rig availability, particularly in deepwater. Seismic
tendering activity has increased, reflecting a shift in supply to West Africa, Brazil and Canada.
The industry is also experiencing an increasing demand in the North Sea / Atlantic Margin
area. The fleet of semi-submersible and drillships operating at deepwater depths (greater than 3,000
feet) consists of 89 units including newbuilds and conversions. According to Fearnley Offshore,
there are currently 26 units, including two newbuilds and two recently commissioned conversions
capable of drilling at water depths greater than 7,000 feet, including our two rigs. The average
utilization rate for the ultra -deepwater segment has stayed above 96% since late 1998. However,
many of these units have been employed on assignments where technical specifications have allowed
competition from less sophisticated units. Thus average day rates have been negatively influenced
by the softness in the lower end of the market. 4.2.5 Governmental Regulation and Environmental Matters Our operations have been, are and will continue to be, subject to numerous international
conventions and national, state and local laws and regulations relating to, among other things, the
protection of the environment, health, safety and security requirements, taxes, labour and wage
standards and other requirements. These laws also require us to obtain permits for some of our operations from governmental
authorities. These authorities can modify or revoke our permits and can enforce compliance through
fines and injunctions. We do not believe that we will need to make any material expenditures in
connection with any violations of our permits. The operation of the rigs may involve the use and
disposal of materials that are or may be classified as hazardous substances. Environmental laws
and regulations applicable to the locations in which the rigs are or will be operated may be
stringent. We cannot predict the extent to which our future cash flow and earnings may be affected
by mandatory compliance with any new legislation or regulations. The laws, regulations and licensing policies of the various jurisdictions in which our rigs
currently and will operate for the exploration for and development of oil and gas reserves could
impact the rate of development of oil and gas fields, which in turn would affect the demand for our
rigs and thus our results of operations and financial condition. The offshore drilling and
floating production industry, of which we are a part, is dependent on demand for services from the
oil and gas exploration industry and, accordingly, is impacted by changing taxes, regulations and
other laws or policies affecting the oil and gas industry generally. 4.3. Organizational Structure The Ocean Rig group comprises Ocean Rig ASA and its subsidiaries, all of which are wholly
owned, directly or indirectly. The following diagram illustrates our current corporate structure
(percentage ownership indicated for each subsidiary): 21




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##### 



(FLOW CHART) The following table sets forth the place of incorporation and primary activity of each
company in our group: Company
    
    Place of
    
    Primary activity as ofName
    
    Incorporation
    
    January 2005Ocean Rig ASA
    
    Norway
    
    Listed parent company ,
group financing and other
corporate activitiesOcean Rig AS
    
    Norway
    
    Support functions and
provision of personnel/
crewOcean Rig UK Ltd.
    
    U.K.
    
    Provision of UK personnel/
crewOcean Rig Norway AS
    
    Norway
    
    Financing of Leiv Eiriksson
and Eirik RaudeOcean Rig Angola AS
    
    Norway
    
    Currently inactiveOcean Rig 1 AS
    
    Norway
    
    Ownership and operation of
Leiv EirikssonOcean Rig 2 AS
    
    Norway
    
    Ownership and operation of
Eirik RaudeOcean Rig Canada Inc.
    
    Nova Scotia, Canada
    
    Currently inactive
 4.4 Property, Plants and Equipment We own 100% of Leiv Eiriksson and Eirik Raude which comprise virtually all of our tangible
property, plant and equipment. The two rigs had a combined book value at December 31, 2004 of USD
1,070.5 million or 99.9% of total fixed assets in our balance sheet. Our principal offices and base offices in Stavanger, Bergen, Hammerfest, Norway and in Luanda,
Angola are leased premises. We believe that the leased properties are adequate for our present
activities and likely to meet our needs for the foreseeable future. 22




---



##### 



ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS 5.1 General This section should be read in conjunction with our financialaccounts included in this annual
report. Unless otherwise indicated, all financial information in this annual report has been
prepared in accordance with Norwegian GAAP. The following information contains forward-looking statements. These forward-looking
statements should be read in conjunction with the cautionary discussion relating to forward-looking
statements found in the section entitled Notice Regarding Forwarding-Looking Statements and in
Item 3, Key Information  Risk Factors. 5.2 Overview From inception in 1996, our main activity was the design, engineering, construction and
outfitting of initially four 5th generation semi -submersible deepwater harsh
environment drilling rigs based on the proprietary Bingo 9000 design. The four units were built at
a construction yard in Dalian, China. On completion in 1998, two units were shipped to a
yard in Pascagoula, Mississippi for outfitting. One unit was completed in late 2001 while the
second unit was transferred to a yard in Halifax, Canada, for completion and delivery in late 2002.
The two remaining baredecks were laid up in China and were sold in March 2002. As Leiv Eiriksson (owned by Ocean Rig 1 AS) began drilling operations in February 2002 and our
second rig, Eirik Raude (owned by Ocean Rig 2 AS), was completed and commenced operations in
November 2002, 2003 was the first full year in which we received revenues from the operation of rig
drilling activities. Since completion and delivery, Leiv Eiriksson has operated offshore Angola for
ExxonMobil, Chevron, BP and TotalFinaElf. Eirik Raude has operated off the east coast of Canada for
EnCana Corporation, PetroCanada and Imperial, offshore Cuba for Repsol, offshore the Shetlands for
BG International and now operates offshore Norway for Statoil and Norsk Hydro. . During the first years of operation, we focused on optimizing the operational performance of
our rigs to ensure the best possible technical performance and to maximize earnings efficiency
while on contract. The technical capabilities of our rigs were proven in harsh conditions off the
East coast of Canada and the rigs have reached a high level of operational performance and safety
standards recognized by our clients and government authorities in the regions where our rigs have
operated. The Companys HES&Q (Health, Environment, Safety and Quality) record shows three lost time
accidents experienced on Eirik Raude and three lost time accidents experienced on Leiv Eiriksson
with no long term disability registered during 2004. Three minor spills were registered for Leiv
Eiriksson and no spills were registered for Eirik Raude in 2004. None of the spills from Leiv
Eiriksson had any adverse effect on the environment. In early 2005, three spills were registered
from Eirik Raude. Two of the spills were minor spills as defined by the Norwegian State Pollution
Control (NPSPC), and had no adverse effect on the environment. The third spill was a consequence of
a hydraulic hose that ruptured and resulted in a spill of a limited volume of hydraulic fluid into
the sea. It is not believed that the spill had any significant impact on the environment. It was
politically sensitive in Norway because of the high environmental focus in the Barents Sea. A
thorough investigation of these incidents has been completed and measures have been implemented in
order to reduce the possibility of further spills. The rigs are designed and equipped to restrict pollution to a low level and well within the
limits that are stipulated internationally and for the continental shelves of the various countries
in which we operate. Quality assurance procedures are in place to reduce the risk of pollutant
emissions. 23




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##### 



In addition to the above, in order to further monitor and improve the total service quality of
our business, Ocean Rig has developed a set of Key Performance Indicators (KPIs) with specific
acceptance criteria defined for our operations. These KPIs represent the main elements of our
HES&Q Management System, but also considers operational efficiency/earning efficiency and
environmental aspects. The KPIs are tracked and reviewed on a monthly basis by the Rig Management
and Senior Management onshore. Any elements of failure in the preceding period are identified and
assessed in detail as part of this monthly review, and necessary mitigating measures are identified
and initiated from Senior Management throughout the organization. Our ongoing focus is on improving our service quality as measured through the KPIs. Our
operational performance has reached a high level as can be seen from the table below showing
development in our earnings efficiency when on hire (achieved revenues compared to highest possible
revenue according to contracts): 2002
    
    
    2003
    
    
    2004%
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4
    
    
    Q1
    
    
    Q2
    
    
    Q3
    
    
    Q4Leiv Eiriksson
    
    
    88
    
    
    
    93
    
    
    
    99
    
    
    
    91
    
    
    
    82
    
    
    
    91
    
    
    
    95
    
    
    
    90
    
    
    
    97
    
    
    
    
    
    
    
    98
    
    
    
    100Eirik Raude
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72
    
    
    
    82
    
    
    
    85
    
    
    
    99
    
    
    
    97
    
    
    
    100
    
    
    
    80
    
    
    
    99
    
    
    
    100
 The offshore drilling market was difficult during 2003 and the beginning of 2004,
resulting in loss of revenue from off-hire periods between contracts. For Eirik Raude, we also lost
revenue as a result of a 2 month yard stay in late 2004 to upgrade the rig for Barents Sea
operation. The market conditions for offshore units have improved significantly over the last 6  12
months. Demand for drilling services has increased as oil companies have increased their offshore
exploration and development activity. In particular, the market segment for high specification
ultra-deep water units has strengthened significantly with day rates reaching record levels. See
Item 5.9 for further detail on market development. The Leiv Eiriksson is currently operating offshore Angola (and may soon operate offshore
Congo) for Total under a six well contract. This contract, which is expected to continue through
the end of 2005, had a corresponding contract value of $68 million at its inception. Total has an
option, with a contract value at its inception of $130 million, to engage the Leiv Eiriksson for
one additional year which must be exercised by September 1, 2005; however, the option is
non-exclusive  that is, we may contract the Leiv Eiriksson to another company at any time during
the option period so long as Total has not yet exercised its option.. The Eirik Raude is operating in the Barents Sea and the North Sea for Statoil and Norsk Hydro
under a contract with Statoil, expected to continue until January 2006. This contract, which
commenced in the fourth quarter of 2004, had a corresponding contract value of $105 million at its inception. (TABLE) Over the years, we have carried out a large number of financial transactions to finance the
construction of the rigs and to ensure adequate working capital. In June 2004, we issued a 3 year
NOK 104.9 million convertible loan with a strike price of NOK 19 and a 7 % coupon. 24




---



##### 



At the same time, a USD 20.5 million short term bridge loan with 14% interest and maturing in
February 2005, was placed with institutional investors. In October we raised NOK 630 million and
USD 10 million in unsecured bond financing at 11% interest and with a 5 year maturity in order to
prepay loans with short maturities and further improve working capital. At December 31, 2004, we had approximately USD 44.1 million in cash and cash equivalents.
Based on the companys projected cashflow, Ocean Rig will not be required to raise new debt or
refinance its existing debt during 2005. 5.3 Operating Results Year ended December 31, 2004 Compared to Year ended December 31, 2003 Ocean Rigs average day rate while on hire in 2004 was 185,000 per day compared to USD
146,000 per day in 2003. During 2004 the Companys strong focus on operational efficiency has
resulted in an average earning efficiency (when on hire) for the company of 95.8 % compared to 91.0
% in 2003. Operating revenue in 2004 was USD 88.6 million compared to USD 103.0 million in 2003. In 2004,
full day rate revenue for Eirik Raude has been recognized from May 11, 2004, the date of
termination of the bareboat charter to East Coast Drilling Partnership. Until May 11, only the
bareboat charter was recognized as revenue in Ocean Rigs accounts while crew and other operating
costs for Eirik Raude were recorded through the East Coast Drilling partnership. Despite this
recognition of full day rate revenue from May 11, operating revenue was reduced by 14 % from 2003
to 2004, resulting mainly from off-hire periods in 2004 for both rigs. The companys operating cost was affected by non-recurring relocation costs associated with
moving Eirik Raude from Canada to Norway. The increase in operating cost was also due to
relocation of the base office from Canada to Norway. An accrual for social tax on the Companys
option program totalling $ 3.4 million resulted from the increase in stock price from NOK 14.50 to
NOK 28.50 during 2004. The net loss for the year amounted to $ -102.3 million compared to $ -212.9 million in 2003
while the operating loss for the year amounted to $ -40.2 million compared to $ -183.1 million in
2003. EBITDA was $ 22.2 million in 2004 compared to $ 50.0 million in 2003. The 2003 figures
include a write-down of $ 183.7 million related to an impairment charge on the Companys drilling
rig Eirik Raude, and $ 8.0 million in exploration expenses related to the Weymouth well, in which
we had a participating interest. In 2004, exploration costs totalling $ 14.3 million were expensed. Interest expense in 2004 amounted to USD 46.8 million compared to USD 42.0 million in 2003.
The increased amount is due to the higher level of debt and increasing interest rate on the
companys floating rate debt which by year end 2004 accounted for 38% of the companys total
interest bearing debt. All revenues are in US dollars while expenses are in US dollars and NOK. Almost all of our
assets are denominated in US dollars while a portion of our debt is denominated in NOK. As a
result, we are exposed to fluctuations in USD/NOK currency exchange rates. We operationally hedge
part of our NOK exposure through forward contracts based on a stop loss policy. These contracts do
not qualify for hedge accounting. The net foreign-exchange result in 2004 was $ -7.6 million compared to $ 21.7 million for
2003. Due to a weakening US dollar versus Norwegian kroner during 2004, we have recognized a
foreign exchange loss related to NOK denominated debt. 25




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##### 



The net foreign exchange result was also affected by an increased proportion of costs and
associated liabilities in NOK related to the relocation of Eirik Raude to Norway in the second half
2004. The adverse effect on the capital structure from our net loss was partly offset by increased
equity resulting from the successful efforts to convert debt to equity. A total of NOK 563.1
million of the mandatory convertible bonds issued in 2002 was converted to equity during the year.
Further, NOK 63.7 million of the 7% convertible bonds issued in June 2004, was converted to shares
in October and December. As a result, total convertible debt was reduced by NOK 626.8 million (USD
102.6 million) during the year and equity increased by a corresponding amount less associated cost.
At year end 2004, 83,506,423 shares were outstanding compared to 64,015,214 at year end 2003. We raised new debt during the year to refinance short term maturities and to fund working
capital requirements, with net proceeds amounting to USD 136 million resulting in the companys
gross interest bearing debt (all external bonds, notes and loans excluding the Mandatory
Convertible Bonds) increasing from $ 512.1 million to $ 593.5 million. However at year end, our
overall debt (bonds, notes and loans) only increased from $ 592.9 million in 2003 to $ 595.3
million in 2004 as a result of the conversions of debt to equity. Approximately 38% of our debt at
year end was subject to interest rate risk while the balance had fixed interest cost. All financial
covenants, as amended, were satisfied throughout the year. The consolidated equity as a percentage of total assets was 43% at year end 2004 compared to
45% at year end 2003. As a result of the stronger market for drilling services, valuations of our two rigs Leiv
Eiriksson and Eirik Raude-have increased significantly over the year. For debt covenant purposes,
we obtain valuations for the rigs on a regular basis from two independent brokers. Even though the
most recent broker valuations received have shown a major increase in 2004, the values are lower
than the book values of the rigs as of December 31, 2004. Our view is that, in the absence of any
sale of a comparable rig for a substantial period of time, these estimates do not reflect the
present earnings potential of the rigs as demonstrated by recent contracts. We also believe that
the new-build price for comparable rigs would have increased significantly over recent years due to
higher prices for materials, increases in the US dollar value for equipment denominated in EUROS
and the current high backlog at shipyards. Based on the year end share price and USD exchange rate,
our enterprise value was approximately USD 1,012 million. As of March 29, 2005, the enterprise
value is approximately USD 1,128 million based on the current share price and USD exchange rate.
Our two rigs had a combined book value at December 31, 2004 of USD 1,070.5 million, corresponding
to 99.9% of total fixed assets in our balance sheet. Year ended December 31, 2003 Compared to Year ended December 31, 2002 In 2003 we had a loss after tax of USD 212.9 million, including a write down of one of
the Companys drilling rigs Eirik Raude of USD 183.7 million. The comparable result for 2002 was a
profit of USD 67.4 million, including a net foreign exchange gain of USD 114.0 million. Operating revenue in 2003 was USD 103.0 million compared to USD 68.6 million in 2002. In 2003 Leiv Eiriksson was operating throughout the year versus 10.5 months in 2002. Eirik
Raude operated 12 months in 2003 versus only 2 months in 2002. From the start of its operations
Eirik Raude has been leased to East Coast Drilling Partnership on a bareboat charter. The bareboat
charter was recorded as operating revenue. 26




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##### 



Operational costs related to Eirik Raude were not recorded in our books in 2003 as the rig was
bareboat chartered to East Coast Drilling Partnership throughout the year, while 2002 reflected
salary cost and other operating cost for Eirik Raude prior to completion of construction.
Operating expenses in 2003, including the write down, amounted to USD 286.1 million. In 2002
operating expenses were USD 89.7 million. Our costs related to the participation in the Weymouth A-45 deep water exploration well
offshore Nova Scotia were temporarily capitalized during 2003 pending evaluation of possible
discoveries of oil and gas reserves. In May 2004, we announced that the Weymouth well was
unsuccessful. Our share of the costs was USD 22.3 million of which USD 8.0 million, incurred at
December 31, 2003, was expensed in 2003 (reference is made to Note 3 to the financial accounts). The Companys cash on hand and long-term loans are mainly denominated in USD. This resulted in
a net foreign exchange gain of USD 21.7 million in 2003 compared to USD 114.0 million in 2002
reflecting that NOK was the functional currency during these periods. Other financial costs
amounted to USD 51.9 million, of which USD 7.9 million was related to non cash items. In 2002 total
financial expense excluding foreign currency losses amounted to USD 28.1 million, of which USD 5.3
million was related to non cash items. The increase in interest expenses in 2003 is mainly
attributable to the fact that in 2002 USD 39.8 million of interest expenses were capitalized during
the construction of Eirik Raude. The Companys revenue is mainly denominated in USD, and as such
the Company has been exposed to currency fluctuation between USD and NOK. But also a significant
portion of the cost is denominated in USD, and as such this reduced the currency fluctuation
exposure. However the most significant issues relating to our currency fluctuation exposure have
during 2003 been our debt denominated in USD. 5.4 Capital Resources and liquidity 5.4.1 Cash flow development 2002  2004 Cash flow from operating activities:Our first rig, Leiv Eiriksson began drilling operations
in February 2002 and our second rig, Eirik Raude, was completed and commenced operations in
November 2002. Accordingly, 2003 was the first full year in which the Company received revenues
from the operation of rig drilling activities. As can be seen from our Consolidated Statements of
Cash Flows for the years ended December 31, 2002, 2003 and 2004, our cash flow from operations
reflects a use of cash of USD 20.2 million in 2002 while the rigs were still under construction and
positive cash flow of USD 7.6 million in 2003 while the rigs were in operation. However, in 2004
our cash used in operations was USD -6.0 million, mainly as a result of five months of off hire
between contracts for Leiv Eiriksson and a two months yard stay for Eirik Raude during that year. Cash flow from investing activities: Cash used for investments was USD 183.8 million, USD 20.3
million and USD 41.6 million for the years ended 2002, 2003 and 2004 respectively. The
construction of our rigs was completed in 2002, with substantial payments (USD 273.2 million) to
building contracts during that year. In 2003, payments related to rig investments amounted to USD
8.7 million. In addition, USD 8.0 million was invested in the Weymouth well in 2003. In 2004, a
further USD 14.3 million was invested in the Weymouth well and in addition, we invested USD 22.9
million in the upgrade of Eirik Raude in preparation for the Barents Sea operation, resulting in a
higher cash outflow from investment in that year compared to 2003. Cash flow from financing activities:Cash provided by financing activities was USD 200.6
million, USD 9.1 million and USD 74.3 million for 2002, 2003 and 2004 respectively. The
construction of our rigs was financed through the placement of debt and equity securities, the
incurrence of indebtedness and financial income generated from cash and cash equivalents. In 2002
the amount of net proceeds from issuance of debt was USD 119.4 million and equity was USD 81.3
million. In 2003, new funding required to finance our participation in the Weymouth well was raised 27




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##### 



through issuance of equity of USD 18.8 million, while approximately 14.1 million of debt was
repaid. In 2004, net proceeds from new debt amounted to USD 136.2 million of which USD 62.1
million was used to repay existing debt and the balance was used to finance further investment in
the Weymouth well and the upgrade of Eirik Raude, as well as to compensate for loss of revenue from
off hire periods. 5.4.2 Debt portfolio The Companys financial indebtedness as of December 31, 2004 includes: Outstanding Debt Obligations and Commitments as of December 31, 2004 Facility
    
    Principal Amount Outstanding
    
    Maturity Date1998/ 2008 Notes
    
    $225 million
    
    June 1, 20081998/ 2008 Loans
    
    $125 million
    
    June 1, 20082002/ 2008 Fortis facility
    
    $99.25 million
    
    Feb 28, 2008Zero Coupon Mandatory
Convertible Bonds 2002/ 2005
    
    NOK 11.5 million ($1.9 million)
    
    August 22, 200513% convertible bonds 2000/ 2005
    
    NOK 51 million ($8.4 million)
    
    May 25, 200511% convertible bonds 2000/ 2005
    
    NOK 88.5 million ($14.7 million)
    
    May 25, 20057% Convertible bonds 2004/ 2007
    
    NOK 41.2 million ($ 6.8 million)
    
    June 26, 200711% Callable bonds 2004/ 2009
    
    NOK 630 million ($104.3 million)
    
    October 15, 200911% Callable bonds 2004/ 2009
    
    USD 10 million
    
    October 15, 2009
 The 1998/2008 Notes and Loans USD 225 million 101/4% senior secured notes due 2008 (the Notes), and the USD 125 million
floating rate senior secured loans due 2008 (the Loans) was issued in 1998. Ocean Rigs
subsidiary, Ocean Rig Norway AS, which issued the Notes and incurred the Loans, is subject to the
terms of the indenture under which the Notes were issued and the credit agreement pursuant to which
the Loans were made. Such agreements place limitations on the use of funds held by Ocean Rig
Norway AS, Ocean Rig 1 AS and Ocean Rig 2 AS. All interest payments due have been made according
to the terms of the agreements. The 13% and 11% Convertible Bonds 2000/ 2005 We issued NOK 200 million (USD 21.9 million at historical exchange rates) 13% unsecured
subordinated convertible bonds due 2005 (the 13% Convertible Bonds) in May/June 2000, and NOK 300
million (USD 32.8 million at historical exchange rates) 11% unsecured subordinated convertible
bonds due 2005 (the 11% Convertible Bonds) in October 2000. The conversion price for the 13%
Convertible Bonds and the 11% Convertible Bond is NOK 228.3 per share and NOK 244.5 per share,
respectively. In August and September 2002, NOK 66.0 million and NOK 41.0 million of the 13% and 11%
Convertible Bonds, respectively, were voluntarily redeemed and prepaid in exchange for a
corresponding participation in our new Mandatory Convertible Bond (described below). In October
2004, a further NOK 83 mill and NOK 170.5 mill of the 13% and 11% Convertible Bonds, respectively,
were voluntarily redeemed and prepaid in exchange for a corresponding participation in our new 11%
Bonds (described below). The combined outstanding amount under the 13% and 11% Convertible Bonds as
of December 31, 2004 was NOK 139.5 million (USD 23.1 million), The 13% and 11% Convertible Bonds
mature on May 25, 2005. All interest payments due have been made according to the terms of the
agreements. 28




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##### 



The 2002/2008 Fortis Facility USD 99.25 million floating rate senior secured credit facility with Fortis Bank (Nederland)
N.V. and Nordea Bank Norge ASA (the Fortis Facility) was made available for drawdown in June
2002, pursuant to a loan agreement entered into by Ocean Rig 2 AS in November 2001, as amended, for
the purpose of refinancing a previous credit facility entered into in 2001. The Company has
negotiated several amendments to (including an amendment in May 2004) and temporary waivers of
certain covenants and requirements under the Fortis Facility, see Note 9 to the Financial accounts,
however no waivers are currently in effect. The Company reports compliance with covenants under
this facility on a quarterly basis and failure to comply with such covenants, or to secure adequate
waivers of the various covenants, could cause an event of default which could lead to acceleration
of the principal amount of this facility. As of December 31, 2004 the Company was in compliance
with all covenants and all interest payments due have been made according to the terms of the
agreement. The Zero Coupon Mandatory Convertible Bonds 2002/ 2005 We issued NOK 669.5 million (USD 88.1 million at historical exchange rates) zero coupon
unsecured mandatory convertible bonds (the Mandatory Convertible Bonds) in August 2002 with the
right for both the investors (at any time) and the borrower (on maturity date only) to convert the
bonds to shares in us at NOK 3.50 per share (NOK 35 per share after the inverse share split 10:1 in
May 2003). For each of the 191.1 million bonds (19.1 million bonds after the inverse split), we
issued one conditional warrant providing the investor the right, under certain conditions, to
acquire on or before November 1, 2002, one share at NOK 1 per share. The warrants were exercised in
late October 2002. Subsequently, several investors have individually converted their bonds into shares at NOK
3.50 per share prior to the inverse split 10:1 of shares in May 2003 and at NOK 35 per share
thereafter. In addition, the Company offered a collective conversion into shares at NOK 35 per
share in November 2004 in exchange for a 1% conversion fee. As of December 31, 2004, a total of NOK
658.0 million had been converted into 18,800,000 shares in a series of conversions. The outstanding
amount of mandatory convertible bonds on December 31, 2004 was NOK 11.5 million (USD 1.9 million). The 7% Convertible Bonds 2004/ 2007 We issued NOK 104.9 million (USD 15.2 million at historical exchange rates) 7% unsecured
convertible bonds in June 2004. The conversion price is NOK 19 per share. In October and December
2004, 60.7% or a total of NOK 63.7 million were converted into 3,352,631 shares. As of December 31, 2004 the outstanding amount was NOK 41.2 million (USD 6.8 million). No
interest payment has yet become due. The 11% Callable Bonds 2004/ 2009 We issued NOK 630 million 11% (tranche 1  USD 93.7 million at historical exchange rates) and
USD 10 million 11% (tranche 2) senior unsecured bonds in October 2004 to refinance short term debt
maturities and improve working capital. The bonds are callable at 103% up to October 15, 2005 and
at 102.5% up to May 15, 2006. After repayment of short term debts, the transactions provided us
with new liquidity of NOK 284.4 million (USD 42.3 million at historical exchange rates). No
interest payment has yet become due. 29




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##### 



Repayments During 2004, we repaid the USD 4 million short term bonds in August and a USD 20.5 million
bridge loan in October in addition to the redemption of NOK 253.5 million of 13% and 11%
Convertible Bonds as a result of the issuance of the new 11% Bonds. 5.4.3 Issuance of Shares During 2004, the Company did not raise capital in the equity market. However, during the year,
exercise of options and several conversions of convertible bonds to shares took place (all figures
in the following table are in Norwegian kroner): Mandatory
    
    
    7%
    
    
    ConverNumber of
    
    
    Share capital
    
    
    Convertible
    
    
    Convertible
    
    
    sionshares
    
    
    (NOK)
    
    
    Bond (NOK)
    
    
    Bond (NOK)
    
    
    price (NOK)Loan balance December 31, 2003
    
    
    
    
    
    
    
    
    
    
    574,553,000
    
    
    
    104,900,000Debt conversions:
    
    4-Feb-04
    
    
    200,314
    
    
    
    2,003,140
    
    
    
    (7,011,000
    )
    
    
    
    
    
    
    35.004-Feb-04
    
    
    500,285
    
    
    
    5,002,850
    
    
    
    (17,510,000
    )
    
    
    
    
    
    
    35.0014-Aug-04
    
    
    28,284
    
    
    
    282,840
    
    
    
    (990,000
    )
    
    
    
    
    
    
    35.0021-Sep-04
    
    
    1,000,000
    
    
    
    10,000,000
    
    
    
    (35,000,000
    )
    
    
    
    
    
    
    35.006-Oct-04
    
    
    368,421
    
    
    
    3,684,210
    
    
    
    
    
    
    
    (7,000,000
    )
    
    
    19.001-Nov-04
    
    
    992,200
    
    
    
    9,922,000
    
    
    
    (34,727,000
    )
    
    
    
    
    
    
    35.0019-Nov-04
    
    
    13,367,495
    
    
    
    133,674,950
    
    
    
    (467,863,000
    )
    
    
    
    
    
    
    35.007-Dec-04
    
    
    2,168,421
    
    
    
    21,684,210
    
    
    
    
    
    
    
    (41,200,000
    )
    
    
    19.007-Dec-04
    
    
    815,789
    
    
    
    8,157,890
    
    
    
    
    
    
    
    (15,500,000
    )
    
    
    19.00Bond balance December 31, 2004
    
    
    
    
    
    
    
    
    
    
    11,452,000
    
    
    
    41,200,000Exercise of options:
    
    23-Feb-04
    
    
    20,000
    
    
    
    200,00029-Mar-04
    
    
    30,000
    
    
    
    300,00050,000
    
    
    
    500,000Total change in 2004
    
    
    
    
    
    
    19,491,209
    
    
    
    194,912,090
 In January 2005, the Company issued 2,555,000 shares at an average NOK 15 per share and
further 851,303 shares at NOK 28.565 per share in connection with the exercise of options held by
members of the Board and Management. See Note 19 to our consolidated accounts for details of the
option program for Board Directors and Management. 5.4.4 Future capital needs Assuming both rigs are on contract for the entire year of 2005 at day rates already
contracted and operational performance is at the same level as the 2004 actual performance, the
Company believes that revenues for 2005 will provide sufficient cash flow for working capital
(including payment of all interest costs and repayment of maturing debt) and budgeted capital
expenditure. With cash and cash equivalents amounting to USD 44.1 million at the end of 2004 and based on
the projected cash flows incorporating the assumptions above, the Company will not be required to
raise new debt or refinance its existing debt during 2005. However, we may elect to refinance the
Companys debt if we identify opportunities to refinance on substantially improved terms. 30




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##### 



We have announced the appointment of financial advisors to review options for refinancing of the
Companys outstanding debt. We hope to conclude the refinancing during the second quarter of 2005. See also Note 23  Subsequent Events and Note 24  Liquidity to our consolidated accounts. 5.5 Related-Party Transactions Reference is made to Item 7.2. 5.6 Research and Development, Patents and Licenses Although we purchased the right to use the Bingo rig design for our rigs, neither we nor the
company from whom we bought those rights has secured or applied for any patents or other
intellectual property protection relating to the design. See Item 3, Key InformationRisk
Factors. 5.7. Trend Information The market for offshore drilling and related services is primarily driven by investments in
wells for exploration, development and production of oil and gas, and by the supply of capable
drilling units. The investment levels depend on the oil companies cash flows and revenues, the
quality of their license portfolio and prospective acreage becoming available for exploration and
development. In addition existing and forecasted oil and gas prices influence the investment in
offshore drilling. These criteria are in turn affected by various political and economic factors
beyond the control of the petroleum companies. Among these factors are global reserves and
production levels, government policies, political stability in the oil producing countries, etc. The offshore drilling market is cyclical and volatile. During 2004, as a consequence of strong
economic development in China and India, an improving global economy, coupled with uncertainties
relating to supplies from Iraq, there has been a strong increase in oil demand, with the rig market
showing healthy development across all sectors. Oil prices have remained high since late 2003
creating large cash flows for the major oil companies. It is important to emphasize that market development within the respective segments of the
offshore drilling industry is not uniform. The utilization and day rate levels for ultra-deepwater
drilling units has been relatively firm and consistent during the last 5 years, while considerable
variations have been observed within other segments such as for shallow water drilling in the Gulf
of Mexico and the intermediate semi-submersible rig market. The fundamental parameters have been strengthened during the last eighteen months. World oil
demand increased by 20%, from 68.6 million barrels to 82.5 million barrels, in the period 1994 to
2004. World demand for gas has increased 24% since 1992 to more than 2,500 billion scm3
in 2002. According to IEA, the world will be using 89 million barrels of oil in 2010 and world gas
demand is expected to increase to more than 3,300 billion scm3. In their May 2005 report IEA
forecasts a 2.2% growth in world oil demand during 2005, compared to the impressive 3.5% growth
experienced in 2004. The reduction in growth rate is mainly attributed to high oil prices and the
interrelated effects on world economic growth. Except for the period 1979-1982, demand has grown
every year since 1971. This, combined with a very moderate growth in production capacity has almost
eliminated the worlds production buffer. On top of this many fields in the OECD area will start to
decline in coming years. This will leave the world even more dependent on a few Middle East
producers. In the mid 1980s there was a significant surplus capacity in the oil market (developed
production capacity in relation to consumption). During the 1990s a significant growth in 31




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consumption was not compensated through a corresponding increase in production capacity,
implying a much more balanced ratio of supply and demand. Oil market experts disagree on the actual size of the remaining capacity surplus, but there seems
to be consensus that the surplus is significantly lower than it has been historically. The experts
also seem to agree that the remaining spare capacity is largely in the hands of OPEC or more
specifically Saudi Arabia and United Arab Emirates. 5.8 Investments in Exploration and Development Analysts such as IEA, CGES and DOE anticipate continued growth in oil consumption over
the next 10 years, while on the supply side a number of fields and provinces suffer from declining
output from aging oil fields. The rate of recovery (i.e., percentage exploitation of each field)
has improved significantly and has increased demand for drilling and other oil-related services. At
the same time, new discoveries represented a smaller portion of total consumption (according to BP
Statistical Review). This suggests that high activity levels will continue; at least, in the
near-term across the entire life cycle of oil and gas developments. Growth in demand for ultra-deepwater exploration and production, which is our main market, is
expected to be much higher than for the industry in general. During the last couple of years the
worlds deepwater reserves have more than doubled. According to the World Deepwater Report 2003-2007 by Douglas-Westwood, deepwater investments
in the period 2003  2007 will be USD billion 57.9 compared to USD billion 25.6 in the period 1998
 2002. Production from shallow water regions is now in serious decline. 5.9 Market for Drilling Rigs for Deepwater Drilling Drilling at water depths exceeding 400 feet normally requires the use of
semi-submersible rigs or drillships. Water depths between 3,000 and 10,000 feet are termed extreme
depths and drilling operations at the deeper water depths are pushing the limits of existing
technology. 5.9.1 Semi-submersible drilling rigs Semi-submersible drilling rigs are floating platforms, which feature a ballasting system that
can lower parts of the hull to a predetermined depth (typically 50  80 feet). This reduces the
rigs exposure to wave impacts and increases their stability and improves their motion
characteristics. Semi-submersible rigs retain their position above the wellhead either by means of
a conventional mooring system, consisting of anchors and chains, or cables, or by a computerized
Dynamic Positioning system (DP system). 5.9.2 Drillships Drillships are ships with on-board propulsion machinery, often constructed for drilling in
deep water. They are based on conventional ship hulls, but have certain modifications. Drilling
operations are conducted through openings in the hull (moon pools). Drillships normally have
greater mobility and a higher load carrying capacity than semi-submersible rigs, but are less
stable in harsh conditions. Drillships are well suited to offshore drilling in remote areas due to
their mobility and high load carrying capacity. Like semi-submersible rigs, drillships can be
equipped with conventional mooring systems or DP systems. 32




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##### 



Market segment
    
    
    Water depth
    
    
    Rig typeShallow water
    
    
    less than 400 feet
    
    
    Jack-upsIntermediate water
    
    
    300-3,000 feet
    
    
    Second and third
generation
semi-submersible rigs
and drillships,Deepwater
    
    
    3,000-7,000 feet
    
    
    Second, third, fourth
and fifth generation
semi-submersible rigs
and drillships,
including DPUltra-deepwater
    
    
    greater than 7,000 feet
    
    
    Fifth generation DP
semi-submersible rigs
and DP drillships
 The worldwide fleet of mobile drilling rigs totals 585 units. Leaving aside the 366 jack-ups
(most of which are only capable of drilling in water depths between 150 and 300 feet) there are 202
floating rigs. There are a total of 164 (working and idle) semi submersibles and 38 (working and
idle) drillships in the world today. 5.9.3 Supply and Demand for Deepwater Rigs During recent years, developments in the market have been positive for suppliers of
rigs, equipment and services. Despite setbacks in certain segments, the overall trend in
offshore drilling has been favourable in the last two years. Offshore drilling activity
has picked up and rig availability has tightened, resulting in increasing rates and prices. The
current drilling plans of the oil and gas companies supported by oil service companies indicate a
concern for rig availability, particularly in deepwater. Seismic tendering activity has increased,
reflecting a shift in supply to West Africa, Brazil and Canada. The industry is also experiencing
an increasing demand in the North Sea/ Atlantic Margin area. The fleet of semi-submersibles and drillships operating at deepwater depths (greater than
3,000 feet) consists of 89 units including newbuilds and conversions. According to Fearnley
Offshore there are currently 26 units, including two newbuilds and two recently commissioned
conversions capable of drilling at depths greater than 7,000 feet,
including our two rigs. Some of these units have been employed on assignments where technical specifications have allowed
competition from less sophisticated units. Thus average day rates have been negatively influenced
by the softness in the lower end of the market. 5.9.4 Utilization rates for rigs According to Fearnley Offshores May 2005 market report, overall utilization for
semi-submersible rigs is approximately 91%, and the corresponding figure for drillships is somewhat
lower at 84%. The average utilization rate for the deepwater segment has stayed above 96% since
late 1998. The current utilization rate for rigs in the segment of the deep water market in which
we operate (ultra-deepwater and/or harsh environments), is close to 100%. The outlook for the deepwater drilling segment is based on the expected level of exploration
and development activity for deepwater oil and gas fields, which, in turn, is affected by oil and
gas companies revenues and ability to invest in exploration and development activities. Key elements for deepwater drilling are:  
    New technologies including deepwater drilling units, has opened up the deepwater
reserve base for exploration. 33




---



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
    A great deal of previously unexplored acreage has become accessible, and the success
rate of deepwater exploration drilling is higher than that at other depths. As a
consequence, exploration costs per barrel of oil equivalents found are generally lower
at deepwater levels than at other levels.  
    At more moderate depths the giant finds are few and far between while in deepwater
the expectations are that there are many large oil accumulations to be found. These elements combine to direct resources toward deepwater activities, and demand for
deepwater rigs and drillships is expected to increase as exploration and development activities
increase. (PERFORMANCE GRAPH) Projected Market Supply and Demand for Deep Water Drilling Units (PERFORMANCE GRAPH) 34




---



##### 



5.9.5 Development of day rates for semi-submersible rigs We believe that day rates for ultra-deepwater semi-submersibles look very promising for 2006
and beyond. As of April 30, 2005, new contracts have been secured at day rates in the range of USD
245,000 to USD 305,000 for work during 2005 which is significantly higher than in previous years.
Fixtures for units capable of drilling in water depths of up to 2,000 meters in the West-African
region, are currently in the range of USD 225,000 to USD 305,000 per day. Day rates for rigs
capable of operating in the ultra-deepwater segment are typically now ranging from USD 200,000 to
USD 270,000 in the Gulf of Mexico, and are expected to exceed USD 300,000. During the first half of
2005, we expect to see day rates well in excess of USD 300,000, in a number of offshore areas, and
for longer term contracts. 5.10 Marketing Strategy We have positioned ourselves to take advantage of opportunities to employ our rigs at the
highest possible market rates and in the areas where we can leverage the benefits of the technical
capabilities of our rigs. We have also targeted appropriate contract lengths, in order to be in a
position to secure the most beneficial term in line with our expectations of the developments in
the market. As a result, we have remained on short term contracts with Leiv Eiriksson in Angola,
as the longer term programs which came to the market in the recent past, did not present the
opportunity for us to obtain high quality day rates. The Leiv Eiriksson has remained in Angola, West Africa to exploit opportunities in ultra-deep
water depths where the rigs deep water rating, its large load carrying capacity and its dynamic
positioning capability have been desirable for clients undertaking exploration work in such water
depths. With Eirik Raude, we saw the opportunity to maximize benefit by obtaining work in the North
Sea and Norway, where the rigs harsh weather experience from Canada and its compliance with the
current requirements for operations in Norway, presented the opportunity to contract the rig
through 2005 on good day rates. The prospects for this work opened up, as interest in
opportunities offshore Eastern Canada waned. Nevertheless, we cannot guarantee that we will be successful in obtaining day rates at the
levels stated above. In addition, the extremes of day rates have been associated with short-term
contracts, or for single wells, with the potential consequent effect of time off- hire, between
contracts. Off Balance Sheet Arrangements None. 35




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##### 



5.12 Tabular Disclosure of Contractual Obligations As of December 31, 2004, the Company had the following contractual obligations: Payments due by PeriodLess than
    
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligations
    
    Total
    
    
    1 year
    
    
    1  3 years
    
    
    3  5 years
    
    
    yearsUSD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD(amounts in thousands)Notes and Loans
    
    
    449,250
    
    
    
    
    
    
    
    
    
    
    
    449,250
    
    
    
    Convertible loans
    
    
    29,922
    
    
    
    23,100
    
    
    
    6,822
    
    
    
    
    
    
    
    Mandatory
convertible bond
(1)
    
    
    1,896
    
    
    
    1,896
    
    
    
    
    
    
    
    
    
    
    
    Callable loans
    
    
    114,322
    
    
    
    
    
    
    
    
    
    
    
    114,322
    
    
    
    Operating leases
    
    
    1,113
    
    
    
    649
    
    
    
    349
    
    
    
    115
    
    
    
    Total
    
    
    596,503
    
    
    
    25,645
    
    
    
    7,171
    
    
    
    563,687
    
    
    
    
   (1)
    
    The Mandatory convertible bonds are shown gross of the unamortized balances for
warrants and conversion rights. See Note 10, Long term bonds, for further information. Certain of the notes and loans included in the table are subject to covenants requirements. If
there is an event of default with respect to these covenants, the holders of these debt instruments
could elect to declare all debts to be due and payable together with accrued and unpaid interest.
As a result, we could be forced into bankruptcy or liquidation. 5.13 The Application of Critical Accounting Policies Financial Reporting Release No. 60, which was released by the Securities and Exchange
Commission, requires all companies to include a discussion of critical accounting policies or
methods used in the preparation of financial accounts. Note 1 of the Notes to Financial accounts
includes a summary of the accounting policies and methods used in the preparation of our
consolidated accounts. The following is a brief discussion of the more significant accounting
policies and methods that we use, which are based on Norwegian GAAP. 5.13.1 General The preparation of financial accounts in conformity with generally accepted accounting
policies in Norway requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial accounts and the reported amounts of revenues and expenses during the
reporting periods. We evaluate these estimates on an ongoing basis, utilizing historical
experience, consultation with experts and other methods we consider reasonable in the particular
circumstances. Nevertheless, actual results may differ significantly from our estimates. The most
significant estimates and the assumptions relate to our fixed assets balances and to revenue and
expense recognition. 5.13.2 Revenue and expense recognition The substantial majority of our revenues are derived from contracts including day rate based
compensation for drilling operation, fixed price mobilization fees and investment contributions.
Revenues from day rate based compensation for drilling operation are recognised in the period
during which the services are rendered and at the rates established in the contracts. 36




---



##### 



Mobilization fees and investment contributions is recognized over the estimated duration of
the drilling contract. Incremental cost of mobilization is deferred and recognized over the
estimated duration of the drilling contracts. To the extent that cost exceeds revenue to be
recognized, it is expensed as incurred. Demobilization fees and expenses are recognized over the
demobilization period. Investments are depreciated over the estimated useful lives of the asset.
Other operating expenses are recorded when incurred. 5.13.3 Fixed Assets Fixed assets are stated at cost, less accumulated depreciation and impairment charges to
recognize an economic impairment when management has determined that impairment has occurred. Cost includes interest incurred during the construction period of the rigs based on prevailing
interest rates and weighted average capital expenditures. Expenditures for additions, significant
renewals and betterments are capitalized, whereas expenditures for maintenance and repairs are
expenses as incurred. The rigs are depreciated on a straight-line basis over the estimated useful life of the assets
ranging from 5 to 30 years. The primary portion of the rigs is depreciated over 30 years. When
assets are sold or retired, their costs and related accumulated depreciation are removed from
accounts and any gain or loss is included in net income. Estimates of remaining useful life of the
rigs could be affected by factors including changing market conditions, technology advances in
industry or changing regulations. All fixed assets are evaluated for impairment on the basis of discounted cash flows whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impaired asset is written down to its estimated fair market value based on the best
information available. Estimated fair market value is generally measured by discounting estimated
future cash flows. In determining impairment of fixed assets, management must make significant
judgments and estimates to determine if the discounted cash flows generated by those assets are
less than their carrying value, including determining the appropriate discount rate to use. The
data necessary for the execution of the impairment tests are based on managements estimates of
future cash flows, which require estimating future day rates, utilization rates and profit margins.
Assumptions used in these cash flows are consistent with internal forecasts. To support management
estimates, market outlook and day rate considerations provided by an independent third party have
been used. These considerations are mainly based on oil price in USD per barrel, oil and gas
continue to be the prime source of energy and confirmation of expectations of discoveries of oil
and gas in the artic. In the first quarter 2003, the Company recorded a write-down of Eirik Raude,
based on this analysis. To the extent that circumstances change or assumptions used in discounted cash flow
calculations change, we could experience additional impairments in the future. 5.13.4 Recent Accounting Pronouncements For information on our significant accounting policies, see Note 1 to our accompanying
financial accounts. Recent US GAAP Accounting Pronouncements On December 16, 2004, the financial Accounting Standards Board (FASB) issued FASB
Statement No 123 (revised 2004), Share-based Payment, which is a revision of FASB statement No.
123, Accounting for Stock-Based Compensation. Statement 123® also supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. 37




---



##### 



Generally,
the approach to accounting for share-based payments in Statement
123(R) is similar
to the approach described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the
financial statements based on their fair value. Pro forma disclosure is no longer an alternative
to financial statement recognition. The
company expects to adopt Statement 123(R) no later than the first quarter of 2006. The
implementation effects is expected to be similar to those included in the Statement 123 pro forma
information included in note 25. 38




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##### 



ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 6.1 Directors and Senior Management The following table sets forth information with respect to the members of our board of
directors and the executive officers of our Company as of March 1, 2005. Our directors serve
two-year terms. There is no limitation on the number of terms that a director may serve. The
executive officers of our Company are appointed by and serve at the discretion of our board of
directors: Name
    
    Age
    
    PositionGeir Aune
    
    
    46
    
    
    Executive Chairman of the Board of
DirectorsJon R. Aisbitt (1)
    
    
    48
    
    
    Deputy ChairmanBjarne Skeie
    
    
    60
    
    
    DirectorJames F. Skouverøe
    
    
    60
    
    
    DirectorMorten Borge (2)
    
    
    57
    
    
    DirectorRoy Mosvold (2)
    
    
    40
    
    
    DirectorKai Solberg-Hansen (3)
    
    
    56
    
    
    CEO & Managing DirectorThor Kristian Haugnaess
    
    
    47
    
    
    PresidentChristian Mowinckel (3)
    
    
    51
    
    
    Interim Managing Director &
Vice President  FinanceDag Eggan (4)
    
    
    32
    
    
    Senior Vice President-HES & QWilly Tørhaug
    
    
    55
    
    
    Senior Vice President-OperationsRobert M. Warrack
    
    
    59
    
    
    SeniorVice President-MarketingErling Meinich-Bache
    
    
    39
    
    
    Senior Vice President-AccountingFrank Tollefsen (5)
    
    
    38
    
    
    Senior Vice
President-Technical
   (1)
    
    On December 5, 2004 Jon R. Aisbitt was appointed Deputy Chairman of the board.(2)
    
    Morten Borge and Roy Mosvold resigned from the Board of Directors effective January 31,
2005, due to their participation in a project which could potentially cause a conflict of
interest.(3)
    
    On January 13, 2005 Christian Mowinckel was appointed Interim Managing Director,
following the resignation of Kai Solberg-Hansen as CEO and Managing Director. Mr Mowinckel
remains Vice President  Finance(4)
    
    Mr Dag Eggan was appointedSenior Vice President HES&Q following the resignation of
Nina Tveita from her position asSenior Vice President HES&Q on January 31, 2004.(5)
    
    Frank Tollefsen was employed in January 2004 asSenior Vice President  Technical, a new
position in the Company. Geir Aunejoined the board of Ocean Rig ASA on November 21, 2001. He has experience as a
field engineer for Schlumberger and in various positions as Managing Director or Chairman of
industrial investment companies and offshore/oil service related companies. Mr. Aune has served as
Vice Chairman of Wilrig ASA, CEO of NCL Holding ASA and Norwegian Cruise Line and CEO of DSND
Subsea AS. Mr. Aune resides in Bærum, Norway. As Executive Chairman of the Board, Mr. Aune serves
Ocean Rig on a full-time basis. Jon R. Aisbittwas elected as director of the board on May 16, 2003. Mr. Aisbitt was a former
partner of Goldman Sachs & Co. and has 20 years experience in international investment banking. On
December 5, 2004 Jon R. Aisbitt was appointed Deputy Chairman of the board. He resides in London,
United Kingdom. 39




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Bjarne Skeiehas vast experience as a director of various privately and publicly traded
companies in Norway. He currently serves as Chairman of the Board of Directors of Skeie Group AS
and the publicly traded company Sinvest ASA. Mr. Skeie also serves as a member of the Board of
Directors of Baltic Holding ASA and Ecuanor ASA, and as Chairman of the Board of Directors of Skeie
Eindom AS. Mr. Skeie holds an engineering degree from Boston College of Engineering and resides in
Kristiansand, Norway. James Frithjof Skouverøeserves as member of the Board of Directors of Stolt Offshore S.A., an
offshore contracting company quoted on Nasdaq and listed on the Oslo Stock Exchange. He is
currently an active owner of a group of companies operating within the contracting and
manufacturing sectors in Norway and Sweden. Mr. Skouverøe has previously served as President of
Stolt Sea Farm AS. Mr. Skouverøe holds a M.Sc. degree from the Norwegian University of Science and
Technology at Trondheim and holds an M.B.A. from INSEAD. He resides in Oslo, Norway. Morten Borgejoined the board of Ocean Rig ASA on November 21, 2001. He has experience with
Arvid Bergvall AS, Pegasus Ocean Services Ltd., O. Ditlev-Simonsen Jr and Anglo Eastern Management
Services Ltd. Mr. Borge has served as Managing Director of Mosvold Shipping AS in Kristiansand,
Chairman of Dual Drilling Inc in Dallas, and Chairman and Managing Director of Mosvold Shipping Ltd
in Bermuda. He holds an MBA from Mannheim University. Mr. Borge resides in Kristiansand, Norway.
Morten Borge resigned from the Board of Directors on January 31, 2005. Roy T. Mosvoldjoined the board of Ocean Rig ASA on November 21, 2001. He has experience from
New York and London in shipping (dry cargo, chemicals, tanker and gas), investment and trading. Mr.
Mosvold has served as Chairman of Mosvold Shipping Ltd. He is currently involved in his own
trading, shipping and investment companies based in London. Mr. Mosvold holds a B.Sc. with a major
in Finance and International Business from New York University. He resides in London, UK. Roy
Mosvold resigned from the Board of Directors on January 31, 2005. Kai Solberg-Hansenhas over 25 years of experience in the offshore and maritime sector.
Before joining our Company, he was CEO of the Norwegian drilling contractor Northern Offshore ASA.
He has worked as CFO of Kvaerner Maritime, as well as the Norwegian drilling contractors Wilrig AS
and Ross Offshore AS. Mr. Solberg-Hansen holds a M. Sc. in Business from the Norwegian School of
Management BI. He resides in Drøbak, Norway. Mr. Solberg-Hansen was appointed President and CEO
on April 8, 2002. As of May 2003, Mr. Solberg-Hansen was CEO and Managing Director. On January 10,
2005 Mr. Solberg-Hansen resigned as CEO and Managing Director Thor Khristian Haugnaesshas been working for Schlumberger for 19 years. His current position
is President. In Schlumberger he has held several positions in Field Operations, Staff and Line
Management. His assignment has covered oilfield operations in Europe, Africa, Middle East and Asia.
Mr. Haugnæss holds a Master of Science degree in Petroleum Technology from NTH, University in
Trondheim, Norway. He resides in Dubai. Christian Mowinckeljoined Ocean Rig in late July 2002. His working career includes senior
positions in Den norske Bank ASA, Elkem ASA, Kvaerner ASA and Deloitte & Touche in the field of
banking, project development, international and corporate finance as well as corporate
restructuring. Mr. Mowinckel holds a Master of Business and Administration degree from University
of Wisconsin, USA and resides in Oslo, Norway.On January 13, 2005 Christian Mowinckel was
appointed Interim Managing Director. Mr Mowinckel remains Vice President  Finance. Dag Egganhas been working with HES&Q issues in the international offshore drilling industry
since he joined Ocean Rig in 1997. Mr. Eggan was HES&Q project manager for the construction project
of the rigs in Mississippi, and HES&Q Manager for Ocean Rig 2 AS in Canada. In February 2004, he
was promoted to HES&Q Director for Ocean Rig AS. Mr. Eggan holds a M. Sc. Degree in Environmental
Engineering and resides in Trondheim, Norway. 40




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Willy Tørhaughas 30 years experience in the offshore industry. From 1985 he has had leading
positions in the operations of drilling rigs in the industry with companies like Golar-Nor
Offshore, Jebsens (UK), Ltd, Aker Drilling and Transocean. He joined Ocean Rig in 1997 and was
promoted Vice President Operations from June 2002. Mr Tørhaug resides in Stavanger, Norway. Robert M. Warrackhas 20 years experience in the drilling contracting business and was
recruited to Ocean Rig from a position as Business Development Manager for Smedvig Offshore in
Aberdeen. Before that he served as Vice President of Contracts and Sales for Sonat Offshore. Mr.
Warrack holds a B. Sc. Degree in Mechanical Engineering from Heriot-Watt University, Edinburgh. He
resides in Aberdeen, Scotland. Mr Warrack was appointed Vice President Marketing as of January 1,
2003. Erling Meinich-Bachejoined Ocean Rig in March 2003. He has 10 years experience from various
positions in Hitec ASA and latest as Vice President Finance in National Oilwell Norway AS. Mr.
Meinich-Bache holds a M.Sc. in Financial Management and resides in Stavanger, Norway. Frank Tollefsenjoined Ocean Rig in January 2004 as Vice President Technical Services. He has
18 years experience from various positions in the drilling contracting business. From 1990 he has
had leading positions in the North Sea, Nigeria, Houston, Brazil, Canada, and the Middle East
region as well as India and the Mediterranean. He spent the last 12 years with Transocean. Before
that he served 6 years with Dolphin Drilling. Mr. Tollefsen is a Mechanical Engineer and resides in
Sandnes, Norway. 6.2 Compensation For the year ended December 31, 2004, the aggregate compensation that we paid to our directors
and officers for services in all capacities was $1.97 million. Each member of our board of
directors that was on the board for the entire period ending at the general assembly in 2004 was
entitled to receive a remuneration of $44,504 for 2003-2004. Members serving for only part of this
period received compensation based upon the amount of time served as a board member. Mr. Solberg-Hansen received a salary of $256,008 (NOK 1,725,753) in 2004 and other
compensation of $1,077 (NOK 7,261). Pension expenses for Mr Solberg-Hansen amounted to $63,720 (NOK
429,540). At December 31, 2004 the Chief Executive Officer held 500,000 share options in Ocean Rig
ASA of which the exercise price for 83,333 options was NOK 10, for 83,334 options was NOK 12, for
83,333 options was NOK 14 and for 250,000 options was NOK 18 (average exercise price was NOK 15 for
each option). The share options were granted during 2003 as part of the Companys share option
program to directors and management. The Chief Executive Officer did not exercise any options
during 2004. No funds have been set aside or accrued to provide for pension or retirement benefits, except
for funds paid to our retirement benefit plan, as described in Note 15, Pensions, included in Item
18. In May 2003, at the Companys Annual General Meeting, a new option plan for members of the
board and management of the Company was authorized (the 2003 Option Program), and the share option
plan authorized in August 2002 was withdrawn. At an Extraordinary General Meeting on December 22,
2004, the shareholders approved an extension of the expiry date for the 2003 Option Program from
December 31, 2004 to January 3, 2005. Furthermore, the Extraordinary General Meeting approved a new
share option program (2004/2006 Option Program). See Section 6.5 below and Note 19 to our
consolidated accounts contained in this annual report for further information about the Companys
share option program. 41




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##### 



6.3 Board Practices The following table sets forth information with respect to the current term of office for the
members of our board of directors: Name
    
    Served Since
    
    Start of Current Term
    
    End of Current TermBjarne Skeie
    
    September 1996
    
    May 2004
    
    May 2006James F. Skouverøe
    
    June 1997
    
    May 2004
    
    May 2006Geir Aune
    
    November 2001
    
    May 2004
    
    May 2006Morten Borge*
    
    November 2001
    
    May 2004
    
    May 2006 (resigned)Roy Mosvold*
    
    November 2001
    
    May 2004
    
    May 2006 (resigned)Jon Aisbitt
    
    May 2003
    
    May 2003
    
    May 2005
   *
    
    Morten Borge and Roy Mosvold resigned from the Board of Directors on January 31,
2005 due to their participation in a project which could potentially cause a conflict of
interest. Our directors do not have service contracts or other agreements that provide for benefits
on termination of employment. We established an audit committee in May 2003. Members of the audit committee are Jon R.
Aisbitt (chairman) and (until January 31, 2005) Morten Borge. James F. Skouverøe was appointed to
the audit committee on March 31, 2005. Ocean Rig is not subject to the audit committee standards
set forth under Section 10A of the U.S. Exchange Act of 1934, as amended. However the audit
committee was established for the sake of good corporate governance and is given the mandate to
assist the board of directors in fulfilling their responsibility to the shareholders, investment
community and others relating to Ocean Rigs financial accounts. The audit committees primary
responsibility is to oversee the financial reporting process on behalf of the board and report the
results of their work to the board. Members of the compensation committee are James F. Skouverøe and (until January 31, 2005) Roy
Mosvold. Jon R Aisbitt was appointed to the compensation committee on March 31, 2005. According to the Companys Articles of Association, the board must have a minimum of 4
members. A decision to replace Morten Borge and Roy Mosvold on the board has not yet been made. A
decision to appoint new directors to the board must be made by a shareholders meeting. 6.4 Employees On average, we had approximately 346 employees in 2004 versus 298 employees in 2003 and 242
employees in 2002. The increase in number of employees is due to commencement of operation in 2002
and relocating Eirik Raude to Norwegian sector in 2004 where a higher number of crew is required to
operate the rig. 160 persons are employed on Eirik Raude and 150 on Leiv Eiriksson. The remaining
36 are shore based support and management positions. Our Norwegian crew are members of unions or
otherwise covered by collective bargaining agreements. We consider relations with our employees to
be good. 6.5 Share Ownership  share option program Ocean Rig has only one class of shares. Accordingly, there are no differences in voting rights
with respect to any of the shares issuable upon exercise of any options. Our board views share options as an integral part of the compensation package of key
employees, members of management and directors of the board and will use authorized share option
programs to attract and retain executives or other key employees. 42




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##### 



At an Extraordinary General Meeting on December 22, 2004, the shareholders approved an
extension of the expiry date for the 2003 Option Program from December 31, 2004 to January 3, 2005.
All 7,670,000 options under this program were exercised on January 3, 2005 in exchange for shares
at the applicable exercise price (average NOK 15 per share) or at the option holders request,
against a cash settlement from Ocean Rig ASA equal to the difference between a) NOK 28.565 per
share, the volume weighted average trading price between December 29, 2004 and January 5, 2005 and
b) NOK 15 per share, the average exercise price. Furthermore, the Extraordinary General Meeting on December 22, 2004 approved a new share
option program (2004/2006 Option Program) authorizing the board to issue up to 6,200,000 shares in
respect of this option program with an exercise price of NOK 28.565 per share, equal to the volume
weighted average trading price between December 29, 2004 and January 5, 2005. These options where
granted on January 5, 2005 and expire on January 4, 2006. Of the total number of options, 1,800,000
were granted to the Executive Chairman, 800,000 options were granted to the Deputy Chairman and
150,000 options were granted to each of the remaining board members. The remaining 3,000,000
options were reserved for the Companys management and key employees with granting to individuals
at the Executive Chairmans discretion. In order to qualify for options under the new 2004/2006 Option Program, participants who had
options under the 2003 Option Program were obliged to reinvest at least 44.7% of the net gain (before
tax) from exercising such options in Ocean Rig ASA shares and new participants must invest an
amount equal to NOK 5,000 per 10,000 options allocated in Ocean Rig shares. Participants must hold
their Ocean Rig shares until December 29, 2005 (vesting date) in order to be able to exercise the
options during the vesting period December 29, 2005 until January 4, 2006. The following table sets forth share ownership in our Company and share options granted to our
directors and senior management as of December 31, 2004: 2003 shareName
    
    Position
    
    Shares (1)
    
    
    optionsDirectorsGeir Aune
    
    Chairman of the Board of Directors
    
    
    
    
    
    
    1,800,000James F. Skouverøe
    
    Director
    
    
    7,568
    
    
    
    800,000Morten Borge
    
    Director
    
    
    36,656
    
    
    
    800,000Bjarne Skeie (2)
    
    Director
    
    
    
    
    
    
    Roy Mosvold
    
    Director
    
    
    338,583
    
    
    
    800,000Jon R. Aisbitt
    
    Director
    
    
    
    
    
    
    800,000Senior ManagementKai Solberg-Hansen
    
    CEO
    
    
    
    
    
    
    500,000Thor Kristian Haugnæss
    
    President
    
    
    36
    
    
    
    600,000Christian Mowinckel
    
    Vice President-Finance
    
    
    
    
    
    
    200,000Willy Tørhaug
    
    Vice President-Operations
    
    
    
    
    
    
    300,000Erling Meinich-Bache
    
    Vice President-Accounting
    
    
    
    
    
    
    150,000Robert M. Warrack
    
    Vice President-Marketing
    
    
    
    
    
    
    200,000Dag Eggan
    
    Vice President-HES & Q
    
    
    
    
    
    
    60,000Frank Tollefsen
    
    Vice President - Technical
    
    
    
    
    
    
    60,000
   (1)
    
    Includes shares owned by companies controlled by the individual or immediate family.(2)
    
    Bjarne Skeie controls directly or indirectly 36.6% of the shares in Sinvest ASA which owns 11,986,922 shares in
Ocean Rig ASA. He also controls Skeie Group which owns 103,742 shares in Ocean Rig ASA 43




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##### 



The following table sets forth share ownership held in our Company and share options
granted to our directors and senior management as of March 1, 2005: 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2004/2006options
    
    
    2003 options in cash
    
    
    New shares
    
    
    
    
    
    
    shareName
    
    Position
    
    exercised
    
    
    settlement
    
    
    from exercise
    
    
    Shares
    
    
    optionsDirectorsGeir Aune
    
    Chairman of the Board
    
    
    
    
    
    
    1,800,000
    
    
    
    375,394
    
    
    
    375,394
    
    
    
    1,800,000Jon R. Aisbitt
    
    Deputy Chairman
    
    
    800,000
    
    
    
    
    
    
    
    800,000
    
    
    
    800,000
    
    
    
    800,000Bjarne Skeie
    
    Director
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    James F. Skouverøe
    
    Director
    
    
    
    
    
    
    800,000
    
    
    
    166,672
    
    
    
    174,240
    
    
    
    150,000Senior ManagementThor Kristian
Haugnæss
    
    President
    
    
    525,000
    
    
    
    75,000
    
    
    
    538,753
    
    
    
    538,789
    
    
    
    900,000Christian Mowinckel
    
    Interim ManagingDirector and SeniorVice President-Finance
    
    
    
    
    
    
    200,000
    
    
    
    41,710
    
    
    
    41,710
    
    
    
    200,000Willy Tørhaug
    
    Senior VicePresident-Operations
    
    
    
    
    
    
    300,000
    
    
    
    31,282
    
    
    
    31,282
    
    
    
    150,000Erling Meinich-Bache
    
    Senior VicePresident-Accounting
    
    
    
    
    
    
    150,000
    
    
    
    
    
    
    
    
    
    
    
    Robert M. Warrack
    
    Senior VicePresident-Marketing
    
    
    200,000
    
    
    
    
    
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,000Dag Eggan
    
    Senior VicePresident-HES & Q
    
    
    
    
    
    
    60,000
    
    
    
    12,520
    
    
    
    12,520
    
    
    
    150,000Frank Tollefsen
    
    Senior Vice President -Technical
    
    
    
    
    
    
    60,000
    
    
    
    12,520
    
    
    
    12,520
    
    
    
    150,000
 See Note 19 and 23 to our consolidated accounts contained in this annual report for
further information about the Companys share option program. 44




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##### 



ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 7.1 Major Shareholders To the knowledge of our management, Ocean Rig ASA is not directly or indirectly controlled by
another corporation or by any foreign government. As of March 10, 2005, only Goldman Sachs & Co,
Sinvest ASA, Morgan Stanley & Co, Credit Suisse (Europe), Bank of New York and Odin
Forvaltning AS owned (beneficially or as nominee) more than five percent of our outstanding shares.
Mr. Skeie, who is a director of the Board of Ocean Rig ASA is the largest shareholder of Sinvest
ASA and holds, directly or indirectly, 36.6% of the share capital of that company. Mr. Skeie also
controls Skeie Group, the owner of 103,742 shares in our Company. As of March 10, 2005, the total
number of shares held beneficially by directors and executive officers of our Company as a group
was 2,186,455 shares representing approximately 2.5% of our outstanding shares, excluding the
shares of Sinvest ASA and Skeie Group. Together, Sinvest ASA, Skeie Group and Directors and
executive officers, as a group, hold a total of 14,277,119 shares or 16.4% of the total number of
shares. Directors and executive officers of our Company have also received options to purchase
shares in our Company, which may be exercised at certain dates and prices, see Item 6, Directors,
Senior Management and EmployeesCompensation. Our large shareholders do not have voting rights
different from those of our shareholders generally. We have a single class of common shares. The following table sets forth details of registered
holdings in excess of 5% ownership of our common shares as of March 10, 2005. Number of
    
    
    Percentage ofName of Beneficial Owner
    
    Common Shares
    
    
    Common SharesGoldman Sachs & Co. (nominee)
    
    
    13,329,759
    
    
    
    15.3%Sinvest ASA (1)
    
    
    11,986,922
    
    
    
    13.8%Morgan Stanley & Co . (nominee)
    
    
    9,159,441
    
    
    
    10.5%Credit Suisse (Europe) . (nominee)
    
    
    8,887,787
    
    
    
   10.2%Bank of New York (nominee)
    
    
    6,696,704
    
    
    
    7.7%Odin Forvaltning AS
    
    
    6,186,237
    
    
    
    7.1%
   (1)
    
    Mr. Skeie, a director of the Board of Directors holds 36.6% of the shares in Sinvest ASA. Goldman Sachs & Co.has reduced their holding of our shares to 15.3% on March 10, 2005,
from 18.2 % on June 8, 2004. Sinvest ASAhas reduced their holding of our shares to 13.8% on March 10, 2005, from 15.8 % on
June 8, 2004. JPMorganChase Bank was onJune 8, 2004 the registered holder of 14.5% of the shares
of our Company. They were not a registered holder above the 5% level on March 10, 2005. Morgan Stanley & Cohas reduced their holding of our shares to 10.5% on March 10, 2005, from
12.5% on June 8, 2004. Credit Suisse (Europe) Cohas increased their holding of our shares to 10.2% on March 10,
2005, from 8.1% on June 8, 2004. The number of record holders in the United States as of March 10, 2005 is 41. Our records
indicate that 3.3% of Ocean Rigs issued and outstanding share capital is held in the United
States. 45




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##### 



As of December 31, 2004 our Companys share capital comprised 83,506,423 shares, with a par
value of NOK 10 per share. As of March 10, 2005 our Company had 86,912,726 shares issued and
outstanding, with a par value of NOK 10 per share. By full conversion of the outstanding amount
under the Companys 2002/2005 Mandatory Convertible Bond and the 7% 2004/2007 Convertible Bond and
provided that all share options under the 2004/2006 Option Program are exercised in exchange for
shares the number of shares in the Company could increase to 95,608,347. 7.2 Related Party Transactions East Coast Drilling Partnership (ECDP) From May 11, 2004, the bareboat charter for Eirik Raude to ECDP was cancelled, and the rig
returned to Ocean Rig 2 AS (OR2). In accordance with the partnership agreement, ECDP exercised
their right to acquire certain assets fully financed by EnCana prior to the termination of the
lease. The acquisition consists of five portable electrical generators valued at about Canadian
dollars 7 million. On May 14, 2004 OR2 and EnCana mutually agreed, pursuant to the terms of the
partnership agreement, to increase OR2s equity share to 80 % of ECDP through an equity swap, where
EnCana reduced their participation from the same date to 20%. The 50% board representation and
voting rights remains unchanged. ECDP is a partnership formed by EnCana to provide energy related services to EnCana and other
companies. Until May 14, 2004, Ocean Rig, through OR2, had a 5% ownership interest in ECDP and
EnCana with subsidiaries had 95% ownership. Both parties had 50% board representation and voting
rights in the Partnership. On November 1, 2002, the drilling rig Eirik Raude was delivered on a
bareboat charter from its owner OR2 to ECDP. ECDP was responsible for all operations of the rig.
Revenues received by OR2 from ECDP amounted to USD 47.0 million in 2003. OR2s net negative
investment in ECDP was USD 1.0 million as at December 31, 2003. The loss related to OR2s interest
in ECDP amounted to USD 0.5 million in 2003. At December 31, 2003, Ocean Rig had accounts payable
to ECDP of USD 0.3 million. All outstanding balances in ECDP at May 14, 2004, were settled between the partners according
to their original ownership shares in ECDP. For the period January 1- May 14, 2004 revenues
received from ECDP by OR2 through the bareboat hire amounted to USD 15.7 million. OR2s net
negative investment in ECDP was USD 1.1 million at December 31, 2004. The loss related to OR2s
participation in ECDP amounted to USD 1.1 million for the period prior to May 14, 2004 at 5%
participation and a profit of USD 0.2 million for the rest of 2004 at 80% participation. The
negative balance at December 31, 2004 of USD 1.1 million represents OR2s best estimate of maximum
liability in relation to the accumulated losses in ECDP. The activity in ECDP after May 14, 2004, is related to hiring out the five portable electrical
generators. The rental agreement is with EnCana and is fixed during the period Ocean Rig has agreed
to hold the 80% interest. At year end 2004 the generator business had generated a small profit.
Ocean Rig has a put option of its 80% owner interest to EnCana, which can be exercised at any time
after January 1, 2005. EnCana has a call option that can be exercised at any time after January 1,
2005. ECDP is accounted for in accordance with the equity method and is not consolidated. Ocean Rig
does not have a controlling interest. EnCana has 50% voting rights as well as control of the
administrative and accounting functions. EnCana also funds the acquisition of the assets and
necessary working capital. Other Ocean Rig has issued a loan to Senior Vice President Operations Willy Torhaug. The balance
outstanding as of December 31, 2004 was $ 0.199 million (NOK 1.2 million). The loan was issued
prior to July 2002. The loan is interest bearing and has instalments over 5 years, ending 2008. 46




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7.3 Interests of Experts and Counsel Not applicable. ITEM 8. FINANCIAL INFORMATION 8.1 Consolidated Statements and Other Financial Information 8.1.1 Please refer to Item 18 for our consolidated financial statements. 8.1.2 Please refer to Item 18 for our comparative financial statements. 8.1.3 Please refer to Item 18 for the independent auditors report of PricewaterhouseCoopers AS. 8.1.4 The last year of audited financial statements is not older than 15 months. 8.1.5 Not applicable. 8.1.6 Not applicable. 8.1.7. Legal Proceedings Except for the matters discussed below, we are not a party to any material litigation where
claims or counterclaims have been filed against us other than routine legal proceedings incidental
to our business:  A.
    Ocean Rig has received a counter claim from Halifax Shipyard relating to the last
invoice for the construction of Eirik Raude in response to a significantly higher claim
served by Ocean Rig. The Halifax Shipyard counter claim amounts to approximately USD 3
million. The counter claim is disputed by Ocean Rig.B.
    Ocean Rig has received a tort
claim from Willi Garry, a former Friede & Goldman
employee, of approximately USD 1 million. Mr. Garry lost the related court case but has
appealed. Ocean Rigs exposure if any, is covered by the Companys P&I insurance with a
maximum $100.000 deductible. 8.1.8 Dividend Policy We intend to retain any future earnings for payment of interest expense and further
development of our rig fleet and do not anticipate paying any cash dividends in the foreseeable
future. 8.2 Significant Changes Reference is made to Note 23, Subsequent Events, to the consolidated accounts included in
Item 18 for significant changes that have occurred since December 31, 2004. ITEM 9. THE OFFER AND LISTING 9.1 Offer and Listing Details Not applicable. 47




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9.2 Plan of Distribution Not applicable. 9.3 Markets Our
outstanding registered securities consist solely of Ocean Rig Norway ASs 10 1/4% secured
notes due 2008 and the guarantees with respect thereto, which were registered under the U.S.
Securities Act of 1933 pursuant to an exchange offer that expired on October 26, 1998. Neither the
notes nor the related guarantees are listed on an exchange and there is no formal trading market
for those securities, which are not registered under Section 12 of the U.S. Securities Exchange Act
of 1934. 9.4 Selling Shareholders Not applicable. 9.5 Dilution Not applicable. 9.6 Expenses of the Issue Not applicable. 48




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ITEM 10.ADDITIONAL INFORMATION 10.1 Share Capital Not applicable. 10.2 Articles of Association The following is a summary of the relevant information about our share capital and the
relevant provisions of our articles of association and Norwegian law. This summary does not
purport to be complete and is qualified in its entirety by our articles of association and
Norwegian law.  1.
    We are registered in the Norwegian national register of business enterprises under
registration no. 976 769 643. Our corporate objective is to own and operate, directly or
indirectly, offshore drilling units, offshore productions units and offshore drilling
businesses as well as activities relating to the foregoing items and activities, including
participation in exploration wells. Our corporate objective clause is found in § 3 of our
articles of association.2.
    Under Norwegian corporate law, directors may not vote on issues where they have a material
interest. Compensation for the members of our board of directors is determined by resolution
of our shareholders at the annual meeting of shareholders. Our directors cannot borrow from
our Company unless the loan has adequate security, and the loan can not exceed distributable
equity. With respect to our own borrowing, our board of directors has the power to arrange
for financing as required and at its discretion. There is no mandatory retirement age under
Norwegian law or in our articles of association. We do not require
our directors to hold shares in our Company.3.
    We have only one class of shares. All shares have equal rights as to voting and dividend
distributions. There is no restriction on the number of shares a shareholder may own.
Further, our shareholders are not liable for additional capital calls and we have no
discriminatory provisions against majority shareholders. Norwegian law requires that we grant
pre-emptive rights to existing shareholders. Our shares do not carry any right to receive
dividends, unless dividends are granted in the discretion of our Board of Directors. Each
share carries one vote, and voting is cumulative. Directors terms are staggered.4.
    Any changes to the rights of our existing shareholders generally require a two-thirds
majority vote of our shareholders represented at the shareholders meeting. In certain cases,
such as reducing the rights to dividends and dividing existing shares into classes not having
equal treatment for shareholders, a 90% majority vote or unanimity may be required. These
provisions are in accordance with the standard prescribed by Norwegian law.5.
    Our shareholders meetings are convened by our board of directors upon at least 14 days of
notice. Shareholders of record as of the date of the meeting are
admitted. However, any shares that have been sold but not delivered have no voting rights.6.
    There are no limitations under our articles of association or under Norwegian law on the
ownership or voting rights of foreign shareholders.7.
    We have no provisions under our articles of association that would have a negative impact on
a change of control, merger, acquisition or restructuring, except that any matter requiring
changes to our share capital require a two-thirds majority vote.8.
    Our articles of association do not require disclosure of ownership, although our share
register is open to the public for review. Furthermore, the Oslo Stock Exchange requires
shareholders passing certain thresholds (upward or downward) to give notice of their
shareholdings. The current thresholds are 5%, 10%, 20%, 33.3%, 50%, 66.7% and 90% of a
companys shares.9.
    The law applicable to our company in the above areas is not significantly different from that
in the United States. 49




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10.
    Our articles of association are not more stringent than required by Norwegian law as to
changes in share capital. A two-thirds majority vote of the shareholders represented at the
shareholders meeting is required for any such change.10.3
    Material Contracts In connection with our contract to drill one well in the Weymouth field offshore Canada for
EnCana, Ocean Rig entered into, on October 17, 2003, a farm out agreement with EnCana to
participate in the Weymouth well with a 22.5% equity interest in the well, with a right to
participate with 15% in the Nova Scotia Exploration License No 2380. Drilling start up commenced in
October, 2003. In May 2004, Ocean Rig announced that the Weymouth well was unsuccessful and was
being abandoned. Ocean Rigs share of the cost was $22.3 million, of which $8.0 was expensed in
2003 and the remainder in 2004. Reference is also made to Notes 3 and 27 to our consolidated
accounts. 10.4 Exchange Controls Under Norwegian foreign exchange controls currently in effect, transfers of capital to and
from Norway are not subject to prior government approval except for the physical transfer of
payments in currency, which is restricted to licensed banks. Consequently, a non-Norwegian
resident may receive dividend, principal and interest payments without a Norwegian exchange control
consent, provided that such payment is made through a licensed bank. There are no limitations imposed by Norwegian law or our articles of association on the right
of non-resident or non-Norwegian persons to hold Ocean Rig Norway
ASs 10 1/4% secured notes due 2008. 10.5 Taxation The following discussion is a summary of material Norwegian income tax matters relating to the
acquisition, ownership and disposition of the 10 1/4% secured notes due 2008 by non-residents of
Norway and does not purport to describe all of the tax considerations, including those arising
under U.S. tax laws, that may be relevant to a U.S. resident holder of the notes. Holders of the
notes are advised to consult their own tax advisors concerning the consequences, in their
particular circumstances, of the ownership and disposition of the notes under Norwegian and other
laws to which they may be subject. The discussion of Norwegian tax law set forth below is based on the laws in force as of the
date hereof, including the current convention between the United States and Norway for the
avoidance of double taxation with respect to income taxes and interpretations thereof by the
relevant tax authorities that are in effect as of the date of this annual report, and does not take
into account possible future changes in Norwegian or other tax laws or in the convention. There is no Norwegian tax on interest received by United States residents. In addition, under
current Norwegian law, payments of principal, premium, and interest on notes to a holder that is a
non-resident of Norway are not subject to Norwegian income or withholding tax unless effectively
held in connection with a permanent establishment in Norway. With the same exception, any gain
realized on the sale or other disposition of a note by such holder will not be subject to Norwegian
income or withholding tax. A holder of a note that is neither a citizen nor a resident of Norway,
will not be subject to Norwegian transfer, inheritance, gift or contribution taxes in respect of
such note. 10.6 Dividends and Paying Agents Not applicable. 50




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10.7 Statements by Experts Not applicable. 10.8 Documents on Display We have filed our Form F-4 registration statement with the U.S. Securities and Exchange
Commission. This annual report does not contain all of the information included in the
registration statement. You should refer to our registration statement and its exhibits if you
would like to find out more about our Company and the 10 1/4% notes due 2008. We are not subject to the periodic reporting and other informational requirements of the
Securities Exchange Act of 1934. Regardless of whether or not we are subject to the requirements
of the Exchange Act, we have agreed to provide the following information to the SEC, our note
holders and our trustee so long as any notes remain outstanding:  
    all annual and quarterly financial information that would be required in a Form
20-F and Form 10-Q filing, including operating and financial reviews and prospects and,
with respect to annual financial information, a report by our independent auditors
provided, however, if such financial information is prepared in accordance with
Norwegian GAAP, such information will be reconciled to US GAAP (including a
determination of EBITDA); and
    all reports that would be required in a Form 8-K filing (other than such
reports required as a result of a Regulation S sale of equity securities). As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing
the furnishing and content of proxy statements, and our officers, directors and principal
stockholders are exempt from the reporting and short-swing profit recovery provisions contained in
Section 16 of the Exchange Act. You may inspect copies of our registration statement, its accompanying exhibits, and any other
document we file with the Commission, without charge. You also may copy or obtain any of these
documents at prescribed rates at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the
operation of the Commission Public Reference Room by calling the Commission at 1-800-SEC-0330. 10.9 Subsidiary Information For more information on our subsidiaries, see Item 4, Information on our
CompanyOrganizational Structure. ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 11.1 Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risk principally through movements in foreign currency exchange rates
and interest rates relating to our outstanding debt. We manage volatility inherent in these
business exposures through natural hedges in our balance sheet and, where necessary, under our risk
management policies and through derivative financial instruments. We use only conventional
derivative instruments such as forward contracts and simple options. See Note 1 to our
consolidated accounts for more information. 51




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In cases in which derivatives constitute an operational hedge, they do not expose us to market
risk because the change in their market value offsets the change in the fair value of the financial
asset and liability being hedged. We do not enter into any derivatives for trading purposes.
Counterparties selected by us for these transactions generally are highly rated international
financial institutions. See Note 8, 20 and 25 to our financial accounts included in Item 18 of this annual report for
additional disclosure on borrowing analyzed by maturity date, fair value of financial instruments
and financial liabilities and assets analyzed by currency and interest rate risk profile. 11.2 Interest Rate Risk We are exposed to the effects of movements in interest rates on the floating rate loans of Ocean
Rig Norway AS and Ocean Rig 2 AS, which bear interest at a rate of LIBOR plus a fixed margin. We
have not to date entered into interest rate collars or interest rate swaps beyond 12 months to
hedge against this exposure, but we might do so in the future if we believe the market conditions
are right. We estimate that a change of 100 basis points across all maturities in the LIBOR
interest rate would have caused an increase or decrease in our interest expense of approximately
USD 2.2 million and USD 2.2 million for 2004 and 2003. 11.3 Foreign Currency Exchange Rate Risk The financial accounts of our Company (including its subsidiaries) are reported in US dollars.
All companies within the group have USD as functional currency, except for Ocean Rig ASA for
which functional currency is Norwegian kroner. We have USD 459.3 million of long-term debt
denominated in U.S. dollars, and USD 136.1 million (NOK 822 million), including the part of this
debt that per 31 December 2004 is due within one year, denominated in Norwegian kroner.
As a result, fluctuations in exchange rates can have a significant effect on our operating results
and financial position. We estimate that a 10% increase or decrease of the U.S. dollar relative to
the Norwegian kroner would have increased or decreased our interest expense in 2004 and 2003 by
approximately USD 0.82 million and USD 0.65 million, respectively, and long-term debt as of
December 31, 2004 and 2003, would have increased or decreased by USD 12.5 million and USD 16.1
million, respectively. The Company is exposed to changes in foreign currency exchange rates and changes in interest
rates, which affect the results of operations and financial condition. The Company manages exposure
to changes in foreign currency exchange rates through its normal operating and financing
activities, as well as through the use of financial instruments. Generally, the only financial
instruments the Company may utilize to operationally hedge currency exposure are forward exchange
contracts and simple options. These contracts do not qualify for hedge accounting. As of December
31, 2004 the Company had a total of USD 6.3 million outstanding with a fair market value of USD 0.8
million. As of December 31, 2003 the Company had a total of USD 8.4 million outstanding with a fair
market value of USD 0.7 million. Forward contracts are recorded at fair market value. Realized and
unrealized gain and losses are recorded as financial items. ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES Not applicable. 52




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PART II ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES None. ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 14.1Not applicable. 14.2Not applicable. 14.3Not applicable. 14.4Not applicable. 14.5 Use of Proceeds We have used the net proceeds from incurrence of various debts in Ocean Rig 2 AS, Ocean Rig
Norway AS and Ocean Rig ASA and from various private placements of shares in Ocean Rig ASA: (1) to
fund the construction and outfitting of Leiv Eiriksson and Eirik Raude; (2) to fund the
construction of the baredeck hulls for Rig No. 3 and Rig No. 4; (3) to make interest payments on
the secured notes and the floating rate loans due 2008 and other indebtedness; and (4) for general
corporate purposes. For a discussion of our capital investment program and capital resources, see
Item 5, Operating and Financial Review and ProspectsLiquidity and Capital Resources. ITEM 15. CONTROLS AND PROCEDURES We have evaluated the effectiveness of our disclosure control and procedures as of the end of
the period covered by this Report. This evaluation was conducted by management with the
participation of our Managing Director and Senior Vice President Accounting. A control system, no matter how well conceived and operated, can provide only reasonable, but
not absolute, assurance that the objectives of a control system are met. Further, any control
system reflects limitations on resources, and the benefits of a control system must be considered
relative to its cost. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any,
within Ocean Rig have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because of simple error or
mistake. There are inherent limitations to the effectiveness of any system of controls and
procedures, including the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and procedures can only
provide reasonable assurance of achieving their control objectives, and management necessarily
applies its judgment in assessing the costs and benefits of such controls and procedures. Based
upon our evaluation, our Managing Director and Senior Vice President Accounting have concluded that
because of the material weakness identified below, our disclosure controls and procedures where
not, as of the end of the period covered by this report, effective in providing reasonable
assurance of meeting the disclosure requirements. 53




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In connection with the audit of our consolidated accounts for the year ended December 31,
2004, and in light of new, recently issued interpretive guidance in relation to the assessment of
the operating effectiveness of our companys internal controls, our management and our independent
registered public accounting firm Ernst & Young AS have identified a material weakness (as
defined by the Public Company Accounting Oversight Board, Auditing Standard No., standard AS2) in
our internal control, including:  
    Reconciliation and revaluation of balance sheet accounts;
    Documentation of transactions between group companies; and
    Capacity and segregation of duties in the accounting department. In order to address the material weakness, the Company instituted a number of corrective
actions to ensure that the financial information and other disclosures included in this report were
complete and accurate in all material respects. Those actions included:  
    Additional internal resources to control and verify financial accounting items,
including balance sheet items, profit and loss accounts and disclosures; and
    A third party accounting consultant involved in preparation of financial statements
including our 20-F annual report. In addition, we are in the process of implementing a revised procedure for reconciliation and
revaluation of balance sheet accounts. We are also implementing a system for controls and reviews
of these procedures. In order to secure proper documentation of transactions between group
companies we are training accountants in The (Public) Companies Act regulating intra-group
transactions and improving the internal procedures related to this issue. The Company has made the
following organizational changes in the accounting department in order to secure segregation of
duties, increase the ownership of balance sheet accounts and focus on proper documentation of
transactions:  
    The group controller who previously was organized within the accounts department and
reporting to the Senior Vice President Accounting, is now reporting directly to the
Managing Director and to the audit committee;
    We have nominated individual rig accountants for each rig, charged with responsibility
for all accounting for each rig (and rig owning company) and reporting directly to the
Senior Vice President Accounting;
    We have centralized the accounting function in order to increase uniformity in working
processes. During 2004, the Company has implemented the following changes in our internal control over
financial reporting:  
    We have included in our internal control procedure a checklist for evaluating new and
existing companies in the group against functional currency indicators according to GAAP,
to ensure that the appropriate functional currency is selected for each of our companies
and that our bookkeeping and reporting procedures are designed to reflect the functional
currency for each company, and which sets forth the documentation to be provided in each
evaluation of functional currency.
    We have implemented in our internal control procedure a technical and methodical review
of our evaluation process and calculation models for impairment of long-lived assets,
performed by a minimum of two competent employees, and
    We have revised our procedures relating to communication with our independent auditors,
and have implemented a more stringent internal review process We discovered certain other deficiencies which were not material to our operations or
financial reporting either individually or in the aggregate. In each instance, we have undertaken
efforts to remediate any deficiencies identified. We are continuing our initiatives to implement
new systems where needed to improve disclosure controls and procedures over financial reporting. 54




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ITEM 16. AUDIT COMMITTEE FINANCIAL EXPERT; CODE OF ETHICS;
PRINCIPAL ACCOUNTANT FEES 16.1 Audit Committee Financial Expert Our board of directors has determined that no one member of the audit committee has all the
attributes of an audit committee financial expert as defined for purposes of this Item 16.1A. The
Company does not have an audit committee financial expert because the board considers that the
membership of the audit committee as a whole has sufficient recent and relevant financial
experience to discharge its functions. 16.2 Code of Ethics We have adopted the following code of ethics, which applies to employees, officers and
directors of our Company: As specified in our basic values, we compete strongly but fairly in the marketplace. We secure
business through well-trained and motivated people who are dedicated to customer service worldwide
in a safe and clean environment, and through the provision of high-quality services and products. We do not secure or retain business through illegal conduct or forms of unfair competition
such as price fixing, bribery, collusion with competitors and deceptive trade practices. Similarly,
our dealings with governments and public agencies are based on honest presentations and
discussions. Bribery in any form and other improper conduct are prohibited. Financial reporting must be carried out in an accurate and timely manner. Our employees should not accept gifts of more than token value, such as loans, excessive
entertainment or other substantial favours, from any company or individual doing business with us
or seeking to do so. Maintaining the highest level of business ethics depends on the honesty, judgment and common
sense of all our employees in ensuring that everyone is treated fairly. In most cases, an employees basic instincts will guide them in distinguishing right from
wrong. If an action feels wrong or questionable, it probably is. If an employee has any doubts
about an act, the best rule is not to do it. Should further guidance be required, or if employees
become aware of potential violations of this policy, they are encouraged to consult their
supervisor or the personnel department. Violations of this policy by any employee will result in disciplinary action, including
possible dismissal. 16.3 Principal Accountant Fees and Services Ernst & Young AS (E&Y) has served as our independent registered public accounting firm since
May 2003 and has audited the financial statements for the fiscal years 2003 and 2004.
PricewaterhouseCoopers AS (PwC) has audited the financial statements for the fiscal year 2002. The
following table summarizes the aggregate fees for professional audit services and other services
rendered by either Ernst & Young or PricewaterhouseCoopers AS during each of our last two fiscal
years. Year ended December 31,2004
    
    
    2003(in USD)Audit Fees
    
    
    324,144
    
    
    
    346,654Audit-Related Fees
    
    
    106,580
    
    
    
    47,891Tax Fees
    
    
    34,548
    
    
    
    2,286All Other Fees
    
    
    1,471
    
    
    
    31,379Total
    
    
    466,743
    
    
    
    428,210
 55




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Audit services. Audit services mainly consisted of the audit of the consolidated accounts as of and for the
years ended December 31, 2004 and 2003. E&Y has conducted the audit with respect to 2004 and 2003.
PwC conducted the audit with respect to our consolidated accounts for 2002 (including the
restatement thereof). Audit-related services. Audit-related services mainly consisted of services which are normally performed by the
external auditor in connection with the audit of our financial accounts, advisory services
regarding specific regulatory filings and reporting requirements, reviews of our consolidated
quarterly accounts and other agreed-upon services related to accounting. Tax services. Tax related services mainly consist of services regarding taxation of expatriates and
registration in foreign countries for corporate tax. Other services. Other services mainly consist of consultations related to internal control routines. Audit Committee Pre-Approval Policies and Procedures Ocean Rig is not currently subject to the pre-approval requirements promulgated pursuant to
the Sarbanes-Oxley Act of 2002 as described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X.
Notwithstanding, for the sake of good corporate governance, the Companys audit committee
pre-approved the engagement terms and fees of Ernst & Young for services performed for the fiscal
year ended December 31, 2004. 16.4 Exemptions from the Listing Standards for Audit Committees Not applicable. 16.5 Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not required. 56




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PART III ITEM 17. FINANCIAL STATEMENTS Not applicable. ITEM 18. FINANCIAL STATEMENTS Ocean Rig ASA and Subsidiaries INDEX TO FINANCIAL STATEMENTS Consolidated financial statements of Ocean Rig ASA and subsidiaries
    
    PageReport of Independent Auditors
    
    
    F-1Consolidated Statements of Operations for the years ended December 31,
    
    
    F-32002, 2003 and 2004Consolidated Balance Sheets as of December 31, 2003 and 2004
    
    
    F-4Consolidated Statements of Changes in Shareholders Equity for the years
    
    
    F-5ended December 31, 2002, 2003 and 2004Consolidated Statements of Cash Flows for the years ended December 31,
    
    
    F-62002, 2003 and 2004Notes to Consolidated Financial Statements
    
    
    F-7
 57




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders
of Ocean Rig ASA We have audited the accompanying consolidated balance sheet of Ocean Rig ASA and subsidiaries as of
December 31, 2004 and 2003, and the related consolidated statements of income, shareholders
equity, and cash flows for each of the two years in the period ended December 31, 2004. These
financial statements are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits. We conducted our audit in accordance with auditing standards generally accepted in Norway and the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an audit of the
Companys internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are appropriate in
the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Companys internal control over financial reporting. Accordingly we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Ocean Rig ASA and subsidiaries at December 31,
2004 and 2003, and the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 2004, in conformity with accounting principles
generally accepted in Norway, which differ in certain respects from accounting principles generally
accepted in the United States of America, as explained in Note 25 to the consolidated financial
statements. /s/ Ernst & Young AS Stavanger, Norway
March 31, 2005
except as to the information
presented in note 23, 24 and 25, for which the date is
June 9, 2005 F-1




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Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of Ocean Rig ASA: In our opinion, the accompanying consolidated statements of operations, of cash flows and of
changes in shareholders equity, present fairly, in all material respects, the results of
operations and cash flows of Ocean Rig ASA and Subsidiaries for the year ended December 31, 2002,
in conformity with generally accepted accounting principles in Norway. These financial statements
are the responsibility of the Companys management; our responsibility is to express an opinion on
these financial statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards in Norway and the standards of the Public
Company Accounting Oversight Board (United States), which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion. Accounting principles generally accepted in Norway vary in certain important respects from
accounting principles generally accepted in the United States. The application of the latter would
have affected the determination of consolidated net income for the year ended December 31, 2002 to
the extent summarized in Note 27 to the financial statements included in the Companys 2002 Form
20-F/A. The accompanying financial statements have been prepared assuming that Ocean Rig will continue as a
going concern. As discussed in Note 26 to the financial statements included in the Companys 2002
Form 20-F/A, Ocean Rig has suffered recurring losses from operations and has insufficient capital
that raise substantial doubt about its ability to continue as a going concern. Managements plans
in regard to these matters are also described in Note 26 to the financial statements included in
the Companys 2002 Form 20-F/A. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. PricewaterhouseCoopers AS Oslo, Norway
March 28, 2003 except as to the information
presented in Note 25 and 26 to the financial
statements included in the Companys 2002
Form 20-F/A, for which the date is June 25,
2003 and except as to note 29 to the financial
statements included in the Companys 2002
Form 20-F/A, for which the date is March 24, 2004
and except as to the conversion to a reporting currency
of USD as described in note 1 to the financial
statements in the Companys 2004 Form 20-F,
for which the date is June 9, 2005 F-2




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OCEAN RIG ASA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 Notes
    
    
    Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands, except for per share information)Operating revenues non-related parties
    
    
    22
    
    
    
    63,217
    
    
    
    58,462
    
    
    
    72,892Operating revenues related parties
    
    
    14
    
    
    
    5,352
    
    
    
    44,548
    
    
    
    15,671Total operating revenues
    
    
    
    
    
    
    68,569
    
    
    
    103,010
    
    
    
    88,563Operating expenses:Salaries and other personnel expenses
    
    
    5
    
    
    
    20,552
    
    
    
    17,063
    
    
    
    24,796Other operating and administrative expenses
    
    
    5
    
    
    
    48,608
    
    
    
    35,997
    
    
    
    41,604Depreciation, amortization and asset
impairment write-down
    
    
    3
    
    
    
    20,561
    
    
    
    225,048
    
    
    
    48,119Exploration expenses
    
    
    3
    
    
    
    
    
    
    
    8,005
    
    
    
    14,287Total operating expenses
    
    
    
    
    
    
    89,721
    
    
    
    286,113
    
    
    
    128,806Operating loss
    
    
    
    
    
    
    (21,152
    )
    
    
    (183,103
    )
    
    
    (40,243
    )Interest and other financial income
    
    
    6
    
    
    
    128,335
    
    
    
    114,323
    
    
    
    71,519Interest and other financial expenses
    
    
    7
    
    
    
    (39,761
    )
    
    
    (144,162
    )
    
    
    (132,297
    )Net financial income (expense)
    
    
    
    
    
    
    88,574
    
    
    
    (29,839
    )
    
    
    (60,778
    )Income (loss) before taxes
    
    
    
    
    
    
    67,422
    
    
    
    (212,942
    )
    
    
    (101,021
    )Income tax expense
    
    
    12
    
    
    
    (3
    )
    
    
    
    
    
    
    (1,266
    )Net income (loss)
    
    
    
    
    
    
    67,419
    
    
    
    (212,942
    )
    
    
    (102,287
    )Basic earnings/ (loss) per share
    
    
    13
    
    
    
    3.53
    
    
    
    (3.90
    )
    
    
    (1.53
    )Diluted earnings/ (loss) per share
    
    
    13
    
    
    
    2.48
    
    
    
    (3.90
    )
    
    
    (1.53
    )
   The accompanying notes are an integrated part of these consolidated financial statements. F-3




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##### 



OCEAN RIG ASA AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 AND 2004 Notes
    
    
    As of December 31,2003
    
    
    2004USD
    
    
    USD(amounts in thousands)AssetsRigs, machinery and equipment
    
    
    3
    
    
    
    1,093,730
    
    
    
    1,070,704Long-term receivables and other non-current assets
    
    
    11, 15
    
    
    
    10,325
    
    
    
    11,275Total non-current assets
    
    
    
    
    
    
    1,104,055
    
    
    
    1,081,979Trade receivables  non-related parties
    
    
    4
    
    
    
    2,526
    
    
    
    8,431Trade receivables  related parties
    
    
    14
    
    
    
    3,909
    
    
    
    342Other current receivables and deferred mobilization cost
    
    
    4
    
    
    
    7,657
    
    
    
    8,872Restricted cash
    
    
    2
    
    
    
    5,089
    
    
    
    6,922Cash and cash equivalents
    
    
    
    
    
    
    16,805
    
    
    
    44,145Total current assets
    
    
    
    
    
    
    35,986
    
    
    
    68,712Total assets
    
    
    
    
    
    
    1,140,041
    
    
    
    1,150,691Liabilities And Shareholders EquityShareholders EquityShare capital
    
    
    18
    
    
    
    97,565
    
    
    
    129,468Other equity
    
    
    18
    
    
    
    420,766
    
    
    
    360,078Total shareholders equity
    
    
    
    
    
    
    518,331
    
    
    
    489,546LiabilitiesConvertible bonds and loans
    
    
    8, 10
    
    
    
    139,623
    
    
    
    8,670Notes and loans
    
    
    8, 9
    
    
    
    449,250
    
    
    
    563,572Total long-term liabilities
    
    
    
    
    
    
    588,873
    
    
    
    572,242Accounts payable  non-related parties
    
    
    
    
    
    
    6,295
    
    
    
    7,207Accounts payable  related parties
    
    
    14
    
    
    
    326
    
    
    
    Short term bonds
    
    
    8
    
    
    
    4,000
    
    
    
    Short-term portion of long term bonds
    
    
    8
    
    
    
    
    
    
    
    23,100Accrued interest and other financial expenses
    
    
    8
    
    
    
    6,698
    
    
    
    7,081Accrued compensation share option program
    
    
    19
    
    
    
    
    
    
    
    14,814Taxes withheld and social security tax
    
    
    
    
    
    
    2,411
    
    
    
    4,584Advance payment from customers
    
    
    
    
    
    
    1,138
    
    
    
    22,312Investments in joint ventures
    
    
    14
    
    
    
    1,072
    
    
    
    1,059Accrued rig operating expenses
    
    
    
    
    
    
    7,146
    
    
    
    6,583Other accrued expenses
    
    
    
    
    
    
    3,751
    
    
    
    2,163Total current liabilities
    
    
    
    
    
    
    32,837
    
    
    
    88,903Total liabilities and shareholders equity
    
    
    
    
    
    
    1,140,041
    
    
    
    1,150,691
    F-4




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##### 



OCEAN RIG ASA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 Number of
    
    
    
    
    
    
    
    
    
    
    Total Share-Shares
    
    
    
    
    
    
    
    
    
    
    holdersOutstanding
    
    
    Share Capital
    
    
    Other Equity
    
    
    EquityUSD
    
    
    USD
    
    
    USD(amounts in thousands, except share data)Balance at December 31, 2001
    
    
    56,077,201
    
    
    
    201,414
    
    
    
    109,649
    
    
    
    311,063Write-down of nominal value
    
    
    
    
    
    
    (182,426
    )
    
    
    182,426
    
    
    
    Share issue, net of share issuance cost
    
    
    245,548,354
    
    
    
    31,300
    
    
    
    117,913
    
    
    
    149,213Exercise of warrants
    
    
    191,258,154
    
    
    
    25,871
    
    
    
    
    
    
    
    25,871Conversion of convertible debt
    
    
    3,142
    
    
    
    1
    
    
    
    1
    
    
    
    2Net income
    
    
    
    
    
    
    
    
    
    
    67,419
    
    
    
    67,419Translation differences
    
    
    
    
    
    
    
    
    
    
    126,421
    
    
    
    126,421Balance at December 31, 2002
    
    
    492,886,851
    
    
    
    76,160
    
    
    
    603,829
    
    
    
    679,989Share issuances, net of share issuance cost
    
    
    35,151,306
    
    
    
    5,086
    
    
    
    (348
    )
    
    
    4,738Conversion of convertible debt
    
    
    487,713
    
    
    
    71
    
    
    
    177
    
    
    
    248Balance before reverse share split 10:1 (1)
    
    
    528,525,870
    
    
    
    81,317
    

    
    
    603,658
    
    
    
    684,975Reverse share split 10:1
    
    
    (475,673,283
    )
    
    
    
    
    
    
    
    
    
    
    Balance after reverse share split 10:1
    
    
    52,852,587
    
    
    
    81,317
    
    
    
    603,658
    
    
    
    684,975Share issue, net of share issuance cost
    
    
    8,500,000
    
    
    
    12,391
    
    
    
    1,634
    
    
    
    14,025Conversion of convertible debt
    
    
    2,662,627
    
    
    
    3,857
    
    
    
    9,644
    
    
    
    13,501Net loss
    
    
    
    
    
    
    
    
    
    
    (212,942
    )
    
    
    (212,942
    )Translation differences
    
    
    
    
    
    
    
    
    
    
    18,772
    
    
    
    18,772Balance at December 31, 2003
    
    
    64,015,214
    
    
    
    97,565
    
    
    
    420,766
    
    
    
    518,331Share issue, net of share issuance cost
(reference is made to note 18)
    
    
    50,000
    
    
    
    72
    
    
    
    27
    
    
    
    99Conversion of convertible debt net of cost
related to the converted debt
    
    
    19,441,209
    
    
    
    31,831
    
    
    
    67,083
    
    
    
    98,914Compensation cost related to share option
program
    
    
    
    
    
    
    
    
    
    
    (11,943
    )
    
    
    (11,943
    )Net loss
    
    
    
    
    
    
    
    
    
    
    (102,287
    )
    
    
    (102,287
    )Translation differences
    
    
    
    
    
    
    
    
    
    
    (13,568
    )
    
    
    (13,568
    )Balance at December 31, 2004
    
    
    83,506,423
    
    
    
    129,468
    
    
    
    360,078
    
    
    
    489,546
   (1)
    
    The nominal value of the Companys shares was written down from NOK 30.0 to NOK 1.0 in February
2002. The accompanying notes are an integrated part of these consolidated financial statements. Reference is made to note 23  Subsequent Events. F-5




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##### 



OCEAN RIG ASA AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004 Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Cash flows from operating activities:Net income / (loss)
    
    
    67,419
    
    
    
    (212,942
    )
    
    
    (102,287
    )Adjustments to reconcile net income/(loss) to net cash
provided by (used in) operating activities:Depreciation, amortization (including amortization of
loan discount) and asset impairment write down
    
    
    45,527
    
    
    
    255,985
    
    
    
    67,446Gain / loss from sale of assets
    
    
    323Net unrealized foreign exchange gain / loss
    
    
    (126,606
    )
    
    
    (31,063
    )
    
    
    (4,530
    )Changes in operating assets and liabilities:Trade receivables related parties
    
    
    (595
    )
    
    
    3,322
    
    
    
    3,567Trade and other current receivables non related parties
    
    
    (7,873
    )
    
    
    (917
    )
    
    
    (7,120
    )Accounts payable related parties
    
    
    (2,925
    )
    
    
    (277
    )
    
    
    (326
    )Accounts payable non related parties
    
    
    (1,432
    )
    
    
    (444
    )
    
    
    912Other current liabilities
    
    
    5,960
    
    
    
    (6,018
    )
    
    
    36,380Net cash provided by (used in) operating activities
    
    
    (20,202
    )
    
    
    7,646
    
    
    
    (5,958
    )Cash flows from investing activities:Payments related to building contracts
    
    
    (273,197
    )
    
    
    
    
    
    
    Change in restricted cash
    
    
    35,152
    
    
    
    (3,796
    )
    
    
    (1,833
    )Proceeds from sale of fixed assets
    
    
    54,167
    
    
    
    Purchase of machinery, equipment and intangible assets
    
    
    (439
    )
    
    
    (16,657
    )
    
    
    (39,380
    )Net change in long-term receivables
    
    
    483
    
    
    
    139
    
    
    
    (366
    )Net cash used in investing activities
    
    
    (183,834
    )
    
    
    (20,314
    )
    
    
    (41,579
    )Cash flows from financing activities:Net proceeds from issuance of long-term debt and
convertible debt
    
    
    119,363
    
    
    
    4,483
    
    
    
    136,155Repayment of debt
    
    
    
    
    
    
    (14,139
    )
    
    
    (62,053
    )Net proceeds from issuance of common shares and
warrants
    
    
    81,266
    
    
    
    18,763
    
    
    
    185Net cash provided by financing activities
    
    
    200,629
    
    
    
    9,107
    
    
    
    74,287Effect of exchange rate changes on cash and equivalents
    
    
    4,238
    
    
    
    649
    
    
    
    590Net increase (decrease) in cash during the year
    
    
    831
    
    
    
    (2,912
    )
    
    
    27,340Cash and cash equivalents at beginning of year
    
    
    18,886
    
    
    
    19,717
    
    
    
    16,805Cash and cash equivalents at end of year
    
    
    19,717
    
    
    
    16,805
    
    
    
    44,145
    Reference is made to note 17  Supplemental Cash Flow Information F-6




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. Organization and Significant Accounting Policies General Ocean Rig ASA is a Norwegian public limited joint stock company that was incorporated on
September 26, 1996. Ocean Rig ASA and its subsidiaries (Ocean Rig or the Company) have been established as a
drilling contractor in the area of offshore exploration, development and production drilling with a
focus on deepwater and harsh-environment areas. Ocean Rig owns and operates two deepwater drilling rigs, Leiv Eiriksson and Eirik Raude. Basis of presentation The financial accounts have been prepared in accordance with Norwegian generally accepted
accounting principles (Norwegian GAAP). All entities in the group except for Ocean Rig ASA, have changed their functional currency
from Norwegian kroner (NOK) to US dollars (USD) as of January 1st, 2004. Beginning in 2004, the
economic circumstances for the operating entities have significantly changed with substantially all
revenues and a significantly increased proportion of expenses denominated in USD. In addition,
material assets are valued and mainly financed in USD. These changes in economic circumstances
indicate that the functional currency has changed. Ocean Rig ASA continues to use NOK as its
functional currency. The Ocean Rig group has also changed its reporting currency from NOK to USD
with effect from January 1st, 2004. Accordingly, the accounts are reported in USD and all figures
in this report are stated in USD unless otherwise specified. Figures relating to previous periods
have been converted to USD for comparison purposes using the exchange rate at the balance sheet
date for assets and liabilities. Revenues and expenses have been converted from NOK to USD on a
quarterly basis applying the average exchange rate for the quarter. Use of estimates The preparation of financial accounts in conformity with generally accepted accounting
policies in Norway requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial accounts and the reported amounts of revenues and expenses during the
reporting periods. The most significant estimates and assumptions relate to our fixed asset
impairment tests, the useful lives for depreciation of fixed assets, realization of deferred tax
assets, pension liabilities and to revenue and expense recognition. We evaluate these estimates on
an ongoing basis, utilizing historical experience, consultation with experts and other methods we
consider reasonable in the particular circumstances. Nevertheless, actual results may differ
significantly from our estimates. Basis of consolidation The consolidated accounts of Ocean Rig include the accounts of Ocean Rig ASA and its
subsidiaries (Ocean Rig AS, Ocean Rig Norway AS, Ocean Rig 1 AS, Ocean Rig 2 AS, Ocean Rig Canada
Inc, Ocean Rig Angola AS and Ocean Rig UK Ltd). All subsidiaries are wholly owned by Ocean Rig. All
material intercompany balances and transactions have been eliminated in the consolidation. Translation of the financial accounts of Ocean Rig ASA, which uses NOK as its functional
currency, is based on the balance sheet rate for assets and liabilities, and on the average
exchange F-7




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##### 



rate for revenues and expenses. Translation differences are accounted for as adjustments to
the shareholders equity in the consolidated balance sheet. Business segments Offshore drilling operations today represent the only business area of Ocean Rig. From the
inception of the Company until February 2002, its activities were focused on managing the
construction contracts and marketing the Companys rigs. In February 2002, the Company started
operations with one of its two rigs and by November 2002 both of its rigs were in operation. Revenue and expense recognition The majority of our revenues are derived from contracts including day rate based compensation
for drilling operations, fixed price mobilization fees and investment contributions. Revenues from
day rate based compensation for drilling operations are recognized in the period during which the
services are rendered and at the rates established in the contracts. Mobilization fees and
investment contributions are recognized over the estimated duration of the drilling contract.
Incremental cost of mobilization is deferred and recognized over the estimated duration of the
drilling contracts. To the extent that cost exceeds revenue to be recognized, it is expensed as
incurred. Investments are depreciated over the estimated useful lives of the asset. Demobilization
fees and expenses are recognized over the demobilization period. Other operating expenses are expensed when incurred. Classification of balance sheet items Assets intended for long-term ownership or use is classified as non-current assets. Other
assets are classified as current assets. Receivables with an original maturity within one year or
less are classified as current assets. Liabilities are classified in the same way. Cash and cash equivalents Cash and cash equivalents include cash, bank deposits and other short-term deposits with an
original maturity of three months or less at the date of purchase. Restricted cash Restricted cash includes cash pledged as collateral for bank guarantees, cash paid to the
retention account relating to the Fortis Loan Facility, collateral to other suppliers and to
employee tax withholding amounts. Foreign currency transactions Transactions in foreign currencies are recorded using the exchange rate at the transaction date.
Balances denominated in foreign currencies are translated using the exchange rates at the balance
sheet date. Foreign currency gains and losses are recorded as financial items when incurred. Derivative financial instruments The Group may from time to time use derivative financial instruments as part of its overall
risk management strategy to hedge economically exposure to foreign currency risk and interest rate
risk. Gains and losses on derivative financial instruments with the aim of reducing exposure on
expected future transactions are recognized as financial income/ expense based on market value. F-8




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##### 



Receivables The Companys receivables are recorded at cost less any provision for uncollectible accounts.
Provisions for uncollectible accounts are determined based on an evaluation of each individual
receivable which is overdue. The evaluation includes several factors, including the nature of the
dispute, if any, the financial condition of the debtor and any security. The receivable is written
off when a settlement is legally binding. Rigs, machinery and equipment Fixed assets are stated at cost, less accumulated depreciation and asset impairment
write-downs. Cost includes interest incurred during the construction period of the rigs based on prevailing
interest rates and weighted average capital expenditures. Expenditures for additions, significant
renewals and betterments are capitalized, whereas expenditures for maintenance and repairs are
expenses as incurred. When assets are sold or retired, their costs and related accumulated depreciation are removed
from the accounts and any gain or loss is included in net income. The estimated useful life of the
rigs could change resulting in different depreciation amounts or impairment in the future. All fixed assets are evaluated for impairment on the basis of discounted cash flows whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impaired asset is written down to its estimated fair value based on the best
information available. The value in use is determined based on the total of estimated discounted
future cash flows, excluding financing expenses and taxes. In determining impairment of fixed
assets, management must make significant judgments and estimates to determine if the discounted
cash flows generated by those assets are less than their carrying value, including determining the
appropriate discount rate to use. The data necessary for the execution of the impairment test is
based on managements estimates of future cash flows, which require estimating future day rates,
utilization rates and profit margins. Assumptions used in these cash flows are consistent with
internal forecasts. To support managements estimates, market outlook and day rate considerations
provided by an independent third party have been used. These considerations are mainly based on the
oil price in USD per barrel, oil and gas continuing to be the prime source of world energy, and
confirmation of expectations of discoveries of oil and gas in the Artic. In the first quarter 2003,
the Company recorded a write-down of Eirik Raude, based on this analysis. To the extent that circumstances change or assumptions used in discounted cash flow
calculations change, we could experience additional impairments in the future. Machinery and equipment include principally EDP and office equipment. Depreciation of rigs and drilling equipment is computed using the straight line method over
estimated useful lives. The cost of rigs has been categorized separately by its main components,
and useful lives have been determined for each component. The primary portion of the rigs is
depreciated over 30 years, while other components are depreciated over their useful lives, ranging
from 5 to 30 years. Average useful life for the rigs is 27 years. That part of the rigs cost which
relates to special periodic surveys, which take place every 5 years, is depreciated over the 5 year
period. EDP and office equipment are recorded at cost and depreciated on a straight-line basis over
the estimated useful lives ranging from 3 to 5 years. F-9




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##### 



Exploration-drilling cost The Company uses the successful efforts method to account for exploration drilling costs.
Such costs are temporarily capitalized under Rigs, machinery and equipment pending evaluation of
possible discoveries of oil and gas reserves. In the case of dry wells or discoveries that are
assessed not to be commercially recoverable, the exploration drilling costs are expensed. If discoveries are assessed to be commercially recoverable, capitalized costs are depreciated
under the unit-of-production method together with other development costs. Impairment of long-lived assets Fixed tangible and intangible assets are reviewed for impairment whenever events or changes
indicate that the book value may not be recoverable. If circumstances indicate that the carrying
amount of the assets may not be recoverable, the fair value of the assets is calculated. The value
in use is determined based on the total of estimated discounted future cash flows, excluding
financing expenses and taxes. If the fair value suggests that the carrying amount of the asset is
not recoverable, the carrying amount is written down to the estimated fair value. The Company considers whether there is a basis for reversing previous asset impairment
write-downs, using the same evaluation criteria as for impairment. If the review suggests that
there is a basis for reversal, the carrying amount is reversed to the estimated fair value, limited
to the carrying amount the asset would have been if no impairment had been recognized. Retirement benefit costs The Company has retirement benefit plans for employees, which are managed and funded through
Norwegian life insurance companies. The projected benefit obligations are calculated based on
actuarial methods, and compared with the value of pension assets. The net amount of projected
benefit obligations and pension assets (pension liabilities or prepaid pensions), adjusted for
unrecognized changes in estimates, is included under long-term liabilities or non-current assets.
Net pension costs (benefit earned during the period including interest on the projected benefit
obligation, less estimated return on pension assets and amortization of accumulated changes in
estimates) are included in salaries and other personnel expenses. Income Tax Expense Income tax expense consists of taxes payable and the net change in deferred taxes arising as a
result of temporary differences. Deferred taxes reflect the future tax payable as a result of the
activities for the period. Deferred taxes are calculated based on temporary differences between
financial and taxable values, less taxable losses carried forward. Deferred tax benefits are
assessed based on general principles for valuation of long term assets. Tax valuation allowance is
determined based on the likelihood of future utilization of the deferred tax benefits. Share and debt issuance costs Share issuance costs are deducted directly from shareholders equity. Debt issuance costs are
deferred and recorded under long-term receivables and other non-current assets. They are amortized
using the effective interest method over the term of the related debt. Debt discount is reported as
a direct reduction to the face amount of the debt, and amortized using the effective interest
method over the expected term of the related debt. Share options All costs related to grants of share options to employees are recorded in accordance with the
intrinsic value method. Under this method, the difference, if any, between the market value of the
underlying share at the grant date and the exercise price for the underlying share to be paid by
the employee, is treated as a compensation expense over the vesting period. F-10




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##### 



Any social security taxes related to the share options are accrued based upon the difference
between the market value of the underlying shares and the exercise price for the underlying share
at the end of each reporting period until the option is exercised. Debt issued with detachable warrants When debt is issued with detachable warrants a fair value calculation is made to allocate the
proceeds received between the loan and the warrants. The allocation is made based upon an estimate
of market value for the two securities at the date of issue. The value allocated to the warrants is
recorded as equity and reduction to the loan, and the reduction of the loan is amortized as other
financial expense over the term of the loan, using the effective interest method. Basic and diluted earnings (loss) per share Basic earnings (loss) per share are computed by dividing net earnings (loss) by the weighted
average number of common shares outstanding during the period. On a diluted basis, both net
earnings (loss) and shares outstanding are adjusted to assume the conversion of the Companys
potentially dilutive instruments. Convertible debt Convertible debt is recorded at its principal balance net of any discount or premium. Any
discount or premium is amortized over the term of the loan. Further, an evaluation is made whether
the embedded conversion feature within the debt instrument is beneficial (has intrinsic value) to
the holder. Any intrinsic value of the conversion feature is recognized as a reduction to the
convertible debt and an addition to equity. Discounts, premiums and intrinsic value of conversion
rights are amortized as other financial expense over the term of the loan, or through the date the
holder is able to convert the debt, using the effective interest method. Extinguishment of debt Any gain or loss from extinguishment of debt is recognized as a financial item at the time of
extinguishment. Investment in joint ventures The equity method is used for investments in joint ventures. Joint ventures are entities that
are jointly controlled and managed together with other non-related parties and none of the
individual ventures are in a position to unilaterally control the entity. Under the equity method,
the Companys share of profits and losses of joint ventures is included in the consolidated income
statement under other financial items. Reclassifications Certain amounts on the balance sheets and the statements of operations in prior year financial
accounts have been reclassified to conform to the current year presentation. NOTE 2. Restricted Cash Restricted cash includes cash pledged as collateral for bank guarantees to suppliers, cash
paid to the retention account relating to the Fortis Loan Facility and to employee tax withholding
amounts. Accrued interest and a portion of the instalment payment due under the Fortis Loan
Facility are paid monthly to the retention account. Payment of interest to the lenders is charged
to the retention account on a quarterly basis. F-11




---



##### 



Below are restricted cash items at December 31, 2003 and 2004: As of December 31,2003
    
    

    2004USD
    
    
    USD(amounts in thousands)Retention account  Fortis Loan Facility
    
    
    4,434
    
    
    
    5,638Amount pledged as collateral for bank
guarantees to suppliers and foreign exchange
deposit
    
    
    108
    
    
    
    493Taxes withheld from employees
    
    
    547
    
    
    
    791Total restricted cash
    
    
    5,089
    
    
    
    6,922
 NOTE 3. Rigs, machinery and equipment Depreciation expense was USD 20.6 million, 41.3 million (excluding asset impairment write-down
of USD 183.7 million) and USD 48.1 million for 2002, 2003, and 2004, respectively. The following table includes activity in long-lived assets for the years ended December 31, 2003
and 2004: Semi-submersiblerig and spare
    
    
    EDP/office
    
    
    Explorationequipment
    
    

    equipment
    
    
    drilling cost
    
    
    TotalUSD
    
    
    USD
    
    
    USD
    
    
    USD(amounts in thousands)Cost at December 31, 2003
    
    
    1,345,895
    
    
    
    1,548
    
    
    
    0
    
    
    
    1,347,443Additions in 2004
    
    
    25,093
    
    
    
    
    
    
    
    14,287
    
    
    
    39,380Unsuccessful exploration expenses
    
    
    
    
    
    
    
    
    
    
    (14,287
    )
    
    
    (14,287
    )Cost at December 31, 2004
    
    
    1,370,988
    
    
    
    1,548
    
    
    
    
    
    
    
    1,372,536Accumulated depreciation at
December 31, 2003
    
    
    252,445
    
    
    
    1,268
    
    
    
    
    
    
    
    253,713Depreciation in 2004
    
    
    48,019
    
    
    
    100
    
    
    
    
    
    
    
    48,119Accumulated depreciation,
write-down and expensed
exploration costs at December
31, 2004
    
    
    300,464
    
    
    
    1,368
    
    
    
    
    
    
    
    301,832Book value at December 31, 2004
    
    
    1,070,524
    
    
    
    180
    
    
    
    
    
    
    
    1,070,704
 In the first quarter 2003, the Company recorded a write-down of Eirik Raude amounting to
USD 183.7 million as a consequence of a change in the accounting standard in Norway regarding
impairment of long lived assets that became effective January 1, 2003. According to the new
accounting standard, a write-down is required if the total net estimated discounted future cash
flows are lower than the carrying amount of the asset. In previous years this impairment test was
based on undiscounted cash flows. The most important assumptions used as the basis for calculating
the write-down of Eirik Raude was a day rate of USD 200,000 per day, an average earnings efficiency
of 92%, a risk adjustment of 10% and a cost of USD 75,000 per day. The cash flow was discounted
using a real risk free discount rate of 3.0%. For Leiv Eiriksson the most important assumptions
used F-12




---



##### 



to evaluate the rig value was an average day rate of USD 190,000 per day, an average
earnings efficiency of 92%, a risk adjustment of 10% and a cost of USD 80,000 per day. The cash flow was discounted using a real risk free discount rate of 3.0%. No write-down was
recorded for Leiv Eiriksson. At the December 2004 year end a new impairment test was performed with the result that no
impairment write-down had to be recorded for either Eirik Raude or Leiv Eiriksson. The most
important assumptions used in evaluating the rig value for Eirik Raude are a day rate for year one
of USD 272,000, for years two to four a day rate of USD 300,000 and thereafter a day rate of USD
250,000. Other key assumptions are an average earnings efficiency of 94%, a risk adjustment of 10%
and a cost of USD 117,000 per day. The cash flow is discounted using a real risk free discount rate
of 2.22%. For Leiv Eiriksson the most important assumptions used to evaluate the rig value are a
day rate for year one of USD 240,000, for years two to four a day rate of USD 250,000 and
thereafter a day rate of USD 200,000. Other key assumptions are an average earnings efficiency of
94%, a real risk adjustment of 10% and a cost of USD 86,700 per day. The cash flow is discounted
using a risk free discount rate of 2.22%. As a result of the stronger market for drilling services, appraisals of our two rigs Leiv
Eiriksson and Eirik Raude have increased significantly over the year. For debt covenant purposes,
the Company obtains limited-use appraisals for the rigs on a regular basis from two independent
brokers to support the outstanding loans. Even though the most recent broker appraisals received
have shown a major increase in 2004, the values are lower than the book values of the rigs as of
December 31, 2004. The Companys view is that, in the absence of any sale of a comparable rig for a
substantial period of time, these estimates do not reflect the present earnings potential of the
rigs as demonstrated by recent contracts. The Company also believes that the new-build price for
comparable rigs would have increased significantly over recent years due to higher prices for
materials, increases in the US dollar value for equipment denominated in EUROS and the current high
backlog at shipyards. Exploration drilling costs are related to the Companys participation in the Weymouth well
through a farm out agreement with EnCana Corporation. The two other partners are EnCana and Shell.
Ocean Rigs total share of the cost was USD 22.3 million. In May 2004, Ocean Rig announced that the
Weymouth well, was unsuccessful and was being abandoned. As a result, the exploration cost was
expensed in 2003 and 2004. NOTE 4. Trade receivables and other current receivables and deferred mobilization cost 4.1 Trade receivables non-related parties As of December 31,2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Trade receivables non-related parties
    
    
    3,953
    
    
    
    9,945Provision for uncollectible accounts
    
    
    (1,427
    )
    
    
    (1,514
    )Net trade receivables non-related parties
    
    
    2,526
    
    
    
    8,431Total write-offs and provisions for receivables recognized in expense
    
    
    (1,427
    )
    
    
    (87
    )Provision for bad debt January 1
    
    
    
    
    
    
    (1,427
    )Increase during period, recognized in expense
    
    
    (1,427
    )
    
    
    (87
    )Decrease during period, recognized in expense
    
    
    
    
    
    
    Provision for bad debt as of December 31
    
    
    (1,427
    )
    
    
    (1,514
    )
 F-13




---



##### 



The Company has a few large customers which are mainly major oil companies. The credit
risk is therefore evaluated by the Company to be low. Reference is
made to Note 22  Segment
Information. The maximum loss from accounts receivable if customer failed completely to perform is
USD 5.4 million as of December 31, 2004. 4.2 Other current receivables and deferred mobilization cost As of December 31,2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Market value financial instruments
    
    
    717
    
    
    
    880Prepaid personnel expenses
    
    
    915
    
    
    
    512Receivables from joint venture
    
    
    3,885
    
    
    
    Deferred mobilization cost
    
    
    
    
    
    
    5,314Other current receivables
    
    
    2,140
    
    
    
    2,166Other current receivables
    
    
    7,657
    
    
    
    8,872
 NOTE 5. Salaries and other personnel expenses and Other Operating and Administrative Expenses 5.1 Salaries and other personnel expenses Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Salaries
    
    
    17,180
    
    
    
    11,837
    
    
    
    15,467Social security taxes
    
    
    2,049
    
    
    
    1,900
    
    
    
    2,468Net pension cost
    
    
    695
    
    
    
    804
    
    
    
    644Other personnel expenses
    
    
    3,151
    
    
    
    2,522
    
    
    
    6,217Capitalized as part of construction in progress (*)
    
    
    (2,523
    )
    
    
    
    
    
    
    Total salaries and other personnel expenses
    
    
    20,552
    
    
    
    17,063
    
    
    
    24,796
   (*)
    
    Expenses related to personnel working directly with the rig construction projects were
capitalized as part of construction in progress. 5.2 Other Operating and Administrative Expenses Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Legal fees
    
    
    2,467
    
    
    
    396
    
    
    
    829Other fees (including engineering and service personnel
related to preparation for operations)
    
    
    25,252
    
    
    
    9,257
    
    
    
    1,892Materials used related to preparation for operations
    
    
    12,097
    
    
    
    18,142
    
    
    
    Fees/ Rig operating expenses
    
    
    
    
    
    
    3,354
    
    
    
    26,609Travel and marketing
    
    
    1,338
    
    
    
    
    
    
    
    2,223Lay-up expenses (Baredecks No. 3 and 4)
    
    
    246
    
    
    
    1,867
    
    
    
    Office and administrative expenses
    
    
    6,399
    
    
    
    1,218
    
    
    
    9,964Bad debt provisions
    
    
    
    
    
    
    1,427
    
    
    
    87Loss on sale of assets
    
    
    282
    
    
    
    
    
    
    
    Other
    
    
    527
    
    
    
    336
    
    
    
    Total other operating and administrative expenses
    
    
    48,608
    
    
    
    35,997
    
    
    
    41,604
 F-14




---



##### 



NOTE 6. Interest and Other Financial Income Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Interest income
    
    
    2,749
    
    
    
    342
    
    
    
    445Foreign currency gains
    
    
    125,586
    
    
    
    113,981
    
    
    
    71,074Total
    
    
    128,335
    
    
    
    114,323
    
    
    
    71,519
 NOTE 7. Interest and Other Financial Expenses Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Interest expense (*)
    
    
    (62,651

    )
    
    
    (42,002
    )
    
    
    (46,770
    )Less: capitalized interest expenses
    
    
    39,820
    
    
    
    
    
    
    
    Amortization and write down of
capitalized debt issuance costs
and conversion rights
    
    
    (5,267
    )
    
    
    (7,909
    )
    
    
    (5,063
    )Foreign currency losses
    
    
    (11,606
    )
    
    
    (92,286
    )
    
    
    (78,721
    )Other financial expenses
    
    
    (57
    )
    
    
    (1,965
    )
    
    
    (1,743
    )Total
    
    
    (39,761
    )
    
    
    (144,162
    )
    
    
    (132,297
    )
   (*)
    
    Reference
is made to accrued interest in note 8  Notes and Loans and to paid interest in
note 17  Supplemental Cash Flow Information NOTE 8. Notes and loans As of December 31,Amount outstanding
    
    
    Accrued interest
    
    
    Security2003
    
    
    2004
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD
    
    
    USD(amounts in thousands)Note
    
    Short-term debt10.1
    
    Convertible bonds  2000 (*)
    
    
    
    
    
    
    23,100
    
    
    
    
    
    
    
    575
    
    
    NoneUSD 4 million short-term bonds
    
    
    4,000
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    InventoryTotal short-term bonds
    
    
    4,000
    
    
    
    23,100
    
    
    
    50
    
    
    
    575Long-term debt10.2
    
    Mandatory Convertible Bonds 2002/2005
    
    
    86,075
    
    
    
    1,896
    
    
    
    
    
    
    
    
    
    
    Noneless unamortized balance of warrants and conversion rights
    
    
    (5,328
    )
    
    
    (48
    )
    
    
    
    
    
    
    10.1
    
    Convertible bonds  2000 (*)
    
    
    58,876
    
    
    
    
    
    
    
    4,167
    
    
    
    
    
    
    None10.3
    
    7% Convertible bonds 2004/ 2007
    
    
    
    
    
    
    6,822
    
    
    
    
    
    
    
    253
    
    
    None10.4
    
    11% Callable bond 2004/ 2009
    
    
    
    
    
    
    114,322
    
    
    
    
    
    
    
    2,653
    
    
    None9.1
    
    1998 Notes and Loans (USD 350 million)
    
    
    350,000
    
    
    
    350,000
    
    
    
    2,481
    
    
    
    2,736
    
    
    1st priority Leiv Eiriksson 2nd priority Eirik Raude9.2
    
    Fortis facility (USD 99.25 million)
    
    
    99,250
    
    
    
    99,250
    
    
    
    
    
    
    
    864
    
    
    1st priority Eirik RaudeTotal long-term bonds and loans
    
    
    588,873
    
    
    
    572,242
    
    
    
    6,648
    
    
    
    6,506Total bonds and loans
    
    
    592,873
    
    
    
    595,342
    
    
    
    6,698
    
    
    
    7,081
    F-15




---



##### 



Booked value of assets pledged as security, as of December 31, 2004 (amounts in thousands): USDLeiv Eiriksson
    
    
    480,411Eirik Raude
    
    
    591,361
 As of December 31, 2004 the Companys debt had the following repayment structure: Payments due by PeriodLess than
    
    
    1 - 3
    
    
    3 - 5
    
    
    More than 5Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    yearsUSD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD(amounts in thousands)Convertible bonds - 2000
    
    
    23,100
    
    
    
    23,100
    
    
    
    
    
    
    
    
    
    
    
    Mandatory Convertible Bonds
    
    
    1,896
    
    
    
    1,896
    
    
    
    
    
    
    
    
    
    
    
    7% Convertible bonds 2004/ 2007
    
    
    6,822
    
    
    
    
    
    
    
    6,822
    
    
    
    
    
    
    
    11% Callable bond 2004/ 2009
    
    
    114,322
    
    
    
    
    
    
    
    
    
    
    
    114,322
    
    
    
    1998 Notes and Loans (USD 350 million)
    
    
    350,000
    
    
    
    
    
    
    
    
    
    
    
    350,000
    
    
    
    Fortis facility (USD 99.25 million)
    
    
    99,250
    
    
    
    
    
    
    
    
    
    
    
    99,250
    
    
    
    Total
    
    
    595,390
    
    
    
    24,996
    
    
    
    6,822
    
    
    
    563,572
    
    
    
    
 NOTE 9. 1998 Notes and Loans and Floating-Rate Loan Credit Facility 9.1. 1998 Notes and Loans At December 31, 2004 and 2003 Ocean Rig had long-term debt with a face value of USD 350
million related to financing of the construction projects for Leiv Eiriksson and Eirik Raude. It
was issued in May 1998 by Ocean Rig Norway, a wholly owned subsidiary of Ocean Rig ASA. The USD 350
million debt consists of 10-1/4% Secured Notes Due 2008 (the 1998 Notes) with a face value of USD
225 million and Floating Rate Secured Loans Due 2008 (the 1998 Loans) with a face value of USD
125 million. The interest rate in respect of the 1998 Loans is LIBOR + 4.75%. Average interest rate
was 6.5% in 2004. At December 31, 2004 the fair market value of the 1998 Notes was estimated to be approximately
103.25% of the principal amount, or USD 232.3 million based on quoted trading prices in the
secondary market. Ocean Rig ASA and the two rig companies owning Leiv Eiriksson and Eirik Raude have fully and
unconditionally guaranteed the 1998 Notes and the 1998 Loans on a joint and several basis. The 1998
Notes and the 1998 Loans, contain covenants typical in bond financing (including inter alia
restrictions on additional indebtedness, creation of liens, sale of assets and payments of
dividends). The 1998 Loans are fully redeemable at par. The 1998 Notes are fully redeemable at a
3.4% premium, reducing to 1.7% from June 1, 2005. The 1998 Notes and the 1998 Loans are secured by a first priority charge in respect of Leiv
Eiriksson and related assets and a second priority charge (subordinate to the USD 99.25 million
Fortis Facility, described below) on Eirik Raude and related assets. 9.2 Floating Rate Loan Facility  USD 99.25 million Fortis Facility In November 2001, the Group entered into an agreement with Nordea Bank Norge and Fortis Bank
(the Fortis Facility) for a six year term loan for an amount up to USD 99.25 million to refinance
existing debt. The Fortis facility was drawn down on June 28, 2002. The loan has a six year term
with final payment on February 28, 2008. The loan has no instalments but Ocean Rig is required to
pay on a monthly basis an amount which currently is approximately USD 1.43 million to a restricted
retention account. The amount in the restricted account can only be used to pay interest F-16




---



##### 



or repay
the loan. The loan may be repaid at any time without penalty and is secured by a first priority
security in Eirik Raude and related assets. Interest on the Fortis Facility accrues at a rate equal to LIBOR plus a margin of 2.75% and is
paid monthly to the retention account. The Fortis Facility includes covenants typical for bank
loans, including a requirement that the Company shall have a minimum balance of unrestricted cash
reserves and certain financial covenants such as maintaining a positive working capital and minimum
value adjusted equity. The average interest rate in 2004 was 4.2%. In May 2004, an amendment to the Fortis Agreement was agreed whereby approximately USD 7.21
million previously paid into retention would be released from the restricted account for the
purpose of improving the working capital at the time. Out of this amount, USD 3.74 million shall be
repaid into the restricted account over a period of 14 months. The balance shall be repaid into the
restricted account over the life of the Fortis Facility. Taken into consideration the amendments mentioned above the Company was in compliance with
all financial covenants at December 31, 2004. NOTE 10. Long term bonds 10.1 Convertible Bonds 2000 In 2000, convertible bonds with total face value of NOK 500 million were issued. These
comprise a 13% Subordinated Convertible Bond Issue 2000/2005 with a face value of NOK 200 million
and an 11% Subordinated Convertible Bond Issue 2000/2005 with a face value of NOK 300 million. No
security has been provided for the convertible loans. The loans and the associated interest are
subordinate to all the other debt of the Company and pari passu with all other unsecured
subordinated debt of the Company. During August and September 2002, NOK 107 million of the NOK 500 million loans were converted
to the new Mandatory Convertible Bond 2002 / 2005. In October 2004, a further NOK 83 million and NOK 170.5 million of the 13% and 11% Convertible
Bonds, respectively were voluntarily redeemed and prepaid in exchange for a corresponding
participation in the Companys new 11% Bond (described below). The combined outstanding amount
under the 13% and 11% Convertible Bonds as of December 31, 2004 was NOK 139.5 million (book value
USD 23.1 million). The 13% and 11% Convertible Bonds mature on May 25, 2005. All interest payments
due have been made according to the terms of the agreements. RemainingFace value
    
    
    
    
    
    
    Subscribed in
    
    
    loan balancevoluntarily
    
    
    Conversion
    
    
    Callable
    
    
    after(amounts in NOK thousands)
    
    redeemed
    
    
    ratio
    
    
    bond
    
    
    exchange
    
    
    StrikeNOK 200 million 13%
convertible bond
    
    
    83,000
    
    
    
    100
    %
    
    
    83,000
    
    
    
    51,000
    
    
    
    228.3NOK 300 million 11
% convertible bond
    
    
    170,500
    
    
    
    100
    %
    
    
    170,500
    
    
    
    88,500
    
    
    
    244.5Total converted
    
    
    253,500
    
    
    
    
    
    
    
    253,500
    
    
    
    139,500
 The bondholders have the right to convert the bonds to shares in Ocean Rig ASA at NOK
228.30 and 244.50 per share respectively at any time during the period from the issue of the loan
until May 25, 2005 (the redemption date of the bonds). At December 31, 2004, the fair market value of the 13% convertible bond of NOK 51 million and
the 11% convertible bond of NOK 88.5 million was estimated at 102.12% (NOK 52 million) and 101.40%
(NOK 89.7 million) respectively, based on estimated market value. F-17




---



##### 



10.2 Mandatory Convertible Bonds 2002 / 2005 The Company issued a zero coupon long term convertible bond in August and September 2002 with
a total face value of NOK 669.5 million. The loan matures in whole August 22, 2005, at which time
the full outstanding principal balance becomes due. The bondholders may convert the loan into
shares in the Company at a conversion rate of NOK 35 per share at any time during the term of the
loan. The bondholders are obligated to convert outstanding bonds at the maturity date of the loan
if such conversion is required by the Company, unless the Company undergoes debt negotiations or
bankruptcy proceedings have been initiated. The loan is subordinated to all other debt of the
Company, whether subordinated or not. Conversion of the Mandatory Convertible Bond 2004: (amounts in thousands)
    
    Norwegian kronerMandatory Convertible Bonds at December 31, 2003
    
    
    574,553Converted during 2004
    
    
    563,101Mandatory Convertible Bonds at December 31, 2004
    
    
    11,452
 From December 31, 2003 to November 3, 2004 bonds with a nominal value of NOK 95.238
million were converted into 2,721,083 shares in the Company. On November 3, 2004, the Company offered a collective conversion into shares at NOK 35 per
share in exchange for a 1% conversion fee. At the expiry of the offer period, investors
representing Mandatory Convertible Bonds with a nominal value of NOK 467,863 million, or 97.6% of
the outstanding bonds at the time of offer were converted into 13,367,495 shares. The outstanding amount of Mandatory Convertible Bonds on December 31, 2004 was NOK 11.452
million (book value USD 1.9 million). The outstanding loan balance at can be converted to 327,200
shares in the Company. The fair market value of the Mandatory Convertible Bonds was estimated at 83% representing NOK
9.5 million at December 31, 2004, based on estimated market value. Allocation of value to warrants and conversion rights: In determining the fair value of the warrants, the Company estimated, as of the issue date,
the probability for the warrants to become exercisable to be 20% and a total of NOK 47.8 million
were allocated to the fair value of the warrants. In addition NOK 26.8 million was allocated to the
intrinsic value of the conversion feature embedded in the bonds. The total value of 74.6 million
was recorded as a reduction to the debt balance and an addition to equity and is amortized as
interest expense over the term of the bonds. The remaining unamortized balance at December 31, 2003
and 2004 was NOK 35.6 million (USD 5.3 million) and NOK 0.3 million (USD 0.1 million) respectively.
During 2004 the balance was reduced by NOK 35.3 million (USD 5.2 million), of which NOK 17.9
million (USD 2.7 million) was recorded as other financial expenses and NOK 17.4 million (USD 2.6
million) was charged to equity as a consequence of debt conversions. 10.3 7% Convertible bond 2004 / 2007 The Company issued a 7% convertible bond with a face value of NOK 104.9 million (USD 15.2
million at historical exchange rate) in June 2004. The bonds are due in June 2007. The bonds were
redeemable at the Companys option at any time prior to December 22, 2004 at a price of 130% of the
issue price. The Company did not use the right to redeem any of the bonds. The bondholders may
convert the loan into shares in the Company at a conversion rate of NOK 19 per share at any time
during the term of the loan. Interest is payable in June each year. F-18




---



##### 



No security has been provided for the convertible bond. The loan shall rank pari passu with
all other unsecured subordinated debt of the Company. The loan agreement also imposes certain
structural restrictions on the Company. In October and December 2004, 60.7% or a total of NOK 63.7 million were converted into
3,352,631 shares. As of December 31, 2004 the outstanding amount was NOK 41.2 million (book value
USD 6.8 million). No interest payment has yet become due. The fair market value of the 7% convertible bond 2004/2007 was estimated at 153% representing
NOK 63 million at December 31, 2004, based on estimated market value. 10.4 Callable bonds 2004 / 2009 In October 2004 the Company issued senior unsecured bonds with a face value of NOK 630 million
11% (tranche 1  book value USD 104.3 million) and a face value of USD 10 million 11% (tranche 2)
to refinance short term debt maturities and improve working capital. Repayment is due in full in
October 2009. The bonds are callable at 103% up to October 15, 2005 and at 102.5% up to May 15,
2006. Annual interest payment is due each October. No security has been provided for the callable bonds. The loan shall rank pari passu with all
other unsecured subordinated debt of the Company. The loan agreement also imposes certain
structural restrictions on the Company. Proceeds of NOK 83 million and NOK 170.5 million of the proceeds were used to redeem 13% and
11% Convertible Bonds, respectively, and NOK 148.0 million was used to prepay the USD 20.5 million
bridge loan, incurred in May 2004. The balance of proceeds net of financing cost has been added to
the Companys working capital. At December 31, 2004 the fair market value of the callable bonds 2004/2009 was 102.25% for the
NOK 630 million tranche and 102% for the USD 10 million tranche, representing NOK 644.2 million and
USD 10.2 million respectively, based on estimated market value. NOTE 11. Debt Issuance Costs Capitalized debt issuance cost is amortized over the term of the related debt. Total
amortization and write-down of debt issuance costs amounted to USD 5.2 million, USD 3.3 million and
USD 2.4 million in 2002, 2003 and 2004, respectively. In addition, USD 1.1 million was recorded as
a reduction of equity as a consequence of debt conversions in the Mandatory Convertible Bonds 2002/
2005 and the 7% Convertible Bonds 2004/ 2009. The unamortized debt issuance costs, which is
included in long-term receivables and other non-current assets, amounts to USD 8.9 million and USD
9.5 million at December 31, 2003 and December 31, 2004 respectively. NOTE 12. Income Tax Expense A summary of taxable income/(loss), annual tax expense, temporary and permanent differences and the
calculation of deferred taxes is presented below. Allocation of income/(loss) before tax2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Norway
    
    
    67,453
    
    
    
    (203,476
    )
    
    
    (87,932
    )Outside Norway
    
    
    (31
    )
    
    
    (9,466
    )
    
    
    (13,089
    )Total
    
    
    67,422
    
    
    
    (212,942
    )
    
    
    (101,021
    )
 F-19




---



##### 



Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Current tax expense
    
    
    3
    
    
    
    
    
    
    
    1,266Deferred tax expense
    
    
    
    
    
    
    
    
    
    
    Taxes
    
    
    3
    
    
    
    
    
    
    
    1,266Foreign tax expense
    
    
    3
    
    
    
    
    
    
    
    1,266
 The temporary differences and tax loss carry forwards giving rise to deferred tax assets
(liabilities) were as follows as of December 31, 2003 and 2004. December 31,2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Accrued expenses
    
    
    1,113
    
    
    
    4,892Tax loss carry forwards
    
    
    552,507
    
    
    
    886,436Temporary differences giving rise to deferred tax assets
    
    
    553,620
    
    
    
    891,328Accelerated depreciation of assets for tax purposes
    
    
    (160,105
    )
    
    
    (275,620
    )Pension asset
    
    
    (1,049
    )
    
    
    (1,545
    )Temporary differences giving rise to deferred tax liabilities
    
    
    (161,154
    )
    
    
    (277,165
    )Net temporary differences and tax loss carry forwards
    
    
    392,466
    
    
    
    614,163
 The tax effect of temporary differences and tax loss carry forwards giving rise to
deferred tax assets (liabilities) were as follows as of December 31, 2003 and 2004. December 31,2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Accrued expenses
    
    
    312
    
    
    
    1,370Tax loss carry forwards
    
    
    147,498
    
    
    
    223,357Total deferred tax assets
    
    
    147,810
    
    
    
    224,727Accelerated depreciation of assets for tax purposes
    
    
    (44,829
    )
    
    
    (77,174
    )Pension asset
    
    
    (294
    )
    
    
    (432
    )Total deferred tax liabilities
    
    
    (45,123
    )
    
    
    (77,606
    )Net deferred tax asset
    
    
    102,687
    
    
    
    147,121Less valuation allowance
    
    
    (102,687
    )
    
    
    (147,121
    )Net deferred tax assets
    
    
    
    
    
    
    
 Based on the Companys historical taxable losses and the lack of certainty regarding the
size of future taxable profits, the realizability of the deferred tax assets is uncertain.
Accordingly, a valuation allowance has been recorded as of December 31, 2003 and 2004. Tax losses carry forwards in Norway and Canada per December 31, 2004 expire as follows: F-20




---



##### 



Norway
    
    
    CanadaYear
    
    As of December 31, 2004
    
    
    As of December 31, 2004USD
    
    
    USD(amounts in thousands)2008
    
    
    18,634
    
    
    
    2009
    
    
    40,425
    
    
    
    32,9662010
    
    
    105,971
    
    
    
    8,6852011
    
    
    143,970
    
    
    
    262,7472012
    
    
    27,430
    
    
    
    2013
    
    
    181,800
    
    
    
    2014
    
    
    136,386
    
    
    
    Indefinitely
    
    
    
    
    
    
    24,125Total
    
    
    654,616
    
    
    
    328,523
 The Company has tax loss carry forwards in both Canada and Norway related to operations
in Canada. In the table of tax effects of temporary differences and tax loss carry forward, the
deferred tax assets in Norway related to these tax loss carry-forwards are included at the
applicable statutory tax rate. Certain tax loss carry forwards in Norway has been disallowed in 2004. Tax loss carry
forwards have been adjusted accordingly. Reconciliation between income tax expenses computed at Norways statutory income tax rate of
28% for the years ended December 31, 2002, 2003 and 2004, to Ocean Rigs effective tax rate is as
follows: Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)28 % of profit / (loss) before taxes
    
    
    18,878
    
    
    
    (59,624
    )
    
    
    (28,286
    )Change in valuation allowance
    
    
    (20,362
    )
    
    
    58,907
    
    
    
    44,434Differences in tax rates
    
    
    (698
    )
    
    
    (4,073
    )
    
    
    1,266Effect of permanent differences
    
    
    
    
    
    
    2,189
    
    
    
    (467
    )Changes in assessment of tax loss
carry forwards and other
differences
    
    
    2,185
    
    
    
    2,601
    
    
    
    (15,681
    )Income tax expense
    
    
    3
    
    
    
    
    
    
    
    1,266
 F-21




---



##### 



NOTE 13. Earnings / (loss) per share Basic earnings / (loss) per share are computed by dividing net loss by the weighted average number
of common shares outstanding during the period. Earnings/(loss)
    
    
    Weighted
    
    
    DilutedEarnings/(loss)
    
    
    Weighted
    
    
    Basic
    
    
    applicable to
    
    
    average shares
    
    
    earnings /applicable to
    
    
    average shares
    
    
    earnings /
    
    
    diluted
    
    
    outstanding
    
    
    (loss) percommon shares
    
    
    outstanding
    
    
    (loss) per
    
    
    shares
    
    
    diluted
    
    
    share(numerator)
    
    
    (denominator)
    
    
    share amount
    
    
    (numerator)
    
    
    (denominator)
    
    
    amountUSD
    
    
    
    
    
    
    USD
    
    
    USD
    
    
    
    
    
    
    USDBasic and dilutedearnings/ (loss) pershare
    
    (Amounts in thousands, except for per share information)For the year ended
December 31, 2002:
    
    
    67,419
    
    
    
    19,074
    
    
    
    3,53
    
    
    
    68,490
    
    
    
    27,645
    
    
    
    2,48For the year ended
December 31, 2003:
    
    
    (212,942
    )
    
    
    54,570
    
    
    
    (3,90
    )
    
    
    (212,942
    )
    
    
    54,570
    
    
    
    (3,90
    )For the year ended
December 31, 2004:
    
    
    (102,287
    )
    
    
    66,890
    
    
    
    (1,53
    )
    
    
    (102,287
    )
    
    
    66,890
    
    
    
    (1,53
    )
 Basic earnings per share calculations are calculated based on the weighted average number
of common shares outstanding during the period. When calculating diluted earnings per share, all
potentially dilutive securities are included in the calculation. At December 31, 2003 and 2004
dilutive securities are excluded from the computation of diluted earnings per share due to their
antidilutive effect. All figures relating to earnings per share and diluted earnings per share are adjusted to
reflect the reverse split of the share (10:1) carried out May 21, 2003. Reconciliation of the numerator and denominator for calculation of basic and diluted earning /
(loss) per share is as follows: Numerator:Year ended December 31,2002
    
    
    2003
    
    
    2004Income (loss) applicable to common shares
    
    
    67,419
    
    
    
    (212,942
    )
    
    
    (102,287
    )Financial expense attributable to mandatory convertible debt
    
    
    1,071
    
    
    
    
    
    
    
    Income (loss) applicable for calculation of dilutive earnings (loss) per share
    
    
    68,490
    
    
    
    (212,942
    )
    
    
    (102,287
    )
 Denominator:Year ended December 31,2002
    
    
    2003
    
    
    2004Basic weighted average shares outstanding
    
    
    19,074
    
    
    
    54,570
    
    
    
    66,890Effect of dilutive securities:Mandatory convertible debt
    
    
    6,760
    
    
    
    
    
    
    
    Warrants
    
    
    1,811
    
    
    
    
    
    
    
    Diluted weighted average shares outstanding
    
    
    27,645
    
    
    
    54,570
    
    
    
    66,890
 Anti-dilutive effects corresponding to 2.0 million, 20.5 million and 17.7 million shares
in 2002, 2003 and 2004 respectively, are not considered in the above table. F-22




---



##### 



NOTE 14. Related Party Transactions East Coast Drilling Partnership (ECDP) From May 11, 2004, the bareboat charter for Eirik Raude was terminated, and the rig returned
to Ocean Rig 2 AS (OR2). In accordance with the partnership agreement ECDP exercised their right
to acquire certain assets fully financed by EnCana prior to the termination of the bareboat
charter. The acquisition consists of five portable electrical generators valued at about Canadian
dollars 7 million. On May 14, 2004 OR2 and EnCana mutually agreed, pursuant to the terms of the
partnership agreement, to increase OR2s equity share to 80 % of ECDP through an equity swap, where
EnCana reduced their participation from the same date to 20%. The 50% board representation and
voting rights remains unchanged. ECDP is a partnership formed by EnCana to provide energy related services to EnCana and other
companies. Until May 14, 2004, Ocean Rig, through OR2, had a 5% ownership interest in ECDP and
EnCana with subsidiaries had 95% ownership. Both parties had 50% board representation and voting
rights in the Partnership. On November 1, 2002, the drilling rig Eirik Raude was delivered on a
bareboat charter from its owner OR2 to ECDP. ECDP was responsible for all operations of the rig.
Revenues received by OR2 from ECDP amounted to USD 47.0 million in 2003. OR2s net negative
investment in ECDP was USD 1.0 million as at December 31, 2003. The loss related to OR2s interest
in ECDP amounted to USD 0.5 million in 2003. At December 31, 2003, Ocean Rig had accounts payable
to ECDP of USD 0.3 million. All outstanding balances in ECDP at May 14, 2004, were settled between the partners according
to their original ownership shares in ECDP. For the period January 1- May 14, 2004 revenues
received from ECDP by OR2 through the bareboat hire amounted to USD 15.7 million. OR2s net
negative investment in ECDP was USD 1.1 million at December 31, 2004. The loss related to OR2s
participation in ECDP amounted to USD 1.1 million for the period prior to May 14, 2004 at 5%
participation and a profit of USD 0.2 million for the rest of 2004 at 80% participation. The
negative balance at December 31, 2004 of USD 1.1 million represents OR2s best estimate of maximum
liability in relation to the incurred accumulated losses in ECDP. The activity in ECDP after May 14, 2004, is related to hiring out the five portable electrical
generators. The rental agreement is with EnCana and is fixed during the period Ocean Rig has agreed
to hold the 80% interest. At year end 2004 the generator business had generated a small profit.
Ocean Rig has a put option of its 80% owner interest to EnCana, which can be exercised at any time
after January 1, 2005. EnCana has a call option that can be exercised at any time after January 1,
2005. ECDP is accounted for in accordance with the equity method and is not consolidated. Ocean Rig
does not have a controlling interest. EnCana has 50% voting rights as well as control of the
administrative and accounting functions. EnCana also funds the acquisition of the generators and
necessary working capital. ECDPs financial accounts at December 31, 2004 showed the following: For the year ended
    
    
    For the year endedStatement of Operations
    
    December 31, 2003
    
    
    December 31, 2004USD
    
    
    USD(amounts in thousands)Revenue
    
    
    61,533
    
    
    
    26,948Operating expenses
    
    
    74,612
    
    
    
    28,316Net financial gain (loss)
    
    
    1,322
    
    
    
    (2,193
    )Profit (loss)
    
    
    (11,757
    )
    
    
    (3,561
    )
 F-23




---



##### 



Balance Sheet
    
    At December 31, 2003
    
    
    At December 31, 2004USD
    
    
    USD(amounts in thousands)Total assets
    
    
    3,216
    
    
    
    8,256Current liabilities
    
    
    2,994
    
    
    
    501Long-term liabilities
    
    
    21,461
    
    
    
    32,554Partners capital
    
    
    (21,239
    )
    
    
    (24,799
    )Total liabilities and partners capital
    
    
    3,216
    
    
    
    8,256
 Other Ocean Rig has issued a loan to Senior Vice President Operations Willy Torhaug. The balance
outstanding as of December 31, 2004 was $ 0.199 million (NOK 1.2 million). The loan was issued
prior to July 2002. The loan is interest bearing and has instalments over 5 years, ending 2008. In 2002 Ocean Rig had an agreement with Hydralift ASA related to the construction of the two
drilling rigs Leiv Eiriksson and Eirik Raude. One of the board members, Bjarne Skeie, sold his
shares in Hydralift ASA in December 2002 and as of December 31, 2002, Hydralift ASA is no longer
considered as a related party to the Company. NOTE 15. Pensions Ocean Rigs pension plans are overfunded, based on calculations from a third party independent
actuary, therefore the Company reports pension assets at year end 2003 and 2004 included in
Long-term receivables and other non-current assets. The Group has two retirement benefit plans for
employees managed and funded through Norwegian life insurance companies. Pension liabilities and
pension costs are calculated based on the actuarial cost method and the following assumptions were
used for 2002, 2003 and 2004: As of December 31,Weighted average assumptions: ,
    
    2002
    
    2003
    
    2004Discount rate
    
    6.0%
    
    5.5%
    
    5.0%Expected return on plan assets
    
    7.0%
    
    7.0%
    
    6.0%Expected rate of compensation increases
    
    3.5%
    
    3.5%
    
    3.0%Adjustments to the social security base
    
    3.0%
    
    3.0%
    
    3.0%Retirement pension increase rate
    
    2.5%
    
    2.5%
    
    2.5%
 Year ended December 31,2002
    
    
    2003
    
    
    2004Components of net periodic pension cost for :
    
    USD
    
    
    USD
    
    
    USD(amounts in thousands)Benefits earned during the year
    
    
    598
    
    
    
    753
    
    
    
    657Interest cost
    
    
    125
    
    
    
    154
    
    
    
    127Expected return on pension assets
    
    
    (177
    )
    
    
    (233
    )
    
    
    (248
    )Amortization of net accumulated changes in estimates
    
    
    18
    
    
    
    25
    
    
    
    4Other pension cost
    
    
    131
    
    
    
    105
    
    
    
    104Net periodic pension cost
    
    
    695
    
    
    
    804
    
    
    
    644
 F-24




---



##### 



The expected return on plan assets are based on historical returns as well as
expectations for future returns. The Companys prepaid pensions (over-funded plans) at December 31, 2003 and December 31, 2004
are included in long-term assets, and are specified below: As of December 31,2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Present value of accumulated benefit obligation
    
    
    (2,925
    )
    
    
    (2,545
    )Effect of projected salary increase
    
    
    (983
    )
    
    
    (935
    )Projected benefit obligation
    
    
    (3,908
    )
    
    
    (3,480
    )Fair value of plan assets
    
    
    4,143
    
    
    
    3,550Unrecognized net changes in estimates
    
    
    814
    
    
    
    1,483Prepaid pensions
    
    
    1,049
    
    
    
    1,553
 Fair value of benefit obligations As of December 31,Total2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Projected benefit obligation at January 1
    
    
    3,226
    
    
    
    3,908Actuarial loss/ (gain)
    
    
    (393
    )
    
    
    (1,543
    )Benefits earned during the year
    
    
    753
    
    
    
    657Interest cost on prior years benefit obligation
    
    
    154
    
    
    
    127Pensions paid during the year
    
    
    0
    
    
    
    (8
    )Exchange gain/(losses)
    
    
    168
    
    
    
    339Projected benefit obligation at December 31
    
    
    3,908
    
    
    
    3,480
 Fair value of plan assets As of December 31,Total2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Fair value of plan assets at January 1
    
    
    3,691
    
    
    
    4,143Actuarial loss/ (gain)
    
    
    (686
    )
    
    
    (424
    )Actual return on plan assets
    
    
    233
    
    
    
    (1,388
    )Company contributions
    
    
    724
    
    
    
    892Pension paid during the year
    
    
    0
    
    
    
    (8
    )Exchange gain/ (losses)
    
    
    181
    
    
    
    335Fair value of plan assets at December 31
    
    
    4,143
    
    
    
    3,550
 F-25




---



##### 



Status of pension plans reconciled to Consolidated Balance Sheet As of December 31,Total2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Funded status of plans at December 31
    
    
    235
    
    
    
    70Unrecognized net changes in estimates
    
    
    814
    
    
    
    1,483Total net prepaid pension recognized at December 31
    
    
    1,049
    
    
    
    1,553
 The Companys pension funds are managed by an independent life-insurance company that
invests the Companys funds according to Norwegian law. The law requires a low risk profile; hence
the majority of the funds are invested in government bonds and high-rated corporate bonds. The Companys estimate contribution to the pension plan for the fiscal year 2005 is USD
915,000. Expected benefits to be paid: The Company is solely responsible for the contribution to the pension plan. There will be no
payments the next 5 years, but USD 449,000 will be paid for the years 2010 to 2014. NOTE 16. Compensation to the Chief Executive Officer, the Board of Directors and the Companys
Auditor In 2004, the Chief Executive Officer (CEO) of Ocean Rig ASA received a salary of USD 256,008
(NOK 1,725,753) and other compensation of USD 1,077 (NOK 7,261). Pension expenses for 2004 amounted
to USD 63,720 (NOK 429,540). At December 31, 2004 the Chief Executive Officer held 500,000 share
options in Ocean Rig ASA with an exercise price for 83,333 options of NOK 10, for 83,334 options of
NOK 12, for 83,333 options of NOK 14 and for 250,000 options of NOK 18 (average exercise price was
NOK 15 for each option). The share options were granted during 2003 as part of the Companys share
option program to directors and management. The Chief Executive Officer did not exercise any
options during 2004. If the CEO is requested to resign from his position, he is entitled to
severance pay equal to 12 months salary with a 50% reduction of salary received from a new
employer. Reference is made to note 23  Subsequent Events. Each member of the Board elected for the period ending at the General Assembly in 2004
received a board remuneration of USD 44,504 (NOK 300,000), adjusted according to Board members
service period. Four members of the Board were granted in aggregate 3,200,000 share options in
Ocean Rig ASA in 2003, with an exercise price of NOK 15. The Executive Chairman was granted
1.800.000 share options on terms applicable to management. No options were exercised by Directors
during 2004. The Chairman of the board, Geir Aune, has throughout 2004 received compensation of USD 323,597
including board remuneration. Geir Aune has a temporary employment agreement with the Company for
the period January 1, to December 31, 2005, which entitles him to a compensation of USD 23,410 per
month in addition to board remuneration. Geir Aune can terminate the agreement with two months
notice and he is entitled to payment through the notice period. The Company can terminate the
contract at any time, however, the compensation is guaranteed through December 2005. If the Company
terminates the contract after July 31, 2005 the compensation is guaranteed for six months. F-26




---



##### 



Fees paid to the Companys auditor related to statutory audit amounted to USD 324,144 for
the Ocean Rig Group in 2004. Audit related fees amounted to USD 106,580, fees related to tax
services amounted to USD 34,548 and other fees amounted to USD 1,471. Of the total paid and accrued
fees, USD 323,847 relates to Ocean Rigs present auditors and USD 142,896 to the predecessor firm. NOTE 17. Supplemental Cash Flow Information As of December 31,Total2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Cash paid during the year for:Interest, net of amounts capitalized
    
    
    22,304
    
    
    
    41,974
    
    
    
    39,689Taxes
    
    
    3
    
    
    
    
    
    
    
    1,266
 NOTE 18. Shareholders Equity Common shares There is only one class of common shares, and each common share is entitled to one vote.
Dividends are proposed by the Board of Directors and subject to final approval by the Annual
General Meeting based upon the Companys distributable equity, financial condition, results of
operations and cash flows, as well as other factors the Board of Directors may deem relevant. In
May 2003, the par value of the Companys shares was increased from NOK 1.0 per share to NOK 10.0
per share as a result of a reverse split of shares in the ratio 10:1. As of December 31, 2004, the
Company had authorized 95,608,347 shares at par value NOK 10.0, of which 83,506,423 shares were
issued and outstanding. The Company had 6,255 registered shareholders (including nominee accounts) at December 31,
2004. Among the 20 largest shareholders (including nominee accounts), the following had ownership
of more than 1%: Shareholder
    
    Number of shares
    
    
    Ownership (%)1
    
    Sinvest Asa
    
    
    11,986,922
    
    
    
    14.35
    %2
    
    Goldman Sachs & Co  Equity Nontreaty
    
    
    10,733,804
    
    
    
    12.85
    %3
    
    Morgan Stanley & Co
    
    
    10,484,185
    
    
    
    12.55
    %4
    
    Credit Suisse First  (Europe)
    
    
    9,754,263
    
    
    
    11.68
    %5
    
    Goldman Sachs Intern  Equity House
    
    
    4,586,934
    
    
    
    5.49
    %6
    
    Odin Norden
    
    
    4,351,386
    
    
    
    5.21
    %7
    

    Deutsche Bank Ag Lon
    
    
    4,314,378
    
    
    
    5.17
    %8
    
    Teigen Frode C/O Thoresen Thai
    
    
    2,500,000
    
    
    
    2.99
    %9
    
    Morgan Stanley And C  Clients Safe Custody
    
    
    2,069,575
    
    
    
    2.48
    %10
    
    Odin Norge
    
    
    1,567,976
    
    
    
    1.88
    %11
    
    Credit suisse first  (europe) ltd./firms
    
    
    1,496,227
    
    
    
    1.79
    %12
    
    Fidelity Funds-Nordi  Brown Brothers
    
    
    1,399,200
    
    
    
    1.68
    %13
    
    Odin Offshore  As
    
    
    1,100,000
    
    
    
    1.32
    %14
    
    Goldman Sachs Intern  Equity Nontreaty
    
    
    1,013,413
    
    
    
    1.21
    %
 Share issuances for cash In January 2003, the Company issued 35,151,298 shares at an issue price of NOK 1.0 per share.
The share capital increased by NOK 35.2 million equalling net proceeds received. F-27




---



##### 



In May 2003, 8 shares were issued, increasing the numbers of shares from 528,525,862 to
528,525,870, in connection with a reverse split of shares at 10:1, reducing the total number of
shares outstanding from 528,525,870 to 52,852,587. In November 2003, the Company completed an equity offering issuing 8,500,000 shares at an
issue price of NOK 11.50 per share. The share capital increased by NOK 85.0 million to NOK
640,152,140 and net proceeds to the Company amounted to NOK 96.2 million. In February and March 2004, the Company issued 50,000 shares related to the exercise of
options in the Companys share option program. The share capital increased by NOK 0.5 million to
NOK 642,655,280 and net proceeds to the Company amounted to NOK 0.7 million. Shares owned by board members and senior management As of December 31, 2004 board members and senior management owns shares in Ocean Rig as
follows: Name
    
    Position
    
    SharesDirectorsJames F. Skouverøe
    
    Director
    
    
    7,568Morten Borge
    
    Director
    
    
    36,656Bjarne Skeie (1)
    
    Director
    
    
    Roy Mosvold
    
    Director
    
    
    338,583Senior ManagementThor Kristian Haugnæss
    
    President
    
    
    36
   (1)
    
    Bjarne Skeie controls directly or
indirectly 36.6% of the shares in Sinvest
ASA which owns 11,986,922 shares in
Ocean Rig ASA. He also controls Skeie Group
which owns 103,742 shares in Ocean Rig ASA NOTE 19. Share Based Incentive Programs Activity in the Companys share option plans for the three years ended December 31, 2002, 2003
and 2004 was as follows: Exercise price greater than
    
    
    Exercise price less than grant dategrant date share fair value
    
    
    share fair value
    
    
    TotalNumber
    
    
    Weighted average
    
    
    Number
    
    
    Weighted average
    
    
    Number
    
    
    Weighted averageof Shares
    
    
    exercise price
    
    
    of Shares
    
    
    exercise price
    
    
    of Shares
    
    
    exercise price(NOK)
    
    
    
    
    
    
    (NOK)
    
    
    
    
    
    
    (NOK)Outstanding at December 31, 2002
    
    
    
    
    
    
    
    
    
    
    5,545,500
    
    
    
    3.50
    
    
    
    5,545,500
    
    
    
    3.50Granted
    
    
    7,660,000
    
    
    
    15.00
    
    
    
    
    
    
    
    
    
    
    
    7,660,000
    
    
    
    15.00Cancelled
    
    
    
    
    
    
    
    
    
    
    (5,545,500
    )
    
    
    3.50
    
    
    
    (5,545,500
    )
    
    
    3.50Outstanding at December 31, 2003
    
    
    7,660,000
    
    
    
    15.00
    
    
    
    
    
    
    
    
    
    
    
    7,660,000
    
    
    
    15.00Exercised
    
    
    (50,000
    )
    
    
    13.80
    
    
    
    
    
    
    
    
    
    
    
    (50,000
    )
    
    
    13.80Granted
    
    
    
    
    
    
    
    
    
    
    140,000
    
    
    
    15.00
    
    
    
    140,000
    
    
    
    15.00Expired
    
    
    (80,000
    )
    
    
    15.75
    
    
    
    
    
    
    
    
    
    
    
    (80,000
    )
    
    
    15.75Outstanding at December 31, 2004
    
    
    7,530,000
    
    
    
    15.00
    
    
    
    140,000
    
    
    
    15.00
    
    
    
    7,670,000
    
    
    
    15.00
 F-28




---



##### 



At the Companys Ordinary General Meeting on May 16, 2003, a share based incentive
program (2003 Option Program) was approved for the issue of up to 8,800,000 options to the
management and Board members. 1,800,000 options were allocated to the Executive Chairman, 800,000
were allocated to each of the other Board members and 3,000,000 were allocated to management. Any
options outstanding under the plan authorized by the Companys Extraordinary General Meeting in
August 2002 were cancelled. Subsequent to the General Meeting on May 16, 2003, four of the Board members purchased options
under the 2003 Option Program to subscribe a total of 3,200,000 shares with strike price of NOK 15
for a total consideration of NOK 801,528 (USD 120,241). The options were fully vested at grant
date. The board members were able to recover the consideration paid for the options if they were
not re-elected and the options expired as a result. For management and the Executive Chairman options were granted in packages each consisting of
three options with an exercise price of NOK 10.00, NOK 12.00 and NOK 14.00, respectively, and three
options with an exercise price of NOK 18.00. The options vested over 12 months, with 40% becoming
exercisable by August 31, 2003, 20% by November 30, 2003, 20% by February 28, 2004 and 20% by May
31, 2004. The 1,800,000 options to the Executive Chairman were granted in the General Meeting for a
total consideration of USD 59,400, payable prorata according to the vesting schedule. Options to
management were granted on June 18, 2003. At grant date the options had no intrinsic value and
therefore, no compensation expense was recorded. As of December 31, 2004 a total of 2,670,000
options of the 3,000,000 options reserved for management, had been granted to management for a
total consideration of USD 90,420 payable prorata according to the vesting schedule. Management
option holders will be able to recover the consideration paid for the options if their employment
is terminated without cause and the options expire as a result. In the first quarter of 2004 two members of management exercised a total of 50,000 options,
with an average exercise price of NOK 13.80, upon leaving the company and another three members of
management were granted 140,000 options with an average exercise price of NOK 15.00. In an extraordinary general meeting on December 22, 2004 the options granted in 2003 and
expiring in December 2004 were extended until January 3, 2005. Further, the extraordinary general
meeting approved changes in the terms of the share option program allowing for cash settlement of
the share options. As a consequence of allowing for cash settlement the calculated liability from
the gain of the option program at December 22, 2004 of USD 11.9 million, was charged to equity. At
December 31, 2004, the liability was, due to lower share price, reduced to USD 11.4 million. The
reduction of USD 0.5 million was recorded as salaries and other personnel expenses. In addition, an
accrual of USD 3.4 million is made for related social security taxes at December 31, 2004. In the event that a transaction (change of control, merger, demerger, or sale of both drilling
rigs) is completed and the option holder resigns, all options become exercisable and vested. The
options are non-transferable. At December 31, 2004 the following options are granted and vested: Total optionsExecutive Chairman
    
    
    1,800,000Members of the Board
    
    
    3,200,000Management
    
    
    2,670,000
 F-29




---



##### 



Granted
    
    
    Vested
    
    
    Exercise price
    
    
    Last exercise dateChairman
    
    
    300,000
    
    
    
    300,000
    
    
    NOK 10
    
    Jan 3, 2005300,000
    
    
    
    300,000
    
    
    NOK 12
    
    Jan 3, 2005300,000
    
    
    
    300,000
    
    
    NOK 14
    
    Jan 3, 2005900,000
    
    
    
    900,000
    
    
    NOK 18
    
    Jan 3, 2005Members of the Board
    
    
    3,200,000
    
    
    
    3,200,000
    
    
    NOK 15
    
    Jan 3, 2005Management
    
    
    445,000
    
    
    
    445,000
    
    
    NOK 10
    
    Jan 3, 2005445,000
    
    
    
    445,000
    
    
    NOK 12
    
    Jan 3, 2005445,000
    
    
    
    445,000
    
    
    NOK 14
    
    Jan 3, 20051,335,000
    
    
    
    1,335,000
    
    
    NOK 18
    
    Jan 3, 2005
 The closing price of the shares at December 31, 2004 was NOK 28.50 which is higher than
the exercise price (average NOK 15). Accordingly, accrual for social security tax has been
recognized. At the Companys Extraordinary General Meeting on December 22, 2004, a new share based
incentive program (2004/2006 Option Program) was approved for the issue of options to aquire up to
6,200,000 shares to the management and Board members. 1,800,000 options were allocated to the
Executive Chairman, 800,000 were allocated to the Deputy Chairman, 600,000 in aggregate were
allocated to the other Board members and 3,000,000 were allocated to management and key employees.
None of these share options were granted at December 31, 2004. The new options will become fully
vested on December 29, 2005, and will expire on January 4, 2006. The exercise price of the new
options was at January 5, 2005 determined to be NOK 28.565 per share. In order to qualify for the
new options, participants who had options under the 2003 Option Program were obligated to retain
44.7% of their shares from exercising their options under the 2003 Option Program or, in the case
of exercise of 2003 options for cash settlement, reinvest 44.7% of their profit from such exercise
in Ocean Rig shares and retain such shares until the new options are vested. NOTE 20. Disclosures about Fair Value of Financial Instruments The Company is exposed to changes in foreign currency exchange rates and changes in interest
rates, which affect our results of operations and financial condition. The Company manages exposure
to changes in foreign currency exchange rates through its normal operating and financing
activities, as well as through the use of financial instruments. Generally, the Company may utilize
foreign exchange cash deposits, forward contracts and options to operationally hedge currency
exposure. These contracts do not qualify for hedge accounting. As of December 31, 2003 the Company
had forward exchange contracts of USD 8.4 million outstanding with a fair market value of USD 0.7
million. As of December 31, 2004 the Company had forward exchange contracts of USD 6.3 million
outstanding with a fair market value of USD 0.8 million recorded as other current receivables and
deferred mobilization cost. Forward contracts are recorded at fair market value. Realized and unrealized gain and losses
are recorded as financial items. The company has recorded a gain of USD 0.7 million and USD 0.8
million in 2003 and 2004 respectively. F-30




---



##### 



The following table summarizes the estimated fair value of the Companys financial instruments
as of December 31, 2003 and 2004: As of December 31,2003
    
    
    2004Carrying
    
    
    Fair
    
    
    Carrying
    
    
    FairAmount
    
    
    Value
    
    
    Amount
    
    
    ValueUSD
    
    
    USD
    
    
    USD
    
    
    USD(amounts in thousands)Cash and cash equivalents
    
    
    16,805
    
    
    
    16,805
    
    
    
    44,145
    
    
    
    44,145Restricted cash
    
    
    5,089
    
    
    
    5,089
    
    
    
    6,922
    
    
    
    6,922Forward contracts
    
    
    717
    
    
    
    717
    
    
    
    880
    
    
    
    880Short-term debt (1)
    
    
    4,000
    
    
    
    4,000
    
    
    
    23,100
    
    
    
    23,484Long-term debt
    
    
    449,250
    
    
    
    438,000
    
    
    
    563,572
    
    
    
    573,432Convertible loans
    
    
    139,623
    
    
    
    78,051
    
    
    
    8,670
    
    
    
    12,011
   (1)
    
    Short term debt in 2004 is convertible debt. Reference is made to note 10  Convertible
Bonds 2000. The amounts shown in the table are gross of unamortized discount and intrinsic value
(reference is made to note 8  Notes and Loans). The fair value of short term-debt is determined by reference to comparably rated debt
instruments at these dates. The fair value of long-term debt and convertible loans is determined by reference to the
market value of the Companys publicly traded debt instruments, the estimated market value or
comparably rated debt instruments at these dates. NOTE 21. Commitments and Contingencies Insurance The Company has obtained insurance for the assessed market value of the rigs. However, such
insurance coverage may not provide sufficient funds to protect the Company from all liabilities
that could result from its operations in all situations. Risks against which the Company may not be
fully insured or insurable include environmental liabilities, which may result from a blow-out or
similar accident, or liabilities resulting from reservoir damage alleged to have been caused by the
negligence of the Company. Moreover, the Companys insurance coverage may not protect against loss
of income. The occurrence of casualty or loss against which the Company is not fully insured could
have a material adverse effect on the Companys results of operations and financial condition. Environmental matters The Companys operations may involve the use or handling of materials that may be classified
as environmentally hazardous substances. Environmental laws and regulations applicable in the
countries in which the Company intends to conduct operations have generally become more stringent.
Such laws and regulations may expose the Company to liability for the conduct of or for conditions
caused by others, or for acts of the Company that were in compliance with all applicable laws at
the time such actions were taken. In recent years, increased concern has been raised over
protection of the environment. Offshore drilling in certain areas has been opposed by environmental
groups, and, in certain areas, has been restricted. F-31




---



##### 



To the extent new laws are enacted or other governmental actions are taken that prohibit or
restrict offshore drilling or impose additional environmental protection requirements that result
in increased costs to the oil and gas industry in general or the offshore drilling industry in
particular, the Companys business or prospects could be materially adversely affected. The
amendment or modification of existing laws and regulations or the adoption of new laws and
regulations curtailing or further regulating exploratory or development drilling and production for
oil and gas for political, economic, environmental, or other reasons could have a material adverse
effect on the Companys business, operating results or financial condition. The Company cannot
predict the extent to which future earnings may be affected by compliance with any such new
legislation or regulations. In addition, the Company may become subject to additional laws and
regulations as a result of future vessel operation or relocation or other operations of the Company
being conducted in jurisdictions in which it is not currently operating. The Company expects that it will be able to obtain some degree of contractual indemnification
from its customers in most of its drilling contracts against pollution and environmental damages,
but there can be no assurance that such indemnification will be enforceable in all instances, that
the customer will be financially capable in all cases of complying with its indemnity obligations
or that the Company will be able to obtain such indemnification agreements in the future. The Company expects to maintain insurance coverage against certain environmental liabilities,
including pollution caused by sudden and accidental oil spills. There can be no assurance, however,
that such insurance will be obtained, will continue to be available or carried by the Company or,
if available and carried, will be adequate to cover the Companys liability in all circumstances,
which could have a material adverse effect on the Companys business, operating results and
financial conditions. Litigation Except for the matters discussed below, we are not a party to any material litigation other
than routine legal proceedings incidental to our business.  
    Ocean Rig has received a counter claim from Halifax Shipyard relating to the last
invoice for the construction of Eirik Raude in response to a significantly higher claim
served by Ocean Rig. The Halifax Shipyard counter claim amounts to approximately USD 3
million. The counter claim is disputed by Ocean Rig.
    Ocean Rig has received a tort claim from Willi Garry, a former Fried & Goldman employee,
of approximately USD 1 million. Mr. Garry lost the related court case but has appealed.
Management evaluates the possibility of suffering any losses in relation to this counter
claim as remote. Leases The Company has operating lease commitments for equipment and office space that expire at
various dates. The Group has no leasing commitments after 2008. At December 31, 2004, the Group had
the following minimum non-cancellable leasing commitments: Operating Leases
    
    
Subleases IncomeUSD
    
    
    USD(amounts in thousands)2005
    
    
    649
    
    
    
    1432006
    
    
    224
    
    
    
    2007
    
    
    125
    
    
    
    2008
    
    
    92
    
    
    
    2009
    
    
    23
    
    
    
    Total
    
    
    1,113
    
    
    
    143
 F-32




---



##### 



The Company recorded rent expense for 2002, 2003 and 2004 in the amount of USD 0.6
million, USD 0.5 million and USD 0.8 million respectively. The Companys lease commitments are
related to office space, flats and equipment in Norway. In the lease contract for office space in Stavanger the Company has an option to prolong the
lease period for another 2 years. NOTE 22. Segment Information During 2004 Leiv Eiriksson has been drilling under drilling contracts with ExxonMobil and BP,
which kept the rig employed 7 months in 2004. The rig was idle for 5 months in 2004. Eirik Raude
has been drilling offshore Canada for EnCana Corporation, offshore Cuba for Repsol, offshore
Shetlands for BG International, and offshore Norway for Norsk Hydro. The rig underwent an upgrade
in Norway during a 2 months yard stay in the fourth quarter, to prepare for drilling offshore
Norway, in the North Sea and the Barents Sea. The rig has been employed all year, except for during
yard stay to do the upgrade. The two rigs Leiv Eiriksson and Eirik Raude, commenced operations in February 2002 and
November 2002, respectively. For the year ended December 31, 2002, 94% of consolidated revenues
came from operations of the Companys two drilling rigs under the respective drilling contracts.
For the year ended December 31, 2003, 96% of consolidated revenues came from operations of the
Companys two drilling rigs. For the year ended December 31, 2004, 100% of consolidated revenues
came from operations of the Companys two drilling rigs. During 2003 Leiv Eiriksson was drilling under a drilling contract with ExxonMobile offshore
Angola and Eirik Raude was operating offshore Canada on drilling contracts with EnCana Corporation,
PetroCanada and Imperial. The Companys investment in ECDP, which is accounted for using the equity method, is described
in note 14  Related Party Transactions. Operating segments are determined based on differences in the nature of their operations, and
is consistent with management reporting and decision-making. The accounting policies of the segments are the same as those described in the Summary of
Significant Accounting Policies. For investments see Note 3. F-33




---



##### 



The table below presents information about reported segments for the years ending December 31,
2002, 2003 and 2004: OffshoreDrilling Operations
    
    
    Other
    
    
    TotalUSD
    
    

    USD
    
    
    USDYear ended December 31, 2002Operating revenues non-related parties
    
    
    59,348
    
    
    
    3,869
    
    
    
    63,217Operating revenues related parties
    
    
    5,352
    
    
    
    
    
    
    
    5,352Total Operating revenues
    
    
    64,700
    
    
    
    3,869
    
    
    
    68,569Operating expenses
    
    
    64,714
    
    
    
    4,449
    
    
    
    69,160Depreciation
    
    
    20,523
    
    
    
    38
    
    
    
    20,561Operating profit/(loss)
    
    
    (20,537
    )
    
    
    (618
    )
    
    
    (21,152
    )Interest and financial income
    
    
    128,142
    
    
    
    193
    
    
    
    128,335Interest and financial expense
    
    
    (39,524
    )
    
    
    (237
    )
    
    
    (39,761
    )Income/ (loss) before income taxes
    
    
    68,081
    
    
    
    (662
    )
    
    
    67,422Total assets
    
    
    1,317,299
    
    
    
    2,627
    
    
    
    1,319,926
 Offshore DrillingOperations
    
    
    Other
    
    
    TotalUSD
    
    
    USD
    
    
    USDYear ended December 31, 2003Operating revenues non-related parties
    
    
    54,610
    
    
    
    3,852
    
    
    
    58,462Operating revenues related parties
    
    
    44,548
    
    
    
    
    
    
    
    44,548Total Operating revenues
    
    
    99,158
    
    
    
    3,852
    
    
    
    103,010Operating expenses
    
    
    49,706
    
    
    
    3,354
    
    
    
    53,060Depreciation, write-down
    
    
    225,007
    
    
    
    41
    
    
    
    225,048Exploration expenses
    
    
    
    
    
    
    8,005
    
    
    
    8,005Operating profit / (loss)
    
    
    (175,555
    )
    
    
    (7,548
    )
    
    
    (183,103
    )Interest and financial income
    
    
    114,323
    
    
    
    
    
    
    
    114,323Interest and financial expense
    
    
    (144,162
    )
    
    
    
    
    
    
    (144,162
    )Income/ (loss) before income taxes
    
    
    (205,394
    )
    
    
    (7,548
    )
    
    
    (212,942
    )Total assets
    
    
    1,138,712
    
    
    
    1,329
    
    
    
    1,140,041
 Offshore DrillingOperations
    
    
    Other
    
    
    TotalUSD
    
    
    USD
    
    
    USDYear ended December 31, 2004Operating revenues non-related parties
    
    
    72,892
    
    
    
    
    
    
    
    72,892Operating revenues related parties
    
    
    15,671
    
    
    
    
    
    
    
    15,671Total Operating revenues
    
    
    88,563
    
    
    
    
    
    
    
    88,563Operating expenses
    
    
    66,400
    
    
    
    
    
    
    
    66,400Depreciation
    
    
    48,119
    
    
    
    
    
    
    
    48,119Exploration expenses
    
    
    
    
    
    
    14,287
    
    
    
    14,287Operating profit / (loss)
    
    
    (25,956
    )
    
    
    (14,287
    )
    
    
    (40,243
    )Interest and financial income
    
    
    71,519
    
    
    
    
    
    
    
    71,519Interest and financial expense
    
    
    (132,297
    )
    
    
    
    
    
    
    (132,297
    )Income/ (loss) before income taxes
    
    
    (86,734
    )
    
    
    (14,287
    )
    
    
    (101,021
    )Total assets
    
    
    1,150,691
    
    
    
    
    
    
    
    1,150,691
 F-34




---



##### 



Geographic segment information offshore drilling operations: The revenue shown in the table below is revenue per country related to the Offshore Drilling
Operation segment: Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Norway
    
    
    
    
    
    
    
    
    
    
    13,283Canada
    
    
    5,352
    
    
    
    44,548
    
    
    
    15,671Angola
    
    
    59,348
    
    
    
    54,610
    
    
    
    37,868Other
    
    
    
    
    
    
    
    
    
    
    21,74164,700
    
    
    
    99,158
    
    
    
    88,563
 Essentially all long-lived assets are booked in Norwegian companies. Benignenvironment incl
    
    
    Harsh environmentCuba and West
    
    
    incl Canada, UK andAfrica
    
    
    Norway
    
    
    TOTALUSD
    
    
    USD
    
    
    USD(amounts in thousands)Year ended December 31, 2002Operating revenues non-related parties
    
    
    59,348
    
    
    
    
    
    
    
    59,348Operating revenues related parties
    
    
    
    
    
    
    5,352
    
    
    
    5,352External revenues
    
    
    59,348
    
    
    
    
    
    
    
    64,700Year ended December 31, 2003Operating revenues non-related parties
    
    
    54,610
    
    
    
    
    
    
    
    54,610Operating revenues related parties
    
    
    
    
    
    
    44,548
    
    
    
    44,548External revenues
    
    
    54,610
    
    
    
    44,548
    
    
    
    99,158Year ended December 31, 2004Operating revenues non-related parties
    
    
    49,813
    
    
    
    23,079
    
    
    
    72,892Operating revenues related parties
    
    
    
    
    
    
    15,671
    
    
    
    15,671External revenues
    
    
    49,813
    
    
    
    38,750
    
    
    
    88,563
 The revenue shown in the table below is from the Companys major customers and is related
to the Offshore Drilling Operation segment: Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Esso Exploration Angola
    
    
    37,349
    
    
    
    16,480
    
    
    
    14,369BP Exploration Angola
    
    
    14,783
    
    
    
    38,128
    
    
    
    23,499Cabinda Gulf oil Company
    
    
    7,216
    
    
    
    2
    
    
    
    East Cost Drilling Partnership (*)
    
    
    5,352
    
    
    
    44,548
    
    
    
    15,671Norsk Hydro
    
    
    
    
    
    
    
    
    
    
    6,786Repsol
    
    
    
    
    
    
    
    
    
    
    11,945BG International
    
    
    
    
    
    
    
    
    
    
    9,796Statoil
    
    
    
    
    
    
    
    
    
    
    6,497
   (*)
    
    Reference is made to note 14  Related Party Transactions. F-35




---



##### 



NOTE 23. Subsequent Events Settlement of options to Board of Directors and Management With reference to the 2003 Option Program, directors and members of management exercised all
7,670,000 outstanding options in exchange for shares or cash settlement on January 3, 2005. Exercised 2003
    
    
    Number of new
    
    
    New optionsName
    
    Options
    
    
    shares
    
    
    grantedGeir Aune
    
    
    1,800,000
    
    
    
    375,394
    
    
    
    1,800,000Jon R Aisbitt
    
    
    800,000
    
    
    
    800,000
    
    
    
    800,000Morten Borge
    
    
    800,000
    
    
    
    166,685
    
    
    
    150,000
    *J Frithjof Skouverøe
    
    
    800,000
    
    
    
    166,672
    
    
    
    150,000Roy Mosvold
    
    
    800,000
    
    
    
    800,000
    
    
    
    150,000
    *Kai Solberg-Hansen
    
    
    500,000Thor K Haugnæss
    
    
    600,000
    
    
    
    538,753
    
    
    
    900,000Christian Mowinckel
    
    
    200,000
    
    
    
    41,710
    
    
    
    200,000Robert M Warrack
    
    
    200,000
    
    
    
    200,000
    
    
    
    200,000Willy Tørhaug
    
    
    300,000
    
    
    
    31,282
    
    
    
    150,000Erling Meinich-Bache
    
    
    150,000Per-Hermod Rasmussen
    
    
    50,000
    
    
    
    7,820
    
    
    
    37,500Peter Oscar Andersen
    
    
    30,000
    
    
    
    30,000Other option holders
    
    
    640,000
    
    
    
    247,987
    
    
    
    1,150,000Options cancelled (marked *)
    
    
    
    
    
    
    
    
    
    
    (300,000
    )TOTAL
    
    
    7,670,000
    
    
    
    3,406,303
    
    
    
    5,387,500
   *
    
    Board members Morten Borge and Roy Mosvold were each granted 150.000 2004/06 options. They
resigned from the Board on January 31, 2005, and consequently all options granted were cancelled. 2,555,000 options were exercised in exchange for 2,555,000 shares at NOK 15 per share,
corresponding to a total subscription amount of NOK 38.3 million. 5,115,000 options were exercised
in exchange for cash settlement at NOK 28.5650 per share, the volume weighted average trading
price between December 29, 2004 and January 5, 2005, less the strike price (averaging NOK 15 per
share), corresponding to NOK 69.4 million. In order to qualify for the options under the new 2004/2006 Option Progeam, participants who
had options under the 2003 Option Program were obligated, in the case of exercise for shares, to
retain 44.7% of such shares or, in the case of exercise for cash, to reinvest 44.7% of their profit
in Ocean Rig shares and retain such shares until the new options are vested. The optionholders who
exercised their options for cash settlement, reinvested a total of NOK 24.3 million in Ocean Rig
shares, corresponding to 851,303 new shares at NOK 28.5650 per share. The option holders who exercised options for shares were granted 1,937,500 options in the new
2004/2006 Option Program (including 150.000 options to Roy Mosvold, since cancelled). The option
holders who exercised their options for cash settlement, were granted 3,210,000 options in the new
2004/2006 Option Program (including 150.000 options to Morten Borge, since cancelled). In addition,
540,000 new options have been granted to new option holders who did not participate in the 2003
Option Program. As a result of the above exercises, commitments, and allocations, a total of 3,406,303 new
shares have been issued and a total of 5,387,500 new options have been granted. F-36




---



##### 



The Executive Chairman, Geir Aune, committed to reinvest 44.7 % of his gain from cash
settlement in order to qualify for 1,800,000 million new options. Geir Aune, Morten Borge
(director) and J. Frithjof Skouverøe (director) and members of management committed together to
reinvest on average 35.6 % of their gain from cash settlement in order to qualify for 3,097,500
options in the new 2004/2006 Option Program. Increased capital. Reference is made to settlement of options to Board of Directors and Management. The issue of
3,406,303 new shares was registered February 20, 2005 in the Share Registry, thus increasing the
number of ordinary shares outstanding in Ocean Rig ASA from 83,506,423 to 86,912,726. Ocean Rig announced March 22, 2005 that investors had converted a further 635 Mandatory
Convertible Bonds with a nominal value of NOK 635,000 in the Mandatory Convertible Bond Issue
2002/2005 (ISIN NO 001015769.6) into 18,138 ordinary shares at NOK 35 per share. Furthermore, investors converted 7,000 Convertible Bonds with a nominal value of NOK 7,000,000
in the 7% Convertible Bond Issue 2004/2007 (ISIN NO 001 022953.7) into 368,421 ordinary shares at
NOK 19 per share. Ocean Rig announced May 23, 2005 that investors had converted a further 1,093 Mandatory
Convertible Bonds with a nominal value of NOK 1,093,000 in the Mandatory Convertible Bond Issue
2002/2005 (ISIN NO 001015769.6) into 31,228 ordinary shares at NOK 35 per share These conversions reduced the outstanding amount under the Mandatory Convertible Bond Issue
from NOK 11,452,000 to NOK 9,724,000 and reduced the outstanding amount under the 7% Convertible
Bond Issue from NOK 41,200,000 to NOK 34,200,000, and increased the number of ordinary shares
outstanding in Ocean Rig ASA from 86,912,726 to 87,330,513 Change in Board of directors On January 31, 2005, Morten Borge and Roy Mosvold notified the company about their decision to
resign as Board members with immediate effect, due to their participation in a project that
potentially could have conflicting interests with the company. All options granted under the 2005
option program were forfeited upon their resignation. Change in Management Kai Solberg-Hansen resigned from his position as Managing Director / CEO with Ocean Rig with
effect from January 10, 2005 for personal reasons. Solberg-Hansen is however, engaged as a
consultant for an interim period. The Board of Directors appointed Christian Mowinckel, Senior Vice
President Finance to the position as interim Managing Director effective from January 13, 2005. He
will continue to act as Senior Vice President Finance during the term of this interim appointment. ExxonMobil exercises option for Leiv Eiriksson Ocean Rig announced January 19, 2005 that Esso Exploration and Production Angola (Block 33)
Limited had exercised the option well to the contract for Leiv Eiriksson. The contract employed
the Leiv Eiriksson for two exploration wells for work offshore Angola, West Africa. The wells are
in Block 33 and drilling of these wells commenced in direct continuation from the previous contract
with BP in Block 31 offshore Angola. Contract for six wells for Leiv Eiriksson On March 29, Ocean Rig accounced a Letter of Intent for a six well firm contract, plus a one
year option, with Total for work offshore Angola. The Leiv Eiriksson is currently operating under
the contract offshore Angola (and potentially offshore Congo) for Total E&P .This contract is
expected to continue through the end of 2005. F-37




---



##### 



Total has an option to engage the Leiv Eiriksson for one additional year which must be exercised by
September 1, 2005; however, the option is non-exclusive  that is, we may contract the Leiv
Eiriksson to another company at any time during the option period so long as Total has not yet
exercised its option. Eirik Raude spill in the Barents Sea On April 12, a hydraulic hose ruptured and resulted in a spill of a limited volume of
hydraulic fluid into the sea. It is not believed that the spill had any significant impact on the
environment. A thorough investigation of these incidents has been completed and measures have been
implemented in order to reduce the possibility of further spills. The rig continued its drilling
program on May 4, 2005. Announcement of financial advisers On April 26, 2005 we announced the appointment of Morgan Stanley and DnB NOR Bank as financial
advisers to review options for refinancing the companys outstanding debt. On May 19, 2005 the
company announced a tender offer relating to our 101/4% Secured Notes Due 2008. The successful tender
(97% consent) will reduce the prepayment notice period from 30 days to 3 days. We hope to complete
the refinancing during the second quarter 2005. Repayment of Convertible Bonds 2000 On May 25, 2005, the Company repaid the full outstanding amounts of 11% and 13% NOK
Convertible Bonds 2000 plus interest due. NOTE 24. Liquidity Assuming both rigs are on contract for the entire year of 2005 at day rates already
contracted and operational performance is at the same level as the 2004 actual performance, the
company believes that revenues for 2005 will provide sufficient cash flow for working capital
(including payment of all interest costs and repayment of maturing debt) and budgeted capital
expenditure. Accordingly, the accounts have been prepared on a going concern basis . With cash and cash equivalents amounting to USD 44.1 million at the end of 2004 and based
on the projected cash flows incorporating the assumptions above, the Company will not be required
to raise new debt or refinance its existing debt during 2005. However, the Company may elect to
refinance the companys debt if it identifies opportunities to refinance on substantially improved
terms. The Company makes the provision that actual operating results may vary from budget assumptions
due to factors including lower utilization or operating regularity of the rigs, higher operating
costs than expected or loss of revenue from accidents or breach of contract, or other unforeseen
event. The Company can not give any guarantees in connection with future generation of cash flows. NOTE 25. Differences between Generally Accepted Accounting Principles in Norway and the United
States The financial accounts are prepared in accordance with the generally accepted accounting
principles in Norway (Norwegian GAAP), which differ in certain respects from accounting
principles generally accepted in the United States (US GAAP). F-38




---



##### 



The major differences between Norwegian GAAP and US GAAP for Ocean Rig are summarized below: Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Net income/ (loss) in accordance with Norwegian GAAP
    
    
    67,419
    
    
    
    (212,942
    )
    
    
    (102,287
    )Share options plan (a)Accrued share compensation expense
    
    
    10
    
    
    
    (489
    )
    
    
    (14,849
    )Reversal of Norwegian GAAP accrued social security tax
    
    
    (1
    )
    
    
    142
    
    
    
    3,218Reversal of Norwegian GAAP shares compensation expense
    
    
    
    
    
    
    
    
    
    
    (455
    )Write-down of rig value (b)
    
    
    
    
    
    
    183,673
    
    
    
    Difference in depreciation of rig due to write-down and other
    
    
    
    
    
    
    (6,799
    )
    
    
    (4,367
    )Troubled debt restructuring (c )
    
    
    3,411
    
    
    
    (1,962
    )
    
    
    (983
    )Debt modification expense (d)
    
    
    
    
    
    
    
    
    
    
    246Tax effect of US GAAP adjustments (e)
    
    
    
    
    
    
    
    
    
    
    (263
    )Net income/ (loss) in accordance with US GAAP
    
    
    70,839
    
    
    
    (38,377
    )
    
    
    (119,740
    )Basic earning per share according to US GAAP
    
    
    3.71
    
    
    
    (0.70
    )
    
    
    (1.79
    )Diluted earning per share according to US GAAP
    
    
    2.56
    
    
    
    (0.70
    )
    
    
    (1.79
    )
 As of December 31,2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Shareholders equity in accordance with Norwegian GAAP
    
    
    518,331
    
    
    
    489,546Share options (a)Share compensation expense
    
    
    (479
    )
    
    
    (15,328
    )Share options outstanding
    
    
    
    
    
    
    5,094Reversal of Norwegian GAAP accrual for cash settlement
    
    
    
    
    
    
    11,943Reversal of Norwegian GAAP share compensation expense
    
    
    141
    
    
    
    2,904Write-down of rig value (b)
    
    
    183,673
    
    
    
    183,673Difference in depreciation of rig due to write-down and other
    
    
    (6,799
    )
    
    
    (11,166
    )Troubled debt restructuring (c )
    
    
    1,449
    
    
    
    466Convertion of troubled debt to shareholders equity, net of tax
    
    
    
    
    
    
    (676
    )Debt modification expense (d)
    
    
    
    
    
    
    246Translation differences US GAAP adjustments
    
    
    10,508
    
    
    
    9,375Tax effect of US GAAP adjustments (e)
    
    
    
    
    
    
    (263
    )Shareholders equity in accordance with US GAAP
    
    
    706,824
    
    
    
    675,814
 F-39




---



##### 



The change in shareholders equity in accordance with US GAAP is as follows: As of December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Beginning of year
    
    
    311,063
    
    
    
    683,792
    
    
    
    706,824Comprehensive income/ (loss):Net income / ( loss) in accordance with US GAAP
    
    
    70,839
    
    
    
    (38,377
    )
    
    
    (119,740
    )Translation differences US GAAP adjustments
    
    
    383
    
    
    
    10,125
    
    
    
    (1,133
    )Translation differences Norwegian GAAP
    
    
    126,421
    
    
    
    18,772
    
    
    
    (13,568
    )Comprehensive income/ (loss)
    
    
    197,643
    
    
    
    (9,480
    )
    
    
    (134,441
    )Share issuances, net of share issuance expense
    
    
    175,086
    
    
    
    32,512
    
    
    
    98,337Share options outstanding
    
    
    
    
    
    
    
    
    
    
    5,094End of year
    
    
    683,792
    
    
    
    706,824
    
    
    
    675,814
 The components of shareholders equity in accordance with US GAAP are as follows as of
December 31, 2002 and 2003: As of December 31,2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Share capital
    
    
    97,565
    
    
    
    129,468Additional paid-in capital
    
    
    618,648
    
    
    
    690,177Accumulated deficit
    
    
    (125,593
    )
    
    
    (245,333
    )Accumulated other comprehensive income (translation differences)
    
    
    116,204
    
    
    
    101,502Total
    
    
    706,824
    
    
    
    675,814
 a) Employee options As discussed in Note 19, the Company cancelled the options outstanding under all previous
option plans and adopted a new plan in 2003. In an extraordinary General Meeting in December 2004,
the plan was extended until January 3, 2005. For additional information see Note 19. Under US GAAP, the plan is accounted for as a variable plan, in accordance with Accounting
Priciples Board opinion (APB) No. 25 Accounting for Stock Issued to Employees and Financial
Accounting Standards Board Interpretation (FIN) No. 44, Accounting for Certain Transactions
Involving Stock Compensation. Under variable plan accounting the compensation expense is measured
and determined as the difference between the fair value of the underlying stock and the exercise
price of the option (the intrinsic value of the options) at each balance sheet date until the
option is exercised. The compensation expense is accrued and expensed as salary over the service
period with an offset to equity or liabilities for options expected to be settled in shares or
cash, respectively. According to US GAAP the social security tax is not to be accrued for until the
options are exercised. No compensation expense was recorded under Norwegian GAAP at the grant date, however, it
requires the Company to accrue for social security tax. The basis for the accrual is the intrinsic
value of the options at the balance sheet date multiplied with the social security tax rate. The
cost is expensed as salary expenses over the service period. As a consequence of the change in the
option program at December 22, 2004 allowing for a cash settlement, a liability of USD 11.9 million
was charged to equity for Norwegian GAAP. At year-end the liability was reduced to USD 11.4 million
and the reduction of USD 0.5 million was recorded as salary expense. F-40




---



##### 



In accordance with Statement of Financial Accounting Standards no. 123 (SFAS 123) pro-forma
information is required to be shown based upon a calculation of the fair value of the options
granted estimated using an option-pricing model. The Companys pricing model is based upon the
Black-Scholes model using the following assumptions: Year ended December 31,2002
    
    
    2003
    
    
    2004Expected volatility
    
    
    50
    %
    
    
    55
    %
    
    
    55
    %Risk-free interest rate
    
    
    6.04
    %
    
    
    2.10
    %
    
    
    2.10
    %Expected life (years)
    
    
    3.0
    
    
    
    1.6
    
    
    
    1.6Expected dividend rate
    
    
    
    
    
    
    
    
    
    
    
 The weighted average grant date fair value per option was USD 0.13 in 2003 and USD 1.05
for options granted in 2004. The following table summarizes the pro-forma effect of share compensation measured following
the fair-value method: Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(Amounts in thousands, except per share data)Net income/ (loss) as reported  US GAAP
    
    
    70,839
    
    
    
    (38,377
    )
    
    
    (119,740
    )Reversal of APB 25 expense
    
    
    (10
    )
    
    
    489
    
    
    
    14,849Add: Compensation expense that would
have been included in net income had
the Company adopted the accounting
provisions of SFAS No. 123 for all
awards
    
    
    (2,498
    )
    
    
    (710
    )
    
    
    (444
    )Pro-forma net income/ (loss)  US GAAP
    
    
    68,331
    
    
    
    (38,598
    )
    
    
    (105,335
    )Basic earnings per share, as reported
    
    
    3.71
    
    
    
    (0.70
    )
    
    
    (1,79
    )Basic earnings per share, pro forma
    
    
    3.58
    
    
    
    (0.71
    )
    
    
    (1,57
    )Diluted earnings per share, as reported
    
    
    2.56
    
    
    
    (0.70
    )
    
    
    (1,79
    )Diluted earnings per share, pro forma
    
    
    2.51
    
    
    
    (0.71
    )
    
    
    (1,57
    )
 For number of shares used in the per share calculations, reference is made to note 13. b) Write-down of rig value Under US GAAP, an asset is tested for impairment based on an undiscounted cash flow. If the
carrying amount of the asset is higher than the impairment value, the asset should be written down
to fair value, which is based on estimated discounted future cash flows. Under Norwegian GAAP
effective January 1, 2003, the impairment test is based on estimated discounted future cash flows
(fair value). If the fair value is lower than the carrying amount of the asset the asset is written
down to the fair value. c) Troubled debt restructuring Under US GAAP, if a creditor for economic or legal reasons related to a debtors financial
difficulties grants a concession to the debtor that it would not otherwise consider, a
restructuring of debt constitutes a troubled debt restructuring. US GAAP defines a specific
methodology to determine if a creditor has granted a concession. Based on this, the exchange of a
portion of the USD short-term loan and the Convertible Bonds 2000 into the Mandatory Convertible
Bond 2002 qualifies as a troubled debt restructuring. F-41




---



##### 



Under Norwegian GAAP, the exchange has been accounted for as an extinguishment of debt, resulting
in a loss of USD 2.7 million. This loss is reversed to reconcile to US GAAP. Under US GAAP, the
troubled debt restructuring resulted in a gain of USD 0.7 million (earnings per share; Basic 0.04,
Diluted 0.03). These deferred amounts were recorded as a reduction to the loan balance under US
GAAP. Subsequently, the deferred amount is amortized to the interest expense using the straight
line method, which approximates effective interest method, to increase the carrying value of debt
to the undiscounted future cash payments for the Mandatory Convertible Bond 2002. As a result,
interest expense for the period from the date of the exchange until December 31, 2002 was USD 0.1
million less according to US GAAP than under Norwegian GAAP. During 2004, the majority of the debt instruments classified as troubled debt were converted
into shareholders  ́ equity. The corresponding unamortized debt restructuring cost has been recorded
net of the tax benefit of USD 263,000, as part of paid-in capital. d) Debt modification costs As discussed in note 10, the company issued senior unsecured bonds with a face value of NOK
630 million, and USD 10 million respectively, in October 2004. Of the total proceeds, NOK 253.5
million were used to redeem Convertible Bonds issued in 2000. Under Norwegian GAAP the repayment was considered an extinguishment of debt and fees relating
to the bonds issued in 2004 were capitalized as debt issuance cost. Costs related to the repayment
of Convertible Bonds 2000 were expensed. Under US GAAP the use of proceeds to redeem old debt were considered a minor modification of
debt instruments (in accordance with EITF 96-19). All third party costs relating to debt
modification are expensed, and conversion fees paid to bond-holders along with remaining
unamortized debt issuance cost are amortized over the term of the modified debt. The 2004
adjustments reflect a reversal of the Norwegian GAAP treatment and entries necessary for a debt
modification (under US GAAP). e) Tax effect of US GAAP adjustments The tax effect of temporary differences on US GAAP adjustments giving rise to deferred tax
assets (liabilities) were as follows as of December 31, 2003 and 2004. December 31,2003
    
    
    2004USD
    
    
    USD(amounts in thousands)Accrued expenses
    
    
    (570
    )
    
    
    (881
    )Accelerated depreciation of assets, including
capitalized interests, for tax purposes
    
    
    (52,351
    )
    
    
    (51,128
    )Total deferred tax liabilities
    
    
    (52,921
    )
    
    
    (52,009
    )Net deferred tax liabilities
    
    
    (52,921
    )
    
    
    (52,009
    )Reduced valuation allowance on deferred tax assets
    
    
    52,921
    
    
    
    52,009Net deferred tax assets
    
    
    0
    
    
    
    0
 Deferred tax expense of USD 0.263 million in 2004 resulted from allocating deferred tax
benefits directly to contributed capital. F-42




---



##### 



Disclosure of derivative financial instruments The Company is exposed to changes in foreign currency exchange rates and changes in interest
rates, which affect the results of operations and financial condition. The Company manages exposure
to changes in foreign currency exchange rates through its normal operating and financing
activities, as well as through the use of financial instruments. Generally, the only financial
instruments the Company may utilize to economically hedge currency exposure are forward exchange
contracts. These contracts do not qualify for hedge accounting. The Company had as of December 31,
2003, forward exchange contracts outstanding of total USD 8.4 million with a fair market value of
USD 0.7 million, and as of December 31, 2004 it had a total of USD 6.3 million outstanding with a
fair market value of USD 0.8 million. Forward contracts are recorded at fair market value.
Realized and unrealized gain and losses are recorded as financial items. The Company manages
exposure to changes in interest rates by maintaining debt with both fixed and variable rates of
interest. The Company does not enter into derivative financial instruments for trading purposes. The
Company only enters into contracts with parties that are highly rated international financial
institutions. Management believes that risk of loss is remote and in any event would be immaterial
to the consolidated net financial position of the Company. Borrowings analyzed by maturity date Notes and
    
    
    Convertible
    
    
    2004
    
    
    2003Loans
    
    
    Loans
    
    
    Total
    
    
    Total(USD
    
    
    (USD
    
    
    (USD
    
    
    (USDmillions)
    
    
    millions)
    
    
    millions)
    
    
    millions)Due within one year (1)
    
    
    
    
    
    
    25.0
    
    
    
    25.0
    
    
    
    4Due within two years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    145.0Due within three years (2)
    
    
    
    
    
    
    6.8
    
    
    
    6.8Due within four years (3)
    
    
    449.3
    
    
    
    
    
    
    
    449.3
    
    
    
    Due within five years (4)
    
    
    114.3
    
    
    
    
    
    
    
    114.3
    
    
    
    449.3Due after five years
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    563.6
    
    
    
    31.8
    
    
    
    595.4
    
    
    
    598.3
 Balances as of December 31, 2003 comprise of:  (1)
    USD 1.9 million (NOK 11.5 million) Zero Coupon Mandatory Convertible Bond, USD 8.4
million (NOK 51 million) 13% convertible bond 2000/2005 and USD 14.7 million (NOK 88.5
million) 11% convertible bond 2000/2005.  (2)
    USD 6.8 million (NOK 41.2 million) 7% Convertible bonds 2004/2009.  (3)
    USD 99.3 million 2002 Floating Rate Senior Secured Loans and USD 225.0 million 1998
Senior Secured Notes and USD 125.0 million 1998 Floating Rate Senior Secured Loans  (4)
    114.3 million (NOK 630 million and USD 10 million) 11% Callable bonds 2004/2009.  Financial liabilities analyzed by currency and interest rate risk profile Floating rate
    
    
    Fixed rate
    
    
    2004
    
    
    2003amount
    
    
    amount
    
    
    Total
    
    
    Total(USD
    
    
    (USD
    
    
    (USD
    
    
    (USDmillions)
    
    
    millions)
    
    
    millions)
    
    
    millions)Currency:Norwegian kroner
    
    
    
    
    
    
    136.1
    
    
    
    136.1
    
    
    
    145.0US dollar  2004 Callable bond tranche 2
(USD 10 mill)
    
    
    
    
    
    
    10.0
    
    
    
    10.0US dollar  Loan (USD 100 million)
    
    
    99.3
    
    
    
    
    
    
    
    99.3
    
    
    
    99.3US dollar  1998 Notes and Loans (USD
350 million)
    
    
    125.0
    
    
    
    225.0
    
    
    
    350.0
    
    
    
    354.0224.3
    
    
    
    371.1
    
    
    
    595.4
    
    
    
    598.3
 F-43




---



##### 



At December 31, 2004 and 2003, the weighted average interest rate on the fixed rate
financial liabilities (interest bearing) was 10.46% and 10.61%, respectively. Floating rate
financial liabilities bear interest rates based on the 3-month US dollar London inter-bank offer
rate (LIBOR) plus 4.75% for the USD 125 million loan and plus interest at a variable margin of
1.75% to 2.75% depending on the rigs contract situation for the USD 99.2 million loan. Financial assets analyzed by currency and interest rate risk profile Cash andRestricted
    
    
    cash
    
    
    2004
    
    
    2003cash
    
    
    equivalents
    
    
    Total
    
    
    Total(USD
    
    
    (USD
    
    
    (USD
    
    
    (USDmillions)
    
    
    millions)
    
    
    millions)
    
    
    millions)CurrencyNorwegian kroner
    
    
    0.9
    
    
    
    24.3
    
    
    
    25.2
    
    
    
    3.2Canadian dollar
    
    
    
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.3British pounds
    
    
    
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    US dollar
    
    
    6.0
    
    
    
    19.0
    
    
    
    25.1
    
    
    
    18.46.9
    
    
    
    44.1
    
    
    
    51.1
    
    
    
    21.9
 The financial assets earn interest at floating rates and comprise of restricted cash and cash
equivalents. Stock split NGAAP numbers of outstanding shares represent historical numbers. In accordance with USGAAP
stock split or reverse split is shown with retroactive effect. Ocean Rig had a write-down of
nominal value from 30:1 in February 2002 and a reverse split from 10:1 in May 2003. These changes
have not been shown with retroactive effect in historical numbers for US GAAP. Adoption of New Standards Ocean Rig implemented EITF 00-21 Revenue Arrangements with Multiple Deliverables for
contracts entered into on or after the fiscal year beginning January 1, 2004. It was determined
that mobilization, drilling and demobilization activities do not meet the criteria for being
separate units of accounting. As drilling is the predominate deliverable, revenues are recognized
as drilling is completed assuming all other revenue recognition criteria are complete. However,
since demobilization fees are not realizable until demobillization is finalized, such fees are
recognized at the completion of demobilization. The same principle was adopted for Norwegian GAAP. Effect of recent pronouncements On December 16, 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123(R)
(revised 2004), Share-Based Payment, which is a revision of SFAS 123, Accounting for Stock-Based
Compensation. SFAS 123(R) also supersedes APB No. 25, Accounting for Stock Issued to Employees. Generally, the approach to accounting for share-based payments in Statement 123(R) is similar
to the approach described in Statement 123. However, Statement 123 (R) requires all share-based
payments to employees, including grants of employee stock options, to be recognized in the
financial accounts based on their fair value. Pro forma disclosure is no longer an alternative to
financial statement recognition. The company expects to adopt Statement 123 (R) no later than the first quarter of 2006. The
implementation effects is expected to be similar to those included in the Statement 123 pro forma
information included in note 25. F-44




---



##### 



On March 31, 2004 Ocean Rig implemented FIN 46 (R), Consolidation of Variable Interest Enties
(VIE). In general a VIE is a corporation, partnership, trust or any other legal structure used for
business purposes that have (a) equity investors with voting rights that are not proportionate to
their economic interests and (b) do not have sufficient equity to permit the entity to finance its
activities without additional subordinate financial support. FIN 46 (R) requires a VIE to be
consolidated by a company if that company is subject to absorb the majority of the risk of loss or
receive the residual returns from a VIEs activities (primary beneficiary). Ocean Rig has
identified ECDP as a VIE but the company would not be considered the primary beneficiary and
therefore did not consolidate ECDP. See Note 14 for additional information on ECDP.  NOTE 26. Supplemental Guarantor Information The Senior Secured Notes and 1998 Loans offered by Ocean Rig Norway AS are fully and
unconditionally guaranteed on a joint and several basis by Ocean Rig ASA, Ocean Rig 1 AS and Ocean
Rig 2 AS, and are collateralized by the shares and assets of Ocean Rig 1 AS and Ocean Rig 2 AS.
The 2002 Loans incurred by Ocean Rig 2 AS are fully and unconditionally guaranteed on a joint and
several basis by Ocean Rig ASA and Ocean Rig Norway AS and are collateralized by the shares and
assets of Ocean Rig 2 AS. Presented below is condensed financial information for: (1) Ocean Rig Norway AS on a separate
company basis; (2) Ocean Rig ASA on a parent company only basis; (3) the guarantor subsidiaries
Ocean Rig 1 AS, Ocean Rig 2 AS and Ocean Rig Canada Inc, on a combined basis; (4) the non-guarantor
subsidiaries on a combined basis; (5) elimination entries and (6) consolidated Ocean Rig ASA and
subsidiaries. The elimination entries includes capitalized interest costs relating to the drilling
rigs owned by Ocean Rig 1 AS and Ocean Rig 2 AS and depreciation on such capitalized costs. The financial information presented below for the above-mentioned entities represent the
actual balance sheets at December 31, 2003 and 2004 and the actual statements of operations, cash
flows for the years ended December 31, 2002, 2003 and 2004, including adjustments to incorporate
equity interests in the respective subsidiaries in accordance with the equity method. The Company
has centralized management, accounting and administrative functions. While certain assets,
liabilities and costs are directly attributable to the subsidiaries, others are of a more general
nature and have been allocated to the subsidiaries based on assumptions and estimates that our
management believes are reasonable under the circumstances. However, these allocations and
estimates are not necessarily indicative of the activity that would have resulted if any of the
entities disclosed had been operated on a stand alone basis for the periods presented. Certain
assets, liabilities, income and expenses have not been allocated. The consolidating financial information has been prepared in accordance with Norwegian GAAP
which differs, in certain respects, from US GAAP. F-45




---



##### 



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002 Non-Parent
    
    
    Subsidiary
    
    
    Guarantors
    
    
    Elimination
    
    
    ConsolidatedIssuer
    
    
    Guarantor
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    entries
    
    
    TotalsOcean Rig 3 ASandOcean Rig 4AS,Ocean Rig 1 AS
    
    
    other
    
    
    
    
    
    
    Ocean RigOcean Rig
    
    
    Ocean Rig
    
    
    and
    
    
    non-guarantor
    
    
    
    
    
    
    ASA andNorway AS
    
    
    ASA
    
    
    Ocean Rig 2 AS
    
    
    subsidiaries
    
    
    
    
    
    
    subsidiaries(Amounts in USD thousands)Operating revenues:
    
    
    9,777
    
    
    
    9,777
    
    
    
    47,137
    
    
    
    34,037
    
    
    
    (32,159
    )
    
    
    68,569Operating expenses:Salaries and personnel expenses
    
    
    
    
    
    
    2,502
    
    
    
    6,323
    
    
    
    11,960
    
    
    
    (233
    )
    
    
    20,552Other operating and
administrative expenses
    
    
    9,527
    
    
    
    7,375
    
    
    
    36,966
    
    
    
    23,352
    
    
    
    (28,612
    )
    
    
    48,608Depreciation and amortization
    
    
    
    
    
    
    851
    
    
    
    17,445
    
    
    
    136
    
    
    
    2,129
    
    
    
    20,561Equity in investee losses
    
    
    24,134
    
    
    
    (5,443
    )
    
    
    
    
    
    
    
    
    
    
    (18,691
    )
    
    
    Total operating expenses
    
    
    33,661
    
    
    
    5,285
    
    
    
    60,734
    
    
    
    35,448
    
    
    
    (45,407
    )
    
    
    89,721Operating income/ (loss)
    
    
    (23,884
    )
    
    
    4,492
    
    
    
    (13,597
    )
    
    
    (1,411
    )
    
    
    13,248
    
    
    
    (21,152
    )Interest income
    
    
    103,842
    
    
    
    10,410
    
    
    
    29,673
    
    
    
    1,780
    
    
    
    (17,370
    )
    
    
    128,335Interest expense and other
financial expenses
    
    
    (70,509
    )
    
    
    (21,420
    )
    
    
    (3,062
    )
    
    
    (2,224
    )
    
    
    57,454
    
    
    
    (39,761
    )Net financial income/ (loss)
    
    
    33,333
    
    
    
    (11,010
    )
    
    
    26,611
    
    
    
    (444
    )
    
    
    40,084
    
    
    
    88,574Net income/ (loss) before taxes
    
    
    9,449
    
    
    
    (6,518
    )
    
    
    13,014
    
    
    
    (1,855
    )
    
    
    53,332
    
    
    
    67,422Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    130
    
    
    
    (133
    )
    
    
    (3
    )Net income/ (loss)
    
    
    9,449
    
    
    
    (6,518
    )
    
    
    13,014
    
    
    
    (1,725
    )
    
    
    53,199
    
    
    
    67,419Net income/ (loss) in
accordance with US GAAP
    
    
    9,449
    
    
    
    (3,098
    )
    
    
    13,014
    
    
    
    (1,725
    )
    
    
    53,199
    
    
    
    70,839
 F-46




---



##### 



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2003 Non-Parent
    
    
    Subsidiary
    
    
    Guarantors
    
    
    Elimination
    
    
    ConsolidatedIssuer
    
    
    Guarantor
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    entries
    
    
    TotalsOcean Rig 3 ASandOcean Rig 4AS,Ocean Rig 1 AS
    
    
    other
    
    
    
    
    
    
    Ocean RigOcean Rig
    
    
    Ocean Rig
    
    
    and
    
    
    non-guarantor
    
    
    
    
    
    
    ASA andNorway AS
    
    
    ASA
    
    
    Ocean Rig 2 AS
    
    
    subsidiaries
    
    
    
    
    
    
    subsidiaries(Amounts in USD thousands)Operating revenues:
    
    
    
    
    
    
    
    
    
    
    75,612
    
    
    
    38,110
    
    
    
    (10,712
    )
    
    
    103,010Operating expenses:Salaries and personnel expenses
    
    
    
    
    
    
    814
    
    
    
    1,302
    
    
    
    19,826
    
    
    
    (4,879
    )
    
    
    17,063Other operating and
administrative expenses
    
    
    2
    
    
    
    (957
    )
    
    
    17,995
    
    
    
    24,820
    
    
    
    (5,863
    )
    
    
    35,997Depreciation, amortization and
asset impairment write-down
    
    
    
    
    
    
    7
    
    
    
    226,167
    
    
    
    160
    
    
    
    6,719
    
    
    
    233,053Equity in investee losses
    
    
    160,685
    
    
    
    190,692
    
    
    
    
    
    
    
    
    
    
    
    (351,377
    )
    
    
    Total operating expenses
    
    
    160,687
    
    
    
    190,556
    
    
    
    245,464
    
    
    
    44,806
    
    
    
    (355,400
    )
    
    
    286,113Operating/ income (loss)
    
    
    (160,687
    )
    
    
    (190,556
    )
    
    
    (169,852
    )
    
    
    (6,696
    )
    
    
    344,688
    
    
    
    (183,103
    )Interest income
    
    
    80,149
    
    
    
    3,232
    
    
    
    27,586
    
    
    
    3,356
    
    
    
    
    
    
    
    114,323Interest expense and other
financial expenses
    
    
    (104,733
    )
    
    
    (18,505
    )
    
    
    (18,716
    )
    
    
    (2,208
    )
    
    
    
    
    
    
    (144,162
    )Net financial income/ (loss)
    
    
    (24,584
    )
    
    
    (15,273
    )
    
    
    8,870
    
    
    
    1,148
    
    
    
    
    
    
    
    (29,839
    )Net income/ (loss) before taxes
    
    
    (185,271
    )
    
    
    (205,829
    )
    
    
    (160,982
    )
    
    
    (5,548
    )
    
    
    344,688
    
    
    
    (212,942
    )Tax expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income/ (loss)
    
    
    (185,271
    )
    
    
    (205,829
    )
    
    
    (160,982
    )
    
    
    (5,548
    )
    
    
    344,688
    
    
    
    (212,942
    )Net income (loss) in
accordance with US GAAP
    
    
    (8,397
    )
    
    
    (31,264
    )
    
    
    15,892
    
    
    
    (5,548
    )
    
    
    (    9,060
    )
    
    
    (38,377
    )
 F-47




---



##### 



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004 Non-Parent
    
    
    Subsidiary
    
    
    Guarantors
    
    
    Elimination
    
    
    ConsolidatedIssuer
    
    
    Guarantor
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    entries
    
    
    TotalsOcean Rig ASand otherOcean Rig 1 AS
    
    
    non-
    
    
    
    
    
    
    Ocean RigOcean Rig
    
    
    Ocean Rig
    
    
    and
    
    
    guarantor
    
    
    
    
    
    
    ASA andNorway AS
    
    
    ASA
    
    
    Ocean Rig 2 AS
    
    
    subsidiaries
    
    
    
    
    
    
    subsidiariesUSD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD(Amounts in thousands)Operating revenues:
    
    
    
    
    
    
    
    
    
    
    107,710
    
    
    
    16,122
    
    
    
    (35,269
    )
    
    
    88,563Operating expenses:Salaries and personnel expenses
    
    
    
    
    
    
    4,496
    
    
    
    35,728
    
    
    
    13,387
    
    
    
    (28,815
    )
    
    
    24,796Other operating and administrative
expenses
    
    
    11
    
    
    
    96
    
    
    
    41,611
    
    
    
    6,504
    
    
    
    (6,618
    )
    
    
    41,604Depreciation, amortization and asset
impairment write down
    
    
    
    
    
    
    2
    
    
    
    55,301
    
    
    
    40
    
    
    
    7,063
    
    
    
    62,406Equity in investee losses
    
    
    36,529
    
    
    
    71,018
    
    
    
    
    
    
    
    
    
    
    
    (107,547
    )
    
    
    Total operating expenses
    
    
    36,540
    
    
    
    75,612
    
    
    
    132,640
    
    
    
    19,931
    
    
    
    (135,917
    )
    
    
    128,806Operating income/ (loss)
    
    
    (36,540
    )
    
    
    (75,612
    )
    
    
    (24,930
    )
    
    
    (3,809
    )
    
    
    100,648
    
    
    
    (40,243
    )Interest income and other financial
income
    
    
    11,108
    
    
    
    16,304
    
    
    
    29,982
    
    
    
    14,125
    
    
    
    
    
    
    
    71,519Interest expense and other financial
expenses
    
    
    (41,539
    )
    
    
    (35,561
    )
    
    
    (40,625
    )
    
    
    (14,051
    )
    
    
    (521
    )
    
    
    (132,297
    )Net financial income/ (loss)
    
    
    (30,431
    )
    
    
    (19,257
    )
    
    
    (10,643
    )
    
    
    74
    
    
    
    (521
    )
    
    
    (60,778
    )Net income/ (loss) before taxes
    
    
    (66,971
    )
    
    
    (94,869
    )
    
    
    (35,573
    )
    
    
    (3,735
    )
    
    
    100,127
    
    
    
    (101,021
    )Tax expense
    
    
    
    
    
    
    
    
    
    
    956
    
    
    
    310
    
    
    
    
    
    
    
    1,266Net income/(loss)
    
    
    (66,971
    )
    
    
    (94,869
    )
    
    
    (36,529
    )
    
    
    (4,045
    )
    
    
    100,127
    
    
    
    (102,287
    )Net income/ (loss) in accordancewith US GAAP
    
    
    (71,338
    )
    
    
    (112,322
    )
    
    
    (40,896
    )
    
    
    (4,045
    )
    
    
    108,861
    
    
    
    (119,740
    )
 F-48




---



##### 



CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2003 Parent
    
    
    Subsidiary
    
    
    Non-Guarantor
    
    
    Elimination
    
    
    ConsolidatedIssuer
    
    
    Guarantor
    
    
    Guarantor
    
    
    Subsidiaries
    
    
    Entries
    
    
    TotalsOcean Rig 3 ASandOcean Rig 4 AS,Ocean Rig
    
    
    
    
    
    
    Ocean Rig 1 AS
    
    
    otherNorway
    
    
    Ocean Rig
    
    
    and
    
    
    non-guarantor
    
    
    
    
    
    
    Ocean Rig ASAAS
    
    
    ASA
    
    
    Ocean Rig 2 AS
    
    
    subsidiaries
    
    
    
    
    
    
    and SubsidiariesUSD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD(amounts in thousands)ASSETSMachinery and equipment
    
    
    
    
    
    
    16,803
    
    
    
    874,342
    
    
    
    129
    
    
    
    202,456
    
    
    
    1,093,730Long-term receivables and other assets
    
    
    5,776
    
    
    
    2,633
    
    
    
    936
    
    
    
    980
    
    
    
    
    
    
    
    10,325Intercompany loan receivable
    
    
    880,146
    
    
    
    5,978
    
    
    
    75,508
    
    
    
    7,715
    
    
    
    (969,347
    )
    
    
    Investment at equity
    
    
    (56,522
    )
    
    
    436,276
    
    
    
    
    
    
    
    
    
    
    
    (379,754
    )
    
    
    Total non-current assets
    
    
    829,400
    
    
    
    461,690
    
    
    
    950,786
    
    
    
    8,824
    
    
    
    (1,146,645
    )
    
    
    1,104,055Other current assets
    
    
    
    
    
    
    337
    
    
    
    10,716
    
    
    
    3,039
    
    
    
    
    
    
    
    14,092Restricted cash
    
    
    
    
    
    
    158
    
    
    
    4,438
    
    
    
    493
    
    
    
    
    
    
    
    5,089Cash and cash equivalents
    
    
    55
    
    
    
    7,977
    
    
    
    5,643
    
    
    
    3,130
    
    
    
    
    
    
    
    16,805Total current assets
    
    
    55
    
    
    
    8,472
    
    
    
    20,797
    
    
    
    6,662
    
    
    
    
    
    
    
    35,986Total assets
    
    
    829,455
    
    
    
    470,162
    
    
    
    971,583
    
    
    
    15,486
    
    
    
    (1,146,645
    )
    
    
    1,140,041Share capital
    
    
    404,442
    
    
    
    97,565
    
    
    
    75,528
    
    
    
    158
    
    
    
    (480,128
    )
    
    
    97,565Other equity
    
    
    40,759
    
    
    
    218,177
    
    
    
    (132,056
    )
    
    
    (10,486
    )
    
    
    304,372
    
    
    
    420,766Total shareholders equity
    
    
    445,201
    
    
    
    315,742
    
    
    
    (56,528
    )
    
    
    (10,328
    )
    
    
    (175,756
    )
    
    
    518,331Pension liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Intercompany loans payable
    
    
    31,657
    
    
    
    4,604
    
    
    
    916,380
    
    
    
    18,221
    
    
    
    (970,862
    )
    
    
    Notes and loans, convertible debt
    
    
    
    
    
    
    139,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139,623Accumulated losses of unconsolidated
losses in excess of investment
    
    
    350,000
    
    
    
    
    
    
    
    99,250
    
    
    
    9
    
    
    
    (9
    )
    
    
    449,250Total long-term liabilities
    
    
    381,657
    
    
    
    144,227
    
    
    
    1,015,630
    
    
    
    18,230
    
    
    
    (970,871
    )
    
    
    588,873Commitments and contingenciesAccounts payable
    
    
    2
    
    
    
    229
    
    
    
    5,247
    
    
    
    1,161
    
    
    
    (18
    )
    
    
    6,621Short term loan
    
    
    
    
    
    
    4,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,000Other current liabilities
    
    
    2,595
    
    
    
    5,964
    
    
    
    7,234
    
    
    
    6,423
    
    
    
    
    
    
    
    22,216Total current liabilities
    
    
    2,597
    
    
    
    10,193
    
    
    
    12,481
    
    
    
    7,584
    
    
    
    (18
    )
    
    
    32,837Total liabilities and shareholders
equity in accordance with Norwegian GAAP
    
    
    829,455
    
    
    
    470,162
    
    
    
    971,583
    
    
    
    15,486
    
    
    
    (1,146,645
    )
    
    
    1,140,041Shareholders equity in accordance with
US GAAP
    
    
    632,167
    
    
    
    504,235
    
    
    
    130,438
    
    
    
    (10,328
    )
    
    
    (549,688
    )
    
    
    706,824
 F-49




---



##### 



CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2004 Subsidiary
    
    
    Non-GuarantorsIssuer
    
    
    Parent Guarantor
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    Elimination entries
    
    
    Consolidated TotalsOcean Rig 1 AS
    
    
    Ocean Rig AS, otherand
    
    
    non-guarantor
    
    
    
    
    
    
    Ocean Rig ASA andOcean Rig Norway AS
    
    
    Ocean Rig ASA
    
    
    Ocean Rig 2 AS
    
    
    subsidiaries
    
    
    
    
    
    
    subsidiariesUSD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD(Amounts in thousands)ASSETSMachinery and equipment
    
    
    
    
    
    
    
    
    
    
    874,926
    
    
    
    82
    
    
    
    195,696
    
    
    
    1,070,704Long term receivables and other assets
    
    
    6,077
    
    
    
    2,826
    
    
    
    1,092
    
    
    
    1,280
    
    
    
    
    
    
    
    11,275Intercompany loan receivable
    
    
    906,601
    
    
    
    17,742
    
    
    
    305,801
    
    
    
    10,396
    
    
    
    (1,240,540
    )
    
    
    Investment in subsidiaries
    
    
    (105,485
    )
    
    
    419,390
    
    
    
    
    
    
    
    
    
    
    
    (313,905
    )Total non-current assets
    
    
    807,193
    
    
    
    439,958
    
    
    
    1,181,819
    
    
    
    11,758
    
    
    
    (1,358,749
    )
    
    
    1,081,979Intercompany receivable
    
    
    
    
    
    
    
    
    
    
    5,331
    
    
    
    14,204
    
    
    
    (19,535
    )
    
    
    Other current assets
    
    
    
    
    
    
    1,011
    
    
    
    15,216
    
    
    
    1,418
    
    
    
    
    
    
    
    17,645Restricted cash
    
    
    
    
    
    
    493
    
    
    
    5,638
    
    
    
    791
    
    
    
    
    
    
    
    6,922Cash and cash equivalents
    
    
    43
    
    
    
    25,563
    
    
    
    16,807
    
    
    
    1,732
    
    
    
    
    
    
    
    44,145Total current assets
    
    
    43
    
    
    
    27,067
    
    
    
    42,992
    
    
    
    18,145
    
    
    
    (19,535
    )
    
    
    68,712Total assets
    
    
    807,236
    
    
    
    467,025
    
    
    
    1,224,811
    
    
    
    29,903
    
    
    
    (1,378,284
    )
    
    
    1,150,691LIABILITIES AND SHAREHOLDERS EQUITYShare capital
    
    
    404,607
    
    
    
    129,468
    
    
    
    75,528
    
    
    
    108
    
    
    
    (480,243
    )
    
    
    129,468Other equity
    
    
    15,139
    
    
    
    167,262
    
    
    
    (181,019
    )
    
    
    (12,974
    )
    
    
    371,670
    
    
    
    360,078Total shareholders equity
    
    
    419,746
    
    
    
    296,730
    
    
    
    (105,491
    )
    
    
    (12,866
    )
    
    
    (108,573
    )
    
    
    489,546Pension liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Intercompany loan payable
    
    
    34,742
    
    
    
    4,723
    
    
    
    1,175,524
    
    
    
    38,737
    
    
    
    (1,253,726
    )
    
    
    Convertible loans
    
    
    
    
    
    
    8,670
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,670Long-term debt
    
    
    350,000
    
    
    
    114,322
    
    
    
    99,250
    
    
    
    
    
    
    
    
    
    
    
    563,572Total long-term liabilities
    
    
    384,742
    
    
    
    127,715
    
    
    
    1,274,774
    
    
    
    38,737
    
    
    
    (1,253,726
    )
    
    
    572,242Accounts payable
    
    
    
    
    
    
    147
    
    
    
    6,819
    
    
    
    241
    
    
    
    
    
    
    
    7,207Intercompany payable
    
    
    11
    
    
    
    57
    
    
    
    15,885
    
    
    
    41
    
    
    
    (15,994
    )
    
    
    -
    )Short term loan
    
    
    
    
    
    
    23,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,100Other current liabilities
    
    
    2,737
    
    
    
    19,276
    
    
    
    32,824
    
    
    
    3,750
    
    
    
    9
    
    
    
    58,596Total current liabilities
    
    
    2,748
    
    
    
    42,580
    
    
    
    55,528
    
    
    
    4,032
    
    
    
    (15,985
    )
    
    
    88,903Total liabilities and shareholders
equity in accordance with Norwegian
GAAP
    
    
    807,236
    
    
    
    467,025
    
    
    
    1,224,811
    
    
    
    29,903
    
    
    
    (1,378,284
    )
    
    
    1,150,691Shareholders equity in accordance
with US GAAP
    
    
    602,345
    
    
    
    482,998
    
    
    
    77,108
    
    
    
    (12,866
    )
    
    
    (473,771
    )
    
    
    675,814
 F-50




---



##### 



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2002 Parent
    
    
    Subsidiary
    
    
    Non-Guarantors
    
    
    Elimination
    
    
    ConsolidatedIssuer
    
    
    Guarantor
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    entries
    
    
    TotalsOcean Rig 3 ASandOcean Rig 4 AS,Ocean Rig
    
    
    
    
    
    
    Ocean Rig 1 AS
    
    
    other
    
    
    
    
    
    
    Ocean RigNorway
    
    
    Ocean Rig
    
    
    and
    
    
    non-guarantor
    
    
    
    
    
    
    ASA andAS
    
    
    ASA
    
    
    Ocean Rig 2 AS
    
    
    subsidiaries
    
    
    
    
    
    subsidiaries(amounts in USD thousands)Cash flows from operating activities:Net income / (loss)
    
    
    9,449
    
    
    
    (6,518
    )
    
    
    13,014
    
    
    
    (1,725
    )
    
    
    53,199
    
    
    
    67,419Adjustments to reconcile net
income/(loss) to net cash provided by
(used in) operating activities:Equity in investee losses
    
    
    24,134
    
    
    
    (5,443
    )
    
    
    
    
    
    
    
    
    
    
    (18,691
    )
    
    
    Depreciation, amortization (including
amortization of loan discount) and
asset impairment write down
    
    
    1,256
    
    
    
    12,385
    
    
    
    29,347
    
    
    
    152
    
    
    
    2,387
    
    
    
    45,527Gain / loss from sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,585
    )
    
    
    2,908
    
    
    
    323Net unrealized foreign exchange gain
/ loss
    
    
    (99,097
    )
    
    
    (1,297
    )
    
    
    (69,039
    )
    
    
    (1,232
    )
    
    
    44,059
    
    
    
    (126,606
    )Changes in operating assets and
liabilities:Other current assets
    
    
    
    
    
    
    (433
    )
    
    
    (3,602
    )
    
    
    (4,297
    )
    
    
    (136
    )
    
    
    (8,468
    )Accounts payable
    
    
    
    
    
    
    (61
    )
    
    
    (4,963
    )
    
    
    667
    
    
    
    
    
    
    
    (4,357
    )Other liabilities
    
    
    (839
    )
    
    
    (13,285
    )
    
    
    2,927
    
    
    
    3,537
    
    
    
    13,620
    
    
    
    5,960Net cash provided by (used in)
operating activities
    
    
    (65,097
    )
    
    
    (14,652
    )
    
    
    (32,316
    )
    
    
    (5,483
    )
    
    
    97,346
    
    
    
    (20,202
    )Cash flows from investing activities:Payments related to building contracts
    
    
    
    
    
    
    (11,279
    )
    
    
    (207,989
    )
    
    
    191
    
    
    
    (54,120
    )
    
    
    (273,197
    )Change in restricted cash
    
    
    
    
    
    
    710
    
    
    
    34,644
    
    
    
    (202
    )
    
    
    
    
    
    
    35,152Proceeds from sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    54,167
    
    
    
    
    
    
    
    54,167Purchase of machinery, equipment and
intangible assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (442
    )
    
    
    3-
    
    
    
    (439
    )Net change in long-term receivables
    
    
    (153,812
    )
    
    
    (183,086
    )
    
    
    98,439
    
    
    
    (47,269
    )
    
    
    286,211
    
    
    
    483Net cash used in investing activities
    
    
    (153,812
    )
    
    
    (193,655
    )
    
    
    (74,906
    )
    
    
    6,445
    
    
    
    232,094
    
    
    
    (183,834
    )Cash flows from financing activities:Net proceeds from issuance of common
shares and warrants
    
    
    218,904
    
    
    
    119,363
    
    
    
    110,536
    
    
    
    
    
    
    
    (329,440
    )
    
    
    119,363Net proceeds from issuance of
long-term debt and convertible debt
    
    
    
    
    
    
    83,040
    
    
    
    (1,774
    )
    
    
    
    
    
    
    
    
    
    
    81,266Net cash provided by financing
activities
    
    
    218,904
    
    
    
    202,403
    
    
    
    108,762
    
    
    
    
    
    
    
    (329,440
    )
    
    
    200,629Effect of exchange rate changes on
cash and equivalents
    
    
    5
    
    
    
    3,052
    
    
    
    911
    
    
    
    270
    
    
    
    
    
    
    
    4,238Net increase (decrease) in cash
during the year
    
    
    
    
    
    
    (2,852
    )
    
    
    2,451
    
    
    
    1,232
    
    
    
    
    
    
    
    831Cash and cash equivalents at
beginning of year
    
    
    15
    
    
    
    14,798
    
    
    
    3,153
    
    
    
    920
    
    
    
    
    
    
    
    18,886Cash and cash equivalents end of year
    
    
    15
    
    
    
    11,946
    
    
    
    5,604
    
    
    
    2,152
    
    
    
    
    
    
    
    19,717
 F-51




---



##### 



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2003 Non-Parent
    
    
    Subsidiary
    
    
    Guarantors
    
    
    Elimination
    
    
    ConsolidatedIssuer
    
    
    Guarantor
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    entries
    
    
    TotalsOcean Rig 3 ASandOcean Rig 4 AS,Ocean Rig
    
    
    
    
    
    
    Ocean Rig 1 AS
    
    
    other
    
    
    
    
    
    
    Ocean RigNorway
    
    
    Ocean Rig
    
    
    and
    
    
    non-guarantor
    
    
    
    
    
    
    ASA andAS
    
    
    ASA
    
    
    Ocean Rig 2 AS
    
    
    subsidiaries
    
    
    
    
    
    subsidiaries(amounts in USD thousands)Cash flows from operating activities:Net income / (loss)
    
    
    (185,271
    )
    
    
    (205,829
    )
    
    
    (160,982
    )
    
    
    (5,548
    )
    
    
    344,688
    
    
    
    (212,942
    )Adjustments to reconcile net income/(loss)
to net cash provided by (used in) operating
activities:Equity in investee losses
    
    
    160,685
    
    
    
    190,692
    
    
    
    
    
    
    
    
    
    
    
    (351,377
    )
    
    
    Depreciation, amortization (including
amortization of loan discount) and asset
impairment write down
    
    
    1,311
    
    
    
    8,128
    
    
    
    239,275
    
    
    
    169
    
    
    
    7,102
    
    
    
    255,985Gain / loss from sale of assets
    
    
    (7
    )
    
    
    (7
    )
    
    
    
    
    
    
    
    
    
    
    14
    
    
    
    Net unrealized foreign exchange gain / loss
    
    
    (16,631
    )
    
    
    (745
    )
    
    
    (13,098
    )
    
    
    (227
    )
    
    
    (362
    )
    
    
    (31,063
    )Changes in operating assets and liabilities:Other current assets
    
    
    
    
    
    
    578
    
    
    
    1,398
    
    
    
    2,057
    
    
    
    (1,628
    )
    
    
    2,405Accounts payable
    
    
    
    
    
    
    (656
    )
    
    
    (1,391
    )
    
    
    (185
    )
    
    
    1,511
    
    
    
    (721
    )Other liabilities
    
    
    (212
    )
    
    
    (2,115
    )
    
    
    (5,234
    )
    
    
    1,477
    
    
    
    66
    
    
    
    (6,018
    )Net cash provided by (used in) operating
activities
    
    
    (40,125
    )
    
    
    (9,954
    )
    
    
    59,968
    
    
    
    (2,257
    )
    
    
    14
    
    
    
    7,646Cash flows from investing activities:Payments related to building contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change in restricted cash
    
    
    
    
    
    
    33
    
    
    
    (3,883
    )
    
    
    54
    
    
    
    
    
    
    
    (3,796
    )Purchase of machinery, equipment and
intangible assets
    
    
    
    
    
    
    (5,027
    )
    
    
    (11,691
    )
    
    
    61
    
    
    
    
    
    
    
    (16,657
    )Net change in long-term receivables
    
    
    40,164
    
    
    
    1,546
    
    
    
    (44,591
    )
    
    
    3,020
    
    
    
    
    
    
    
    39Net cash used in investing activities
    
    
    40,164
    
    
    
    (3,448
    )
    
    
    (60,165
    )
    
    
    3,135
    
    
    
    
    
    
    
    (20,314
    )Cash flows from financing activities:Net proceeds from issuance of common
shares and warrants
    
    
    
    
    
    
    18,763
    
    
    
    7
    
    
    
    7
    
    
    
    (14
    )
    
    
    18,763Net proceeds from issuance of long-term
debt and convertible debt
    
    
    
    
    
    
    (9,656
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,656
    )Net cash provided by financing activities
    
    
    
    
    
    
    9,107
    
    
    
    7
    
    
    
    7
    
    
    
    (14
    )
    
    
    9,107Effect of exchange rate changes on cash and
equivalents
    
    
    1
    
    
    
    329
    
    
    
    225
    
    
    
    94
    
    
    
    
    
    
    
    649Net increase (decrease) in cash during the
year
    
    
    40
    
    
    
    (3,966
    )
    
    
    35
    
    
    
    979
    
    
    
    
    
    
    
    (2,912
    )Cash and cash equivalents at beginning of
year
    
    
    15
    
    
    
    11,943
    
    
    
    5,608
    
    
    
    2,151
    
    
    
    
    
    
    
    19,717Cash and cash equivalents at end of year
    
    
    55
    
    
    
    7,977
    
    
    
    5,643
    
    
    
    3,130
    
    
    
    
    
    
    
    16,805
 F-52




---



##### 



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004 Non-Parent
    
    
    Subsidiary
    
    
    Guarantors
    
    
    Elimination
    
    
    ConsolidatedIssuer
    
    
    Guarantor
    
    
    Guarantors
    
    
    Subsidiaries
    
    
    entries
    
    
    TotalsOcean Rig 1
    
    
    Ocean Rig ASOcean Rig
    
    
    
    
    
    
    AS and
    
    
    and non-
    
    
    
    
    
    
    Ocean RigNorway
    
    
    Ocean Rig
    
    
    Ocean Rig 2
    
    
    guarantor
    
    
    
    
    
    
    ASA andAS
    
    
    ASA
    
    
    AS
    
    
    subsidiaries
    
    
    
    
    
    subsidiariesUSD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD
    
    
    USD(Amounts in thousands)Cash flows from operating activities:Net income / (loss)
    
    
    (66,971
    )
    
    
    (94,869
    )
    
    
    (36,529
    )
    
    
    (4,045
    )
    
    
    100,127
    
    
    
    (102,287
    )Adjustments to reconcile net income/(loss)
to net cash provided by (used in) operating
activities:Equity in investee losses
    
    
    36,529
    
    
    
    71,018
    
    
    
    
    
    
    
    
    
    
    
    (107,547
    )
    
    
    Depreciation, amortization (including
amortization of loan discount) and asset
impairment write down
    
    
    (301
    )
    
    
    5,024
    
    
    
    55,619
    
    
    
    40
    
    
    
    7,064
    
    
    
    67,446Gain / loss from sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net unrealized foreign exchange gain / loss
    
    
    
    
    
    
    (4,771
    )
    
    
    (55
    )
    
    
    (60
    )
    
    
    356
    
    
    
    (4,530
    )Changes in operating assets and liabilities:Other current assets
    
    
    
    
    
    
    (674
    )
    
    
    (4,500
    )
    
    
    1,621
    
    
    
    
    
    
    
    (3,553
    )Accounts payable
    
    
    (2
    )
    
    
    (82
    )
    
    
    1,573
    
    
    
    (903
    )
    
    
    
    
    
    
    586Other liabilities
    
    
    142
    
    
    
    13,312
    
    
    
    25,590
    
    
    
    (2,664
    )
    
    
    
    
    
    
    36,380Net cash provided by (used in) operating
activities
    
    
    (30,603
    )
    
    
    (11,042
    )
    
    
    41,698
    
    
    
    (6,011
    )
    
    
    
    
    
    
    (5,958
    )Cash flows from investing activities:Change in restricted cash
    
    
    
    
    
    
    (335
    )
    
    
    (1,200
    )
    
    
    (298
    )
    
    
    
    
    
    
    (1,833
    )Purchase of machinery, equipment and
intangible assets
    
    
    
    
    
    
    16,803
    
    
    
    (56,190
    )
    
    
    7
    
    
    
    
    
    
    
    (39,380
    )Purchase of business, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Sale of fixed assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investments in subsidiaries
    
    
    
    
    
    
    (53,662
    )
    
    
    
    
    
    
    (289
    )
    
    
    53,951
    
    
    
    Net change in long-term receivables
    
    
    (23,360
    )
    
    
    (9,000
    )
    
    
    26,801
    
    
    
    5,193
    
    
    
    
    
    
    
    (366
    )Net cash used in investing activities
    
    
    (23,360
    )
    
    
    (46,194
    )
    
    
    (30,589
    )
    
    
    4,613
    
    
    
    53,951
    
    
    
    (41,579
    )Cash flows from financing activities:Net proceeds from issuance of common
shares and warrants
    
    
    53,951
    
    
    
    185
    
    
    
    
    
    
    
    
    
    
    
    (53,951
    )
    
    
    185Net proceeds from issuance of long-term
debt and convertible debt
    
    
    
    
    
    
    74,102
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,102Net cash provided by financing activities
    
    
    53,951
    
    
    
    74,287
    
    
    
    
    
    
    
    
    
    
    
    (53,951
    )
    
    
    74,287Effect of exchange rate changes on cash and
equivalents
    
    
    1
    
    
    
    534
    
    
    
    55
    
    
    
    0
    
    
    
    
    
    
    
    590Net increase (decrease) in cash during the
year
    
    
    (11
    )
    
    
    17,585
    
    
    
    11,164
    
    
    
    (1,398
    )
    
    
    
    
    
    
    27,340Cash and cash equivalents at beginning of
year
    
    
    55
    
    
    
    7,977
    
    
    
    5,643
    
    
    
    3,130
    
    
    
    
    
    
    
    16,805Cash and cash equivalents at end of year
    
    
    44
    
    
    
    25,562
    
    
    
    16,807
    
    
    
    1,732
    
    
    
    
    
    
    
    44,145
 F-53




---



##### 



NOTE 27. Supplementary (Unaudited) Information on Oil and Gas Activities In accordance with Statement of Financial Accounting Standard No. 69, Disclosures about oil
and gas producing activities and regulations of the U.S. Securities and Exchange Commission (SEC),
Ocean Rig is making certain supplemental disclosure about oil and gas exploration operations. Cost incurred in oil and gas acquisition, exploration and development activities. All cost relates to the participation in the Weymouth exploration well in Canada, only. Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Exploration cost
    
    
    
    
    
    
    8,005
    
    
    
    14,287Development cost
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    8,005
    
    
    
    14,287
 Results of operation for oil and gas producing activities Year ended December 31,2002
    
    
    2003
    
    
    2004USD
    
    
    USD
    
    
    USD(amounts in thousands)Sales
    
    
    
    
    
    
    
    
    
    
    Exploration expenses
    
    
    
    
    
    
    (8,005
    )
    
    
    (14,287
    )Results of operations before taxes
    
    
    
    
    
    
    
    
    
    
    Taxes
    
    
    
    
    
    
    
    
    
    
    Results of operations
    
    
    
    
    
    
    (8,005
    )
    
    
    (14,287
    )
 Capitalized expenditures related to oil and gas producing activities No expenditures related to oil and gas activities have been capitalized in 2002, 2003 or 2004.
Ocean Rig has no proven oil and gas reserves as defined in the industry standards under the
requirements of the SEC. Hence, neither oil and gas reserves nor standardized measure of discounted
net cash flow relating to proved oil and gas reserves are disclosed. F-54




---



##### 



ITEM 19. EXHIBITS Exhibit
    
    
    
    PageNumber
    
    Description
    
    Number1.1
    
    Articles of association of the Company (incorporated
by reference to Exhibits 3.1, 3.2, 3.3 and 3.4 to our
registration statement on Form F-4 (Registration
Statement No. 333-9110)).
    
    2.1
    
    Undertaking to furnish a copy of the instruments
relating to our loans, bonds and notes.
    
    F-562.2
    
    Indenture, dated May 27, 1998, among Ocean Rig Norway
AS, Ocean Rig ASA, Ocean Rig 1 AS, Ocean Rig 2 AS and
the Chase Manhattan Bank (incorporated by reference to
Exhibit 4.1 to our registration statement on Form
F-4).
    
    2.3
    
    Form of Note for 10 1/4% senior secured notes due 2008
(incorporated by reference to Exhibit 4.1 to our
registration statement on Form F-4).
    
    8.1
    
    Significant subsidiaries (please see Item 4,
Information on our CompanyOrganizational Structure
of this Form 20-F).
    
    12.1
    
    Certification Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    F-5712.2
    
    Certification of Vice-President, Accounting Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
    
    F-5813.1
    
    Certification of Chief Executive Officer and
Vice-President, Accounting Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
    
    F-59
 SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant
certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this
annual report to be signed on its behalf by the undersigned, thereunto duly authorized. Ocean Rig ASA/s/ Christian MowinckelChristian MowinckelInterim Managing DirectorDate: June 9, 2005
 F-55