##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 20-F



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(Mark One)

| ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------------



OR



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2004



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------



For the transition period from  to



Commission file number 1-14532



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SMEDVIG asa

(Exact name of Registrant as specified in its charter)



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Kingdom of Norway

(Jurisdiction of incorporation or organization)



Finnestadveien 28, P.O. Box 110, N-4001, Stavanger, Norway

(Address of principal executive offices)



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Securities registered or to be registered pursuant to Section 12(b) of the
Act:



|                                                                                 |  |                                          
|-------------------------------------------------------------------------------- |  | -----------------------------------------
|Title of Each Class                                                              |  | Name of Each Exchange On Which Registered
|Class A Ordinary Shares, par value NOK 10.00 per share                           |  | New York Stock Exchange Inc.*            
|Class A American Depositary Shares, each representing One Class A Ordinary Share |  | New York Stock Exchange Inc.             
|Class B Ordinary Shares, par value NOK 10.00 per share                           |  | New York Stock Exchange Inc.*            
|Class B American Depositary Shares, each representing One Class B Ordinary Share |  | New York Stock Exchange Inc.             



|* | Not for trading, but only in connection with registration of American Depositary Shares representing such Class A and Class B Shares, pursuant to the requirements of the Securities
and Exchange Commission.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Securities registered or to be
registered pursuant to Section 12(g) of the Act: None



Securities for
which there is a reporting obligation pursuant to Section 15(d) of the Act: None



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The number of outstanding shares of each of the issuers classes of capital or common
stock as of December 31, 2004:



53,764,004 Class A Ordinary
Shares, with nominal value of NOK 10.00 per share**



26,317,000
Class B Ordinary Shares, with nominal value of NOK 10.00 per share**



|** | Excludes 550,000 Class A Shares and 1,653,000 Class B Shares held as treasury shares at December 31, 2004.
|-- | ----------------------------------------------------------------------------------------------------------



Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



Indicate by check mark which financial statement item the registrant has elected to
follow.    Item 17 ̈Item 18  x



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##### Table of Contents

TABLE OF CONTENTS

|                                                          |  |                                                                              |  |     
|--------------------------------------------------------- |  | ---------------------------------------------------------------------------- |  | ----
|                                                          |  |                                                                              |  | Page
|                                                          |  | INTRODUCTION                                                                 |  |     
|                                                          | 
|Presentation of Financial and Other Information           |  | 3                                                                           
|Cautionary Statement Regarding Forward-Looking Statements |  | 3                                                                           
|Statements Regarding Competitive Position                 |  | 4                                                                           
|                                                          |  |                                                                             
|                                                          |  | PART I                                                                       |  |     
|                                                          |  |                                                                             
|Item 1:                                                   |  | Identity of Directors, Senior Management and Advisers                        |  | 4   
|Item 2:                                                   |  | Offer Statistics and Expected Timetable                                      |  | 4   
|Item 3:                                                   |  | Key Information                                                              |  | 4   
|Item 4:                                                   |  | Information on the Company                                                   |  | 11  
|Item 5:                                                   |  | Operating and Financial Review and Prospects                                 |  | 29  
|Item 6:                                                   |  | Directors, Senior Management and Employees                                   |  | 51  
|Item 7:                                                   |  | Major Shareholders and Related Party Transactions                            |  | 55  
|Item 8:                                                   |  | Financial Information                                                        |  | 56  
|Item 9:                                                   |  | The Offer and Listing                                                        |  | 57  
|Item 10:                                                  |  | Additional Information                                                       |  | 59  
|Item 11:                                                  |  | Quantitative and Qualitative Disclosures About Market Risk                   |  | 71  
|Item 12:                                                  |  | Description of Securities Other Than Equity Securities                       |  | 73  
|                                                          |  |                                                                             
|                                                          |  | PART II                                                                      |  |     
|                                                          |  |                                                                             
|Item 13:                                                  |  | Defaults, Dividend Arrearages and Delinquencies                              |  | 73  
|Item 14:                                                  |  | Material Modifications to the Rights of Security Holders and Use of Proceeds |  | 73  
|Item 15:                                                  |  | Controls and Procedures                                                      |  | 73  
|Item 16A:                                                 |  | Audit Committee Financial Expert                                             |  | 74  
|Item 16B:                                                 |  | Code of Ethics                                                               |  | 74  
|Item 16C:                                                 |  | Principal Accountant Fees and Services                                       |  | 74  
|Item 16D:                                                 |  | Exemptions from the Listing Standards for Audit Committees                   |  | 75  
|Item 16E:                                                 |  | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       |  | 75  
|                                                          |  |                                                                             
|                                                          |  | PART III                                                                     |  |     
|                                                          |  |                                                                             
|Item 17:                                                  |  | Financial Statements                                                         |  | 76  
|Item 18:                                                  |  | Financial Statements                                                         |  | 76  
|Item 19:                                                  |  | Exhibits                                                                     |  | 76  



2



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##### Table of Contents

INTRODUCTION



Presentation of Financial and Other Information



We publish our financial statements in Norwegian kroner, or NOK. Unless otherwise indicated, all amounts in this annual report are expressed in Norwegian kroner. Solely for the convenience of the reader, certain
amounts denominated in foreign currencies have been translated into U.S. dollar at the exchange rate (noon buying rate) applicable at December 31, 2004, except where otherwise noted. These translations should not be construed as representations that
the amounts referred to actually represent such translated amounts or could be converted into the translated currency at the rate indicated.



Our annual audited consolidated financial statements are prepared in accordance with Norwegian GAAP, which differ in certain significant respects from
U.S. GAAP. Information relating to the nature and effect of such differences as they relate to us, is presented in note 29 to our consolidated financial statements.



References to we, us, our refer to Smedvig asa and its subsidiaries, unless the context
otherwise requires.



Cautionary Statement Regarding Forward-Looking Statements



This annual report contains statements that constitute forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933, as amended, and Section 21E of the U.S. Securities
Exchange Act of 1934, as amended. In addition, other written or oral statements, which constitute forward-looking statements, have been made and may in the future be made by us or on our behalf. In this annual report, such forward-looking statements
include, without limitation, statements relating to:



| |  | the implementation of strategic initiatives,
|- |  | --------------------------------------------



| |  | the development of revenues overall and within specific business areas,
|- |  | -----------------------------------------------------------------------



| |  | the development of operating expenses, particularly personnel expenses,
|- |  | -----------------------------------------------------------------------



| |  | the anticipated level of capital expenditures and associated depreciation,
|- |  | --------------------------------------------------------------------------



| |  | the development of working capital and liquidity,
|- |  | -------------------------------------------------



| |  | the outlook in our primary markets, including the demand for our services,
|- |  | --------------------------------------------------------------------------



| |  | the outlook for the demand for energy and its effect in the oil and gas industry and
|- |  | ------------------------------------------------------------------------------------



| |  | other statements relating to our future business development and economic performance.
|- |  | --------------------------------------------------------------------------------------



The words anticipate, believe, expect, estimate, intend,
plan, suggest, should and similar expressions identify certain of these forward-looking statements. In particular, statements made in Item 4: Information on the Company and Item 5: Operating and
Financial Results and Prospects contain forward-looking information regarding our business and industry and the markets in which we operate. Readers are cautioned not to put undue reliance on forward-looking statements because actual events
and results may differ materially from the expected results described by such forward-looking statements.



Many factors may influence our actual results and cause them to differ materially from expected results as described in forward-looking statements.
Specific risks that we face are described under Risk Factors on pages 7 to 11.



3



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##### Table of Contents

Statements Regarding Competitive Position



Statements made in Item 4: Information on the Company, referring to our competitive position are based on our belief and in some cases rely on a range of sources, including investment analysts reports and independent
market studies.



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



SELECTED
CONSOLIDATED FINANCIAL INFORMATION



Summary



The selected consolidated financial data presented in the table below has
been derived from our audited consolidated financial statements and related notes for the five years ended December 31, 2004. You should read the following selected consolidated financial information in conjunction with our audited consolidated
financial statements and related notes appearing elsewhere in this 20-F. Our audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Norway, which differ in certain significant
respects from generally accepted accounting principles in the United States. You should read note 29 to our consolidated financial statements for additional information on the differences between Norwegian and U.S. generally accepted accounting
principles.



|                                          |  |                                                    |      |   |      |     |        |      |  |     |        |   |  |      |        |   |      |     |        |   |  |     |        |  
|----------------------------------------- |  | -------------------------------------------------- | ---- | - | ---- | --- | ------ | ---- |  | --- | ------ | - |  | ---- | ------ | - | ---- | --- | ------ | - |  | --- | ------ | -
|                                          |  | Year Ended December 31,                            |     
|                                          |  | 2004(1)                                            |      |   | 2004 |     |        | 2003 |  |     | 2002   |   |  | 2001 |        |   | 2000 |    
|                                          |  | (amounts in millions except for share information) |     
|INCOME STATEMENT DATA:                    |  |                                                    |      |   |      |     |        |      |  |     |        |   |  |      |        |   |      |     |        |   |  |     |        |  
|                                          |  |                                                    |      |   |      |    
|Amounts in Accordance with Norwegian GAAP |  |                                                    |      |   |      |     |        |      |  |     |        |   |  |      |        |   |      |     |        |   |  |     |        |  
|                                          |  |                                                    |      |   |      |    
|Revenues                                  |  | U.S.$                                              | 507  |   |      | NOK | 3,081  |      |  | NOK | 3,037  |   |  | NOK  | 3,354  |   |      | NOK | 3,816  |   |  | NOK | 3,588  |  
|Personnel and other operating expenses    |  |                                                    | (381 | ) |      |     | (2,315 | )    |  |     | (2,146 | ) |  |      | (2,490 | ) |      |     | (2,356 | ) |  |     | (2,294 | )
|Depreciation                              |  |                                                    | (58  | ) |      |     | (352   | )    |  |     | (361   | ) |  |      | (451   | ) |      |     | (464   | ) |  |     | (442   | )
|                                          |  |                                                    |      |   |      |     |        |      |  |     |        |   |  |      |        |   |      |     |        |   |  |     |        |  
|Operating profit                          |  |                                                    | 68   |   |      |     | 414    |      |  |     | 530    |   |  |      | 413    |   |      |     | 996    |   |  |     | 852    |  
|Financial expense, net                    |  |                                                    | (14  | ) |      |     | (90    | )    |  |     | (38    | ) |  |      | (169   | ) |      |     | (545   | ) |  |     | (895   | )
|Other items (2)                           |  |                                                    | 37   |   |      |     | 224    |      |  |     | (668   | ) |  |      | (962   | ) |      |     | 721    |   |  |     |       |  
|Income tax benefit (expense)              |  |                                                    | (16  | ) |      |     | (97    | )    |  |     | 88     |   |  |      | (84    | ) |      |     | (104   | ) |  |     | 119    |  
|                                          |  |                                                    |      |   |      |     |        |      |  |     |        |   |  |      |        |   |      |     |        |   |  |     |        |  
|Net income (loss)                         |  |                                                    | 74   |   |      |     | 451    |      |  |     | (88    | ) |  |      | (802   | ) |      |     | 1,068  |   |  |     | 76     |  
|                                          |  |                                                    |      |   |      |     |        |      |  |     |        |   |  |      |        |   |      |     |        |   |  |     |        |  
|Earnings (loss) per share (3)             |  |                                                    | 0.92 |   |      |     | 5.60   |      |  |     | (0.71  | ) |  |      | (9.74  | ) |      |     | 12.97  |   |  |     | 0.99   |  
|Diluted earnings (loss) per share (4)     |  |                                                    | 0.91 |   |      |     | 5.55   |      |  |     | (0.71  | ) |  |      | (9.74  | ) |      |     | 12.96  |   |  |     | 0.98   |  
|Ordinary dividends per share (3)(5)       |  |                                                    | 0.25 |   |      |     | 1.50   |      |  |     | 1.25   |   |  |      | 1.00   |   |      |     | 1.50   |   |  |     | 1.25   |  
|                                          |  |                                                    |      |   |      |    
|Amounts in Accordance with U.S. GAAP      |  |                                                    |      |   |      |     |        |      |  |     |        |   |  |      |        |   |      |     |        |   |  |     |        |  
|Net income (loss) (6)(10)                 |  |                                                    | 23   |   |      |     | 137    |      |  |     | 64     |   |  |      | (949   | ) |      |     | 789    |   |  |     | (46    | )
|Basic earnings (loss) per share (3)(6)    |  |                                                    | 0.28 |   |      |     | 1.70   |      |  |     | 0.79   |   |  |      | (11.54 | ) |      |     | 9.53   |   |  |     | (0.56  | )
|Diluted earnings (loss) per share (4)(6)  |  |                                                    | 0.28 |   |      |     | 1.69   |      |  |     | 0.79   |   |  |      | (11.54 | ) |      |     | 9.52   |   |  |     | (0.56  | )



4



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##### Table of Contents

|                                                      |  |                                                    |       |   |      |     |        |      |  |     |       |   |  |      |       |   |      |     |        |   |  |     |        |  
|----------------------------------------------------- |  | -------------------------------------------------- | ----- | - | ---- | --- | ------ | ---- |  | --- | ----- | - |  | ---- | ----- | - | ---- | --- | ------ | - |  | --- | ------ | -
|                                                      |  | As at December 31,                                 |      
|                                                      |  | 2004(1)                                            |       |   | 2004 |     |        | 2003 |  |     | 2002  |   |  | 2001 |       |   | 2000 |    
|                                                      |  | (amounts in millions except for share information) |      
|BALANCE SHEET DATA:                                   |  |                                                    |       |   |      |     |        |      |  |     |       |   |  |      |       |   |      |     |        |   |  |     |        |  
|                                                      |  |                                                    |       |   |      |    
|Amounts in Accordance with Norwegian GAAP             |  |                                                    |       |   |      |     |        |      |  |     |       |   |  |      |       |   |      |     |        |   |  |     |        |  
|                                                      |  |                                                    |       |   |      |    
|Cash, cash equivalents and Short-term investments (7) |  | U.S.$                                              | 123   |   |      | NOK | 746    |      |  | NOK | 993   |   |  | NOK  | 626   |   |      | NOK | 1,064  |   |  | NOK | 1,221  |  
|Working capital (8)                                   |  |                                                    | 110   |   |      |     | 667    |      |  |     | 858   |   |  |      | 608   |   |      |     | 905    |   |  |     | 1,163  |  
|Long-term assets                                      |  |                                                    | 1,047 |   |      |     | 6,367  |      |  |     | 5,699 |   |  |      | 5,809 |   |      |     | 8,855  |   |  |     | 8,749  |  
|Total assets                                          |  |                                                    | 1,332 |   |      |     | 8,098  |      |  |     | 7,575 |   |  |      | 7,540 |   |      |     | 10,951 |   |  |     | 11,095 |  
|Long-term interest-bearing debt                       |  |                                                    | 630   |   |      |     | 3,828  |      |  |     | 3,323 |   |  |      | 2,783 |   |      |     | 4,524  |   |  |     | 5,596  |  
|Shareholders equity (10)                             |  |                                                    | 488   |   |      |     | 2,969  |      |  |     | 3,062 |   |  |      | 3,379 |   |      |     | 5,068  |   |  |     | 4,145  |  
|                                                      |  |                                                    |       |   |      |    
|Amounts in Accordance with U.S. GAAP                  |  |                                                    |       |   |      |     |        |      |  |     |       |   |  |      |       |   |      |     |        |   |  |     |        |  
|Shareholders equity (10)                             |  |                                                    | 347   |   |      |     | 2,108  |      |  |     | 2,429 |   |  |      | 2,540 |   |      |     | 4,240  |   |  |     | 3,585  |  
|Total assets (9)                                      |  |                                                    | 1,299 |   |      |     | 7,895  |      |  |     | 7,609 |   |  |      | 7,264 |   |      |     | 10,833 |   |  |     | 10,923 |  
|                                                      | 
|                                                      |  | Year Ended December 31,                            |      
|                                                      |  | 2004(1)                                            |       |   | 2004 |     |        | 2003 |  |     | 2002  |   |  | 2001 |       |   | 2000 |    
|                                                      |  | (amounts in millions except for share information) |      
|CASH FLOW AND OPERATING DATA:                         |  |                                                    |       |   |      |     |        |      |  |     |       |   |  |      |       |   |      |     |        |   |  |     |        |  
|                                                      |  |                                                    |       |   |      |    
|Net cash flow provided by Operating activities        |  | U.S.$                                              | 98    |   |      | NOK | 587    |      |  | NOK | 271   |   |  | NOK  | 645   |   |      | NOK | 1,029  |   |  | NOK | 810    |  
|Net cash provided by (used in) Investing activities   |  |                                                    | (235  | ) |      |     | (1,425 | )    |  |     | (472  | ) |  |      | 101   |   |      |     | 32     |   |  |     | (411   | )
|Net cash provided by (used in) Financing activities   |  |                                                    | 100   |   |      |     | 608    |      |  |     | 610   |   |  |      | (999  | ) |      |     | (1,242 | ) |  |     | (31    | )
|                                                      | 
|                                                      |  | Year Ended December 31,                            |      
|                                                      |  | 2004(1)                                            |       |   | 2004 |     |        | 2003 |  |     | 2002  |   |  | 2001 |       |   | 2000 |    
|                                                      |  | (amounts in millions except for share information) |      
|INVESTMENTS:                                          |  |                                                    |       |   |      |     |        |      |  |     |       |   |  |      |       |   |      |     |        |   |  |     |        |  
|                                                      |  |                                                    |       |   |      |    
|Capital expenditures                                  |  | U.S.$                                              | 244   |   |      | NOK | 1,481  |      |  | NOK | 512   |   |  | NOK  | 354   |   |      | NOK | 967    |   |  | NOK | 325    |  

---

|(1) | Translations of amounts from Norwegian kroner into U.S. dollars have been made solely for the convenience of the reader at an exchange rate of U.S.$ 1.00 = NOK 6.0794, the noon
buying rate on December 31, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In 2004, we recorded a partial reversal of the previous write-down of West Navigator amounting to NOK 209 million. Gains on sale of assets amounting to NOK 13 million reflect the
partial sale of T-9 and retirement of T-2. In 2003, we recorded a net loss of NOK 668 million for the decision in the Balder dispute. In 2002, we recorded a write-down of West Navigator amounting to NOK 1,313 million. The semi-submersible drilling
unit, West Vanguard, was sold in 2002, resulting in a gain of NOK 351 million (West Vanguard was renamed after the sale and the new name Ocean Vanguard is used throughout this document). In 2001, we sold our semi-submersible drilling unit West Delta
and we realized a gain of NOK 721 million from such sale.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Earnings, dividends and extraordinary dividends per share in accordance with Norwegian accounting rules have been calculated using the weighted average number of shares outstanding,
retroactively adjusted for the two-for-one stock split in October 2000. The average number of shares outstanding for the years ended December 31, 2000 through 2004, as so adjusted, were: 82,700,004; 82,753,475; 82,253,720; 81,346,850; and
80,562,850. We have calculated basic earnings per share in accordance with U.S. GAAP using the same weighted average number of shares outstanding for each of the respective periods.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | We have calculated diluted earnings per share in accordance with Norwegian GAAP and U.S. GAAP using the weighted average number of shares outstanding, as per (3) above,
retroactively adjusted for the two-for-one stock split effected in October 2000 and adjusted to include the dilutive effect of all outstanding share options under the treasury stock method. The number of shares used in calculating diluted earnings
per share for the years ended December 31, 2000, 2001, 2002, 2003 and 2004 were: 82,882,721; 82,836,176; 82,253,720; 81,346,850 and 80,562,850.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Ordinary dividends with respect to a fiscal year are paid during the following fiscal year. The payment dates were May 15, 2001, May 22, 2002, May 22, 2003, May 24, 2004 and June 8,
2005 for the ordinary dividends relating to fiscal years 2000, 2001, 2002, 2003 and 2004. The ordinary dividends per share, expressed in U.S. dollars based on the exchange rate (noon buying rate) at each respective payment date, retroactively
adjusted for the stock split described in (4) above, were U.S.$0.14, U.S.$0.18, U.S.$0.15, U.S.$0.19 and U.S.$0.25.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



5



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##### Table of Contents

|(6) | We adopted Statement of Financial Accounting Standards (SFAS) No. 142 on January 1, 2002. Under SFAS No. 142, goodwill and intangible assets with indefinite lives are no
longer amortized, but instead tested for impairment at least annually. If such amortization were excluded from results for prior periods, net income (and earnings per share and diluted earnings per share) would be increased by NOK 10 million (NOK
0.12 per share) for the years ended December 31, 2000 and 2001.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | We have presented short-term investments with cash and cash equivalents because such investments are available for immediate sale and are readily convertible to cash.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | Working capital is defined as current assets less current liabilities.
|--- | ----------------------------------------------------------------------

|(9) | As permitted under Item 17(c)(2)(vii) of Form 20-F, the amount presented as our total assets under U.S. GAAP does not include any adjustment for classification or display
differences that result from our use of the proportionate consolidation method under Norwegian GAAP for certain joint stock companies and limited partnerships. Condensed financial information for companies and partnerships that have been
proportionately consolidated is included in note 23 to our consolidated financial statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | In the Norwegian government budget for 2005, there was a decision to eliminate the taxation of unrealized foreign exchange differences within the tonnage tax system. The Company
believed that the change in the regulation impacted the accumulated unrealized foreign exchange gains at December 31, 2004 and reduced related deferred taxes by NOK 196 million which resulted in a corresponding increase in shareholders equity
as of December 31, 2004. After our 2004 consolidated financial statements were issued, the Company determined that the new regulation applied only to foreign exchange gains arising after January 1, 2005. Accordingly, under Norwegian GAAP the
consolidated balance sheet included herein and consolidated shareholders equity have been adjusted to appropriately reflect a deferred tax liability of NOK 196 million on unrealized foreign currency gains as of December 31, 2004 resulting in a
corresponding reduction of shareholders equity.
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under U.S. GAAP, deferred taxes were also restated resulting in an increase in the deferred tax liability of NOK 196 million as of December 31, 2004 with a corresponding increase in deferred income tax expense for
2004 and a related reduction of shareholders equity as of December 31, 2004. Corresponding earnings per share data has also been restated.



EXCHANGE RATES



The table below shows the high, low and average noon buying rates in The City of New York for cable transfers in foreign currencies as certified for
customs purposes by the Federal Reserve Bank of New York for Norwegian kroner per U.S.$1.00. The average is computed using the noon buying rate on the last business day of each month during the period indicated.



|                        |  |        
|----------------------- |  | -------
|Year ended December 31, |  | Average
|2000                    |  | 8.8307 
|2001                    |  | 9.0330 
|2002                    |  | 7.9253 
|2003                    |  | 7.0627 
|2004                    |  | 6.0794 



The table below shows
the high and low noon buying rates for each month during the six months prior to the date of this annual report.



|              |  |        |  |       
|------------- |  | ------ |  | ------
|              |  | Low    |  | High  
|December 2004 |  | 6.0551 |  | 6.2225
|January 2005  |  | 6.1035 |  | 6.3558
|February 2005 |  | 6.2009 |  | 6.5602
|March 2005    |  | 6.0667 |  | 6.3888
|April 2005    |  | 6.2310 |  | 6.4235
|May 2005      |  | 6.2619 |  | 6.4656



On June 6, 2005, the
noon buying rate for Norwegian kroner was U.S.$1.00 = NOK 6.4120.



Fluctuations in the exchange rate between the Norwegian kroner and the U.S. dollar will affect the U.S. dollar amounts received by holders of our ADSs on conversion of dividends, if any, paid in Norwegian kroner on our ordinary shares and
may affect the U.S. dollar price of our ADSs on the New York Stock Exchange.



6



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##### Table of Contents

RISK FACTORS



We are directly affected by trends and conditions of the oil and gas industry.



Historically, the markets for oil and gas have been volatile in response to
frequent changes in numerous factors and are likely to continue to be so in the future. Demand for our services depends on oil and gas industry activity and expenditure levels that are directly affected by trends in oil and natural gas prices.
Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of other economic and political factors that are beyond our
control. A prolonged downturn in oil and gas prices could have a material adverse effect on our results of operations and financial condition. Demand for our drilling units and services is particularly sensitive to the level of development,
production and exploration activity of, and the corresponding capital spending by, oil and natural gas companies. Any prolonged reduction in oil and natural gas prices would depress the level of exploration, development and production activity.
Lower levels of activity would result in a corresponding decline in the demand for our drilling units and services, which could have a material adverse effect on our revenues and profitability. We cannot predict the future level of demand for our
services or future conditions of the oil and gas industry. While we believe that our long-term contracts reduce our exposure in the near term to fluctuations in oil and gas prices and changes in oil companies spending, decreases in
exploration, development and production expenditures could have a material adverse effect on our business and results of operations. Factors affecting the prices of oil and natural gas include:



| |  | governmental regulations, such as taxation and environmental policies;
|- |  | ----------------------------------------------------------------------



| |  | global economic conditions;
|- |  | ---------------------------



| |  | global weather conditions;
|- |  | --------------------------



| |  | worldwide political, military and economic conditions, including the ability of OPEC to set and maintain production levels and prices for oil and gas;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the level of production by non-OPEC countries;
|- |  | ----------------------------------------------



| |  | the policies of governments regarding the exploration for, and production and development of, their oil and natural gas reserves; and
|- |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  | global and regional supply and demand for oil and natural gas.
|- |  | --------------------------------------------------------------



We are exposed to risks arising out of competition in the offshore drilling industry.



We operate in the offshore drilling industry, which historically has been highly cyclical. The industry is capital
intensive, with long lead times for construction of new rigs and significant competition for relatively few customers. Drilling contracts are traditionally awarded on a competitive bid basis, and price competition is often the primary factor in
determining which among qualified contractors is awarded a contract. You should read Item 4: Information on the CompanyBusiness OverviewCompetition for additional information on our competitive position.



Our ability to compete may be adversely affected by governmental regulations promulgated
in the countries in which we operate.



Our operations are
subject to numerous domestic and foreign laws and regulations that may relate directly or indirectly to the offshore drilling and oil services industry, including, without limitation, laws and regulations controlling the discharge of materials into
the environment, requiring removal and cleanup or otherwise relating to the protection of the environment, and the certification, licensing, health, safety and training and other requirements imposed by treaties, laws, regulations and conventions in
the jurisdictions in which we operate.



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Laws, regulations and licensing policies of the various governments of the countries in which we operate,
in particular those of Norway, regarding the exploration for, and development of, their oil and gas reserves can impact the rate of development of oil and gas fields, which in turn affects the demand for our services. The offshore drilling and oil
services industry 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.



Governmental regulation may require us to engage in business practices that
may not be to our benefit, including regulation designed to:



| |  | encourage or mandate the hiring of local contractors; and
|- |  | ---------------------------------------------------------



| |  | require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction.
|- |  | --------------------------------------------------------------------------------------------------------



We are exposed to potentially adverse changes in the tax regimes of each jurisdiction in which we operate.



We are subject to taxation in many jurisdictions, and the final
determination of our tax liabilities involves the interpretation of the statutes and requirements of taxing authorities worldwide. Income tax returns of Norwegian and foreign subsidiaries, unconsolidated affiliates and related entities are routinely
examined by Norwegian and foreign tax authorities. These tax examinations may result in assessments of additional taxes or penalties or both. Significant changes in the tax regimes of the countries in which we operate could have a material adverse
effect on our operations or financial condition. You should read note 28 to our consolidated financial statements for additional information relating to potential taxation-related expenses.



We may be subject to environmental liabilities or be adversely affected by environmental
regulatory action.



Environmental laws and regulations
applicable in the countries in which we conduct operations have generally become more stringent. Our operations and facilities are subject to numerous environmental laws, rules and regulations of Norway and other countries. Sanctions for failure to
comply with these laws, rules and regulations, many of which may be applied retroactively, may include:



| |  | administrative, civil and criminal penalties;
|- |  | ---------------------------------------------



| |  | revocation of permits; and
|- |  | --------------------------



| |  | corrective action orders.
|- |  | -------------------------



Such laws and regulations may expose us to liability for the conduct of, or conditions caused by, others, or for our acts which were in compliance with
all applicable laws at the time such actions were taken. 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, and the offshore drilling industry in particular, our business and prospects could be adversely affected. The modification of existing laws and regulations or the adoption of new laws and
regulations curtailing or further regulating exploratory or developmental drilling and production for oil and gas for political, economic, environmental or other reasons could have a material adverse effect on our operations. We cannot predict the
extent to which our future earnings may be affected by compliance with any such new legislation or regulations. You should read Item 4: Information on the CompanyBusiness OverviewRegulation for additional information on the
regulatory framework in which we operate.



Our operations expose us to
currency fluctuations.



Our principal operations are
currently conducted in Norway, Brunei, Thailand, Indonesia, Malaysia, Congo and Mauritania, and a significant portion of our business is conducted in currencies other than Norwegian kroner. A substantial portion of our revenues and expenses are
denominated in U.S. dollars. Fluctuations in value of the



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Norwegian kroner relative to the U.S. dollar and the other currencies in which we conduct our business have caused, and
will continue to cause, foreign currency transaction and translation gains and losses. In general, a weakening of the Norwegian kroner against other currencies, in which we conduct operations, tends to affect operating income positively, while a
strengthening of the Norwegian kroner against such other currencies tends to affect operating income negatively. Our foreign currency risks arise from:



| |  | fluctuations in exchange rates on the value of our revenues and costs in foreign currencies; and
|- |  | ------------------------------------------------------------------------------------------------



| |  | our investment in certain subsidiaries net assets.
|- |  | ---------------------------------------------------



You should read Item 5: Operating and Financial Review and ProspectsOperating Results for more information on the impact of the lower
U.S. dollar/Norwegian kroner exchange rate on our accounts and Item 11: Quantitative and Qualitative Disclosures About Market Risk.



In addition, we do business in countries that have non-traded, or soft, currencies that have restricted or limited trading markets. We may
accumulate cash in soft currencies which may significantly limit our ability to convert our profits into Norwegian kroner or repatriate our profits from those countries. For those currencies that are not readily convertible, our ability to hedge
exposure is limited because financial hedge instruments for those currencies are nonexistent or limited and because pricing of hedging instruments, where they exist, is often volatile and not necessarily efficient.



Due to multiple currencies involved, the variability of currency exposures
and the potential volatility of currency exchange rates, we cannot predict the effects of exchange rate fluctuations upon future operating results. While we engage in certain foreign exchange transactions with respect to a portion of our foreign
currency exposure, there can be no assurance that these transactions will protect us from the effects of future exchange rate fluctuations. You should read note 19 to our consolidated financial statements for additional information on our currency
risk and Item 11: Quantitative and Qualitative Disclosures about Market Risk.



In addition, fluctuations in exchange rates between the Norwegian kroner and the U.S. dollar will affect the U.S. dollar equivalent of the Norwegian kroner prices of the Class A and Class B shares traded on the Oslo
Stock Exchange and, as a result, may affect the market price of the Class A and Class B ADSs in the United States. Such fluctuations will also affect the U.S. dollar amounts received by holders of Class A and Class B ADSs on conversion by the
depositary of our Class A and Class B ADSs of any cash dividends paid in Norwegian kroner on the Class A and Class B shares represented by the Class A and Class B ADSs. You should read Item 3: Key InformationExchange Rates for
additional information on our exchange rates.



The political and economic
risks of the countries in which we operate may adversely affect our results of operations and financial condition.



In 2004, 40% of our revenues were derived from our international operations, which exposes us to risks inherent in doing business in each of the countries
in which we operate. Our operations in countries other than Norway are subject to various risks peculiar to each country. With respect to any particular country, these risks may include:



| |  | expropriation and nationalization;
|- |  | ----------------------------------



| |  | political and economic instability;
|- |  | -----------------------------------



| |  | armed conflict and civil disturbance;
|- |  | -------------------------------------



| |  | currency fluctuations, devaluations and conversion restrictions;
|- |  | ----------------------------------------------------------------



| |  | confiscatory taxation or other adverse tax policies;
|- |  | ----------------------------------------------------



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| |  | governmental activities that limit or disrupt markets, restrict payments or the movement of funds; and
|- |  | ------------------------------------------------------------------------------------------------------



| |  | governmental activities that may result in the deprivation of contract rights.
|- |  | ------------------------------------------------------------------------------



The occurrence of any of these risks could have an adverse effect on our results of operations and financial condition.



We are exposed to operating risks for which we may not be adequately insured.



Our drilling operations are subject to 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 property and that of others, pollution, suspension of drilling operations and loss of production. Our offshore fleet is also subject to the hazards inherent in
marine operations, either while on site or under tow, such as capsizing, grounding, collision, damage from heavy weather or sea conditions and unsound location. We may also be subject to liability for oil spills, reservoir damage and other
accidents. The principal risks against which we may not be fully insured or insurable, or we may not be able to negotiate adequate contractual protection, are environmental liabilities, which may result from a blowout or similar accident, or
liabilities resulting from reservoir damage alleged to be caused by our negligence. You should read Item 4: Information on the CompanyRegulation for additional information on our operating risk. Further, there can be no assurance
that we will be able to obtain adequate insurance coverage in the future at rates we consider reasonable.



The eventual outcome of legal proceedings may differ materially from our current estimates and beliefs.



From time to time in the ordinary course of our business, we are parties in certain legal proceedings. We are unable to predict with certainty and
accuracy the outcome or effect of any litigation described in this report or of any other pending litigation. Therefore we cannot exclude that, contrary to managements current estimates and beliefs, the eventual outcome of such matters could
have a material adverse effect on our financial position, results of operations or liquidity.



We have some significant clients.



For the year ended December 31, 2004, approximately 28%, 17% and 13% of our revenues were attributable to services provided to our three largest customers, Statoil, Norsk Hydro and BP, respectively. The loss of any of
these significant clients, which could occur over time, could, at least in the short-term, have a material adverse effect on our results of operations. You should read Item 4: Information on the CompanyBusiness
OverviewCustomers for additional information on our significant customers.



We have drilling contracts that contain cancellation clauses.



Drilling contracts contain cancellation clauses that permit our clients and our contractors to terminate the contract upon the occurrence of specified events. Such early cancellation of any of these contracts could
have a material adverse effect on our business and results of operations. There can be no assurance that such clauses will not become effective and, if they become effective, that such parties will not exercise their cancellation right.



We are dependent on skilled personnel.



Our operations require highly skilled personnel to operate and provide
technical services and support for our drilling units. As a result of increased demand for drilling services and increases in the size of the worldwide offshore drilling fleet, from time to time we may experience shortages of qualified personnel.
Such shortages could create upward pressure on wages, difficulties in recruiting adequate crews and delays in reactivating rigs. We are committed to maintain adequate recruitment and training programs in order to meet our anticipated personnel
needs. However, we cannot assure you that we will be able to attract and retain qualified personnel on terms which we find reasonable. The loss of key personnel, or our inability to attract and retain additional, highly skilled employees, could have
a material adverse effect on our business, results of operations and financial condition.



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Our results may be adversely affected by the capital-intensive nature of our business.



Our business is capital intensive and requires significant capital outlays
for equipment such as mobile drilling units, tender rigs and other fixed assets. As a result, our financial expenses are high. Our inability to secure contracts and maintain high utilization rates for our fixed assets and crews will have an adverse
impact on our operating results. Further, there can be no assurance that our existing and future contracts will provide revenues adequate to cover all fixed and variable costs associated with our rigs, or that such contracts will be renewed,
extended or replaced upon expiration.



The concentration of ownership within
the Smedvig family effectively may prevent change of control or the exercise of voting and other rights by other shareholders.



Peter T. Smedvig and other members of the Smedvig family beneficially own directly or indirectly approximately 40.8% of our outstanding Class A shares and
approximately 12.4% of our outstanding Class B shares which do not carry voting rights. As a result, the Smedvig family owns approximately 40.8% of our voting share capital and will continue to be in a position to block certain actions that require
the approval of two-thirds or more of our voting share capital, including amendments to our articles of association and any mergers. Holders of Class B shares are generally not entitled to vote at general meetings of shareholders. You should read
Item 10: Additional InformationMemorandum and Articles of Association for additional information on our capital structure. Peter T. Smedvig is currently chairman of our board of directors. In the event that circumstances arise in
which the interests of the Smedvig family conflict with the interests of other shareholders, the other shareholders could potentially be disadvantaged. This concentration of ownership may also have the effect of delaying, deterring or preventing a
change of control over us. You should read Item 6: Directors, Senior Management and Employees and Item 7: Major Shareholders and Related Party Transactions for additional information on our corporate governance and control.



Civil liabilities may not be enforceable against us.



We are organized under the laws of Norway. All but one of our directors and
all of our executive officers (and certain experts named herein) are not residents of the United States, and all or a substantial portion of their respective assets are located outside the United States. As a result, it may not be possible for U.S.
investors to effect service of process in the United States upon us or such persons, or to enforce against them judgments obtained in United States courts, including judgments predicated upon civil liability provisions of the federal securities laws
of the United States. We have been advised by our Norwegian legal counsel, Thommessen Krefting Greve Lund AS, that in essence the enforceability in original actions or in actions for enforcement of judgments of United States courts of civil
liabilities predicated upon the federal securities laws of the United States will be subject to the defendant giving its consent thereto.



ITEM 4: INFORMATION ON THE COMPANY



GENERAL



We are an offshore drilling contractor
headquartered in Stavanger, Norway. We own and operate a fleet of drilling units specifically designed for offshore oil and gas exploration and development and equipped for operations in harsh environments. Our primary activities are located in the
Norwegian sector of the North Sea, in Southeast Asia, principally offshore Thailand, Brunei, Indonesia and Malaysia and in West Africa, principally offshore Congo and Mauritania. As of December 31, 2004, our mobile drilling rig fleet consisted of:



| |  | 2 semi-submersible drilling rigs: West Alpha and West Venture;
|- |  | --------------------------------------------------------------



| |  | 1 ultra-deepwater drillship: West Navigator; and
|- |  | ------------------------------------------------



| |  | 1 ultra-large jack-up rig: West Epsilon.
|- |  | ----------------------------------------



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We also provide platform drilling services, well services and well maintenance services on fixed
platforms in the Norwegian and UK sectors of the North Sea. We operate the worlds largest fleet of self-erecting tender rigs in Southeast Asia and West Africa. Our tender rig fleet consists of 10 units, which are wholly or partially owned by
us, including three semi-submersible tender rigs. You should read Business OverviewBusiness divisionsTender Rigs Division for additional information on our tender rigs.



We are a public company organized under the laws of Norway incorporated and
operating under the name Smedvig asa. We were incorporated on September 14, 1989. We are subject to the provisions of the Norwegian Act relating to Public Limited Liability Companies. You should read Item 10: Additional
InformationMemorandum and Articles of AssociationDescription of shares for additional information on certain provisions of the Norwegian Public Limited Companies Act.



Our principal executive offices are located at Finnestadveien 28, P.O. Box 110, N-4001 Stavanger, Norway. Telephone number:
+47 51 50 99 00.



Our registered agent in the United States is:
CT Corporation System, 111 Eighth Avenue, New York, NY 10011. Telephone number: +1-212-894-8940.



HISTORY AND DEVELOPMENT OF THE COMPANY



The history of the Smedvig group dates back to 1915, when the Peder Smedvig Shipping Company was established. The Smedvig group entered the offshore oil
and gas market by investing in an exploration company in 1965, at the start of offshore exploration and production activities in the North Sea. In 1973, further investment in the offshore market was made through the design, development and
construction of the first Norwegian-flagged semi-submersible drilling unit, West Venture. The Smedvig group expanded our drilling business with the construction of the Ocean Vanguard in 1982 and the West Vision in 1986 and by purchasing one of the
largest operators of mobile drilling units in Norway in 1988. In 1989, we were reorganized to hold all of the Smedvig familys offshore drilling and oil services businesses. In a private placement followed by a listing on the Oslo Stock
Exchange in 1990, the Smedvig familys interest in us was reduced to approximately 49%. In November 1996, we increased our equity capital through a U.S.$143 million stock offering to U.S., Norwegian and international investors, and by a listing
of our shares on the New York Stock Exchange. The Smedvig family sold one million shares in connection with the equity offering. In 1998, the Smedvig family purchased 425,300 Class A shares and currently owns approximately 39.5% of the outstanding
voting shares and 30.0% of our equity capital. You should read Item 7: Major Shareholders and Related Party Transactions for additional information on our major shareholders. Today, we operate independently from the other Smedvig family
businesses.



In 1990, we increased our international presence
by acquiring Robray Offshore Drilling Company Ltd (the predecessor of Smedvig Asia Ltd), a tender rig company headquartered in Singapore. We sold three of our tender rigs in 1991 and one additional tender rig in 1994 to Varia Perdana Sdn. Bhd., or
Varia Perdana, a Malaysian company established under a joint venture between us, owning a 49% interest, and an entity controlled by the Renong Group, a Malaysian industrial group. In February 1997, we enhanced our presence in the developing
Southeast Asian market through the acquisition of Petrodril Holdings, Inc., or Petrodril, the owner of one tender rig and one semi-submersible tender drilling rig. In January 1998, we signed an agreement to build an advanced semi-submersible tender
rig against a five-year operating contract in Southeast Asia. The unit was delivered in April 1999. In October 2001, the new semi-submersible self-erecting tender rig West Alliance, similar to the design of West Menang, was delivered from the yard
in Singapore. We simultaneously exercised our option to increase ownership interest in the rig from 28% to 100%. The total capital expenditure for the unit amounted to approximately U.S.$85 million.



In May 2004, an enhanced version of our existing tender barge design (T-9)
was delivered in Malaysia. The capital expenditure on this new unit was approximately U.S.$70 million. In April 2004, we entered into an agreement with Keppel FELS in Singapore to build a new semi-submersible self-erecting tender rig. Total capital
expenditure for the new semi-tender (West Setia) is estimated at U.S.$94 million, of which Smedvigs share is approximately U.S.$29 million. The agreement with Keppel FELS is based on the principle that Keppel shall build and own the
semi-submersible hull, and we shall own the derrick equipment set. The agreement includes an option for Smedvig to purchase the semi-submersible hull during a ten-year period at a pre-agreed price.



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In May 2005, we exercised our option under the agreement with Keppel FELS in Singapore to build a new
semi-submersible self-erecting tender rig (semi-tender), West Setia II. Total capital expenditure for the new semi-tender is estimated at U.S.$ 105 million, of which our share is approximately U.S.$ 33 million. It is intended by the parties that
Keppel will build and own the semi-submersible hull, and we will own the derrick equipment set. The new rig is scheduled for delivery in the fourth quarter 2006.



In 1997, after restructuring our rig fleet in order to focus on the upper end of the worldwide offshore drilling market, we
ordered a fifth-generation semi-submersible drilling rig and two deepwater drillships. We contracted these new units against five-year or longer operating contracts with major oil companies. In August 1998, we terminated the construction project for
one of these drillships with the consent of the operator. In February 2000, we took delivery of the other deepwater drillship and the fifth-generation semi-submersible drilling rig.



In April 2001, we completed the sale of our semi-submersible drilling rig West Delta to Odfjell Drilling AS, a Norwegian
drilling contractor. The sale price was approximately U.S.$110 million (approximately NOK 1,000 million), and our gain on the sale was estimated to be approximately U.S.$80 million (NOK 721 million).



In December 2002, we completed the sale of our semi-submersible drilling rig
Ocean Vanguard to Diamond Offshore. The sale price was approximately U.S.$69 million (approximately NOK 494 million) and our gain on the sale was approximately U.S.$51 million (NOK 351 million). The purpose of the divestments was to release capital
for new investments and to allow us to focus on modern and technologically advanced drilling units for harsh environments and deep waters.



In October 2003, our joint venture Varia Perdana, in which we hold a 49% interest, entered into agreements to acquire the self-erecting tender rigs T-9
and Teknik Berkat. The total consideration for these two units was U.S.$95 million. T-9 was constructed in Malaysia and delivered in May 2004. The agreed purchase price for T-9 was approximately U.S.$70 million. Teknik Berkat was completed in 1991
and was owned by Crest Petroleum, our partner in the Varia Perdana joint venture. The agreed purchase price for the unit was U.S.$25 million.



In 2004, we agreed to purchase the remaining 50% interests in both West Alpha and West Navigator, from Difko XLIV and Statoil, respectively. The total
consideration for Difko XLIVs interest in West Alpha was U.S.$75 million in cash combined with an additional payment of up to U.S.$5 million dependent of the price development of our share in the period until December 31, 2005. The agreement
is effective from July 1, 2005. In November 2004, we aquired Statoils 50% share in West Navigator for U.S.$175 million in cash.



In June 2005, we agreed to invest U.S.$ 50 million in Eastern Drilling ASA, which represents an ownership interest in the company of 25 percent. The
investment is made in relation to the construction of a new 6th generation semi- submersible drilling unit where we will be responsible for the construction, supervision, marketing and operations management. Samsung Heavy Industries in South Korea
will construct the semi-submersible drilling rig. Our investment is estimated to total U.S.$ 550 million. The deepwater unit will be constructed for winter operations in northern areas with special focus on minimizing the exposure to the
environment. We expect the drilling rig to be ready for delivery from the yard in the fourth quarter 2007, and commencement of operations is scheduled for the first quarter of 2008. The contract between Eastern Drilling ASA and Samsung includes an
option for an identical unit on similar terms and conditions, which must be declared within 12 months from signing of the contract.



In pursuit of our previous strategy to broaden our range of technology products and services, between 1995 and 1997 we acquired six reservoir software and
management companies and a drilling engineering company, which we combined under the name Smedvig Technologies, to offer reservoir technology products and services. In March 1999, we agreed to merge Smedvig Technologies with Multi-Fluid ASA, a
Norwegian company listed on the Oslo Stock Exchange. The primary business of Multi-Fluid is the production of multiphase flow meters for the oil industry. Multi-Fluid was the surviving entity and was renamed Roxar ASA. The merger was completed in
August 1999. In 2003, Smedvig together with Lime Rock Partners II, L.P., Riverside Investments LLC and Friends of Lime Rock LP formed a company called Lisme AS with the purpose of acquiring the remaining outstanding shares in Roxar. At December 31,
2003, Lisme controlled 100% of Roxar and Smedvig has a 44% ownership interest in Lisme. We report our ownership in Lisme in our financial statements as an associated company, which is the manner in which we have reported Roxar since May 11, 1999.



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In 1991, we expanded our business to include mobile production solutions that capitalize on advances in
floating production technology. We increased our involvement in this developing market in 1994, by committing to design, build and market the Balder FPU, which we subsequently sold to Esso. In April 1998, we decided to discontinue our mobile
production activities in response to deteriorating market conditions, increased competition, low profitability and Essos termination of the Balder contracts. Also in April 1998, we brought a formal claim against Esso in the Stavanger City
Court in Norway in connection with its termination of the Balder contract. In July 2003, Esso was awarded compensation of NOK 667 million and we were required to write-off a receivable of NOK 175 million. In January 2004, we received compensation
from a related dispute with Keppel FELS, pursuant to which we received, among other things, NOK 174 million. See Item 8: Financial InformationLegal Proceedings for further information on the Balder and related proceedings.



We perform drilling and maintenance services on fixed platforms in the North
Sea. In November 1998, as a result of the decision to concentrate on geographic markets in which we had a large business volume, we sold our well services operations in the UK sector of the North Sea. However, in April 2004, we were awarded a
contract with Shell UK Limited for platform drilling services and maintenance on 12 fixed installations on the UK continental shelf. The contract with Shell UK strengthens our position within platform drilling in the North Sea and represents a
re-entry into a market of which we have thorough knowledge. We intend to maintain our leading position in the well services market in the Norwegian sector of the North Sea.



BUSINESS STRATEGY



Our strategy is to strengthen our position as a preferred provider of offshore drilling and well services and pursue growth in selected international
market segments. We seek long-term contracts through well-established relationships with our customers.



The key elements of our strategy platform are:



| |  | We are committed to providing customers with safe and efficient operations.
|- |  | ---------------------------------------------------------------------------



| |  | We intend to execute high-quality operations by combining state-of-the-art mobile units with experienced and skilled employees.
|- |  | -------------------------------------------------------------------------------------------------------------------------------



| |  | We intend to capitalize on innovative technology in deepwater operations.
|- |  | -------------------------------------------------------------------------



| |  | We intend to develop our strong position in the tender rig market and pursue further organic growth opportunities in conventional as well as deep water areas.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | We intend to offer a diversified product range in the well services division through selected value-adding services.
|- |  | --------------------------------------------------------------------------------------------------------------------



INDUSTRY



Overview



The market for offshore drilling and oil services is fundamentally driven by the exploration, development and production expenditures of oil and gas
companies and the availability of offshore drilling units. Industry exploration, development and production expenditures depend on the cash flow of oil and gas producers, which is primarily determined by oil and gas prices and production volumes.
Oil and gas prices are influenced by a variety of political and economic factors beyond the control of oil and gas companies, including worldwide demand for oil and gas, production levels, governmental policies regarding exploration and development
of reserves, political factors in producing countries and weather conditions.



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Increasing focus by the oil and gas companies on reducing their costs has had important implications for
the offshore drilling and oil services business. Some of the oil and gas producers have redefined the core areas of their businesses and have downsized their organizations in order to concentrate their resources, maximize returns from existing
assets and focus on finding and developing new reserves. As a result, oil and gas producers are increasingly outsourcing certain field exploration, development and production activities, including the commercial and technical aspects of development
and operation. This has created new opportunities for the offshore drilling and oil services sector.



After a favorable period for the offshore drilling and services industry beginning in the mid-nineties, which was characterized by an increase in
expenditures for exploration, production and development by oil companies, oil prices decreased to their lowest level in real terms in 1998. As a result of this decrease, oil companies deferred their exploration programs and cut back on planned
investments. This in turn had a negative impact on the drilling industry and resulted in reduced demand for drilling capacity, a general decrease in dayrates and a significant decrease in the utilization rate for the worlds rig fleet. Since
the second half of 1999, oil prices have recovered and, as a result, utilization rates and day rates have rebounded. However, 2002 and 2003 were characterized by significant fluctuations in oil and gas prices and great uncertainties due to the trend
in the world economy. This translated into weaker demand for drilling services in some market segments, especially the North Sea. In 2004, the oil and gas prices have continued to fluctate, but have risen overall and higher prices together with the
oil companies declining oil reserves, has caused demand for drilling units to increase rapidly. For additional information about current market conditions, you should read Outlook.



The following table shows the yearly average crude oil trading prices,
natural gas contract prices and U.S. dollar/Norwegian kroner exchange rates for 2002, 2003 and 2004.



|                                                            |  |      |  |      |  |     
|----------------------------------------------------------- |  | ---- |  | ---- |  | ----
|                                                            |  | 2004 |  | 2003 |  | 2002
|Crude oil (U.S.$ per barrel Brent blend)                    |  | 38.0 |  | 29.1 |  | 25.0
|Natural gas (NOK per scm)                                   |  | 1.10 |  | 1.02 |  | 0.95
|Norwegian kroner/U.S. dollar exchange rate (yearly average) |  | 6.74 |  | 7.08 |  | 7.93



Outlook



In 2004, the world consumption of oil and gas continued to grow at an
increasing pace. This contributed to oil and gas prices reaching historical high levels and boosting activity for the oil and gas industry. The increased spending by oil companies on exploration and production (E&P) pushed the offshore drilling
activity to the highest level seen since the oil price collapse in 1998. The International Energy Agency (IEA) indicates that the global energy demand is set to continue the upward trend with oil and gas consumption climbing annually by 1.7 percent
to a level of 115 billion barrels-of-oil equivalent per year by 2030. Such growth in demand for energy should provide the oil industry with strong incentives to increase the E&P spending further with emphasis on exploration for new oil and gas
reserves and a strong incentive to enhance the recovery rate from existing fields. We expect this could translate into increased demand in all three divisions.



A commonly held view in the oil industry is that the majority of potential new and large oil reserves are located in deeper waters. As a result, the
oil companies have gradually over the years shifted expenditure on exploration from shallow water into deep waters. Following initial technological challenges, the industry has gained significant deepwater experience and the activities in deep
waters are growing rapidly. In 2003, 65 percent of offshore discoveries were made in water depths greater than 1,000 meters. An estimated 60 percent of global discoveries larger than 100 million boe are now in deep waters. We expect the combination
of increased exploration and production spending and focus on deeper waters to create an improved position for the greater part of the mobile fleet, since it is either tailor-made for deepwater operations or may be outfitted for deeper waters. We
have increased our deepwater exposure by taking the tender rig concept into deeper waters presenting the oil companies with a cost-effective development-drilling alternative for deepwater benign environments.



15



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##### Table of Contents

Favorable energy prices make it attractive for oil companies to increase the recovery from existing
fields causing significant additional investment in refurbishing existing platforms and infrastructure in order to extend the lifetime of producing reservoirs. This should provide good growth opportunities for the platform drilling and engineering
activities in the well services division. Demand for work-over of existing subsea wells, the drilling of new and more complex wells in existing reservoirs and the development of smaller fields with tie-backs to existing infrastructure should
contribute to higher demand for mobile units and tender rigs.



We believe that the outlook for our business units is favorable. At the end of first quarter 2005, we had a backlog of drilling contracts averaging 15 months for the mobile units, 18 months for the tender rigs and a satisfactory portfolio
of well service contracts. We expect the current contract coverage combined with the market outlook will strengthen our financial situation creating a basis for increased activity and enhanced performance over time. We believe our financial position
is sound. The above discussion contains forward-looking statements. You should read Introduction: Cautionary Statement Regarding Forward-Looking Statements in this annual report on Form 20-F for a more detailed discussion of
forward-looking statements.



ORGANIZATIONAL STRUCTURE



The following are our significant
subsidiaries, as that term is defined by applicable rules of the Securities and Exchange Commission.



|                    |  |                          |  |                                     
|------------------- |  | ------------------------ |  | ------------------------------------
|Company Name        |  | Country of Incorporation |  | Proportion of ownership Interest (1)
|Smedvig Rig AS      |  | Norway                   |  | 100%                                
|Smedvig Offshore AS |  | Norway                   |  | 100%                                
|AS Smedvig Prodrill |  | Norway                   |  | 100%                                
|Smedvig Asia Ltd    |  | Hong Kong                |  | 100%                                

---

|(1) | Ownership percentage reflects proportion of voting power, as well as economic interest in the company.
|--- | ------------------------------------------------------------------------------------------------------



BUSINESS OVERVIEW



Business divisions



We have three business divisions:



| |  | Mobile Units;
|- |  | -------------



| |  | Tender Rigs; and
|- |  | ----------------



| |  | Well Services.
|- |  | --------------



For accounting purposes only, we also maintain an additional division, Discontinued Activities.



During 2004, 2003 and 2002, operations in the North Sea provided
approximately 65%, 69% and 65% of our revenues and accounted for approximately 47%, 41% and 0% of our operating profit, respectively. The rest of the world, principally Southeast Asia, provided for approximately 35%, 31% and 35% of our revenues and
accounted for approximately 53%, 59% and 100% of our operating profit in 2004, 2003 and 2002, respectively. In 2004, 2003 and 2002, 92%, 97% and 86%, respectively, of our North Sea revenues were attributable to Norway.



16



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##### Table of Contents

SEGMENTAL INFORMATION



The following table shows our principal capital expenditures by segment and by geographic area for 2004, 2003 and 2002:



|                   |  |                         |  |      |  |     
|------------------ |  | ----------------------- |  | ---- |  | ----
|                   |  | Year ended December 31,
|                   |  | 2004                    |  | 2003 |  | 2002
|                   |  | (NOK in millions)      
|By segment         |  |                         |  |      |  |     
|Mobile Units       |  | 1,075                   |  | 21   |  | 273 
|Tender Rigs        |  | 383                     |  | 451  |  | 72  
|Well Services      |  | 23                      |  | 40   |  | 9   
|                   |  |                         |  |      |  |     
|Total              |  | 1,481                   |  | 512  |  | 354 
|                   |  |                         |  |      |  |     
|                   |  |                         | 
|By geographic area |  |                         |  |      |  |     
|Norway             |  | 1,098                   |  | 56   |  | 219 
|Brunei             |  |                        |  | 120  |  | 2   
|Thailand           |  |                        |  | 22   |  | 65  
|Malaysia           |  | 256                     |  | 301  |  | 5   
|Singapore          |  | 116                     |  |     |  |    
|Other              |  | 11                      |  | 13   |  | 63  
|                   |  |                         |  |      |  |     
|Total              |  | 1,481                   |  | 512  |  | 354 
|                   |  |                         |  |      |  |     



We expect to finance
our further capital expenditures out of cash generated by our operations, amounts remaining available under the two credit facilities in the aggregate amount of U.S.$750 million (of which U.S.$ 539 million is outstanding as of June 13, 2005), our
long-term bonds and the issuance from time to time of short-term commercial paper. You should read Item 5: Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFinancial Activities for additional
information on our financing.



The following table sets forth
our revenues, income and assets by geographic area:



|                                                          |  |                         |  |       |   |  |        |  
|--------------------------------------------------------- |  | ----------------------- |  | ----- | - |  | ------ | -
|                                                          |  | Year ended December 31, | 
|                                                          |  | 2004                    |  | 2003  |   |  | 2002   |  
|                                                          |  | (NOK in millions)       | 
|Revenues*                                                 |  |                         |  |       |   |  |        |  
|Norway                                                    |  | 1,843                   |  | 2,045 |   |  | 1,866  |  
|Congo                                                     |  | 253                     |  |      |   |  |       |  
|Thailand                                                  |  | 207                     |  | 278   |   |  | 328    |  
|Brunei                                                    |  | 170                     |  | 338   |   |  | 318    |  
|UK                                                        |  | 151                     |  | 54    |   |  | 189    |  
|Indonesia                                                 |  | 149                     |  | 135   |   |  |       |  
|Malaysia                                                  |  | 144                     |  | 159   |   |  | 399    |  
|Mauritania                                                |  | 110                     |  | 28    |   |  |       |  
|Other                                                     |  | 54                      |  |      |   |  | 254    |  
|                                                          |  |                         |  |       |   |  |        |  
|Total                                                     |  | 3,081                   |  | 3,037 |   |  | 3,354  |  
|                                                          |  |                         |  |       |   |  |        |  
|                                                          |  |                         | 
|Income (loss) before income taxes                         |  |                         |  |       |   |  |        |  
|Norway (1)                                                |  | 170                     |  | (398  | ) |  | 408    |  
|Congo                                                     |  | 45                      |  |      |   |  |       |  
|Thailand                                                  |  | 50                      |  | 55    |   |  | 93     |  
|Brunei                                                    |  | 37                      |  | 173   |   |  | 142    |  
|UK                                                        |  | 24                      |  | (7    | ) |  | (10    | )
|Indonesia                                                 |  | 54                      |  | 36    |   |  |       |  
|Malaysia (2)                                              |  | 55                      |  | 63    |   |  | 192    |  
|Mauritania                                                |  | 14                      |  | (14   | ) |  |       |  
|Other (3)                                                 |  | 189                     |  | (46   | ) |  | (1,374 | )
|                                                          |  |                         |  |       |   |  |        |  
|Income (loss) before income taxes and net financial items |  | 638                     |  | (138  | ) |  | (549   | )



17



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|                                  |  |                         |   |  |       |   |  |       |  
|--------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                  |  | Year ended December 31, |  
|                                  |  | 2004                    |   |  | 2003  |   |  | 2002  |  
|                                  |  | (NOK in millions)       |  
|Net financial items               |  | (90                     | ) |  | (38   | ) |  | (169  | )
|                                  |  |                         |   |  |       |   |  |       |  
|Income (loss) before income taxes |  | 548                     |   |  | (176  | ) |  | (718  | )
|                                  |  |                         |   |  |       |   |  |       |  
|Identifiable assets (4)           |  |                         |   |  |       |   |  |       |  
|Norway                            |  | 3,289                   |   |  | 3,968 |   |  | 4,490 |  
|Congo                             |  | 750                     |   |  |      |   |  |      |  
|Thailand                          |  | 290                     |   |  | 542   |   |  | 490   |  
|Brunei                            |  | 406                     |   |  | 873   |   |  | 447   |  
|UK                                |  | 88                      |   |  |      |   |  | 186   |  
|Indonesia                         |  | 576                     |   |  | 638   |   |  |      |  
|Malaysia                          |  | 402                     |   |  | 152   |   |  | 529   |  
|Mauritania                        |  | 2,146                   |   |  | 15    |   |  |      |  
|Other (5)                         |  | 151                     |   |  | 1,387 |   |  | 1,398 |  
|                                  |  |                         |   |  |       |   |  |       |  
|Total                             |  | 8,098                   |   |  | 7,575 |   |  | 7,540 |  
|                                  |  |                         |   |  |       |   |  |       |  

---

|* | Revenues from non-affiliated customers.
|- | ---------------------------------------

|(1) | Including a loss on the Balder dispute of NOK 668 million for the year ended December 31, 2003 and a gain on sales of assets of NOK 351 million for the year ended December 31, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Including gains on sale of T-2 and T-9 of NOK 15 million for the year ended December 31, 2004.
|--- | ----------------------------------------------------------------------------------------------

|(3) | Including a partial reversal of a previous write-down of West Navigator of NOK 209 million for the year ended December 31, 2004 and a write-down of West Navigator of NOK 1,313
million for the year ended December 31, 2002.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | A substantial portion of the Company ́s assets are mobile drilling units. Asset locations at the end of a period are not necessarily indicative of the geographic distribution
of the revenues or operating profits generated by such assets during such period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Including West Navigator at NOK 943 million and NOK 982 million for the years ended December 31, 2003 and 2002, repectively. At December 31, 2004 West Navigator was operating in
Mauritania.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table sets forth our
revenues by category of activities (you should read note 3 in the Financial Statements for more segmental information):



|                        |  |                         |  |       |  |      
|----------------------- |  | ----------------------- |  | ----- |  | -----
|                        |  | Year ended December 31,
|                        |  | 2004                    |  | 2003  |  | 2002 
|                        |  | (NOK in millions)      
|Revenues*               |  |                        
|Mobile Units            |  | 1,168                   |  | 1,287 |  | 1,423
|Tender Rigs             |  | 955                     |  | 911   |  | 1,076
|Well Services           |  | 958                     |  | 838   |  | 855  
|Discontinued Activities |  |                        |  | 1     |  |     
|                        |  |                         |  |       |  |      
|Total                   |  | 3,081                   |  | 3,037 |  | 3,354
|                        |  |                         |  |       |  |      

---

|* | Revenues from non-affiliated customers.
|- | ---------------------------------------



Mobile Units Division



Our strategy for our Mobile Units division is to offer innovative and cost-efficient services encompassing drilling, completion and maintenance of
offshore wells in deep waters and harsh environments. We seek to maintain high utilization rates of our drilling units through long-term contracts in order to ensure stable cash flow. This renders us less vulnerable to market volatility and enables
further investments and long-term growth. In line with this strategy, the fleet is concentrated on high specification drilling rigs generally employed under long-term contracts. We emphasize high-quality operations, stressing safety, health,
efficiency and environmental considerations.



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##### Table of Contents

Semi-submersible rigsconsist of an upper working and living quarters deck resting on vertical
columns connected to lower hull components. Such rigs operate in a semi-submerged position, remaining afloat, off bottom, in a position in which the lower hull is below the water line and the upper deck protrudes high above the surface.
The rig is typically anchored or dynamically positioned and remains stable for drilling in the semi-submerged floating position, due in part to its wave transparency characteristics at the water line. The term generation indicates the
year the semi-submersible rig was built and, to a certain extent, the rigs drilling and deckload capabilities.



Jack-up rigsare mobile, self-elevating drilling platforms equipped with legs that are lowered to the ocean floor. Tugboats tow a jack-up rig to
the drill-site with its hull riding in the sea as a vessel and its legs raised. At the drill-site, the legs are lowered until they rest on the seabed and jacking continues until the hull is elevated above the surface of the water. After completion
of the drilling operations, the hull is lowered until it rests on the water, the legs are raised and the rig can be relocated to another drill-site.



Drillshipsare self-propelled ships equipped for drilling. Drillships are positioned over the well through either an anchoring system or a
computer-controlled thruster system similar to that used on semi-submersible rigs. Certain drillships are capable of drilling in water depths of more than 6,000 feet, where jack-ups and other bottom-supported rigs are technologically incapable of
operating.



Our dual handling capacity. To perform
drilling operations more efficiently, West Venture and West Navigator are equipped with a computerized hydraulic dual derrick system (RamRig) that provides for dual handling operations.



The dual handling capacity enables drilling and completion operations to be performed simultaneously. The units have two
drilling areas for different tasks such as drilling, handling of blow-out preventer (BOP), cementing or logging, two of which may be performed simultaneously. As an example, while the main derrick is drilling, the auxiliary derrick can prepare and
begin the casing operation. This reduces stoppages in operations and increases drilling efficiency significantly compared to conventional drilling units. The dual-handling feature on West Navigator and West Venture has improved the operating
efficiency of these units by approximately 20% and 40% in single-well and multi-well cases, respectively.



The dual-handling system is especially advantageous for handling of sub-sea production equipment in completion of sub-sea production wells. We believe
that for such operations the handling system on West Venture and West Navigator is one of the best in the world.



On a worldwide basis, only eight drilling units currently combine deepwater capabilities and dual handling capacity. In addition, West Navigator and West
Venture are the only deepwater units with dual handling capacity that are tailor-made for operations in arctic and harsh environments.



In 2004:



| |  | all our rigs were employed in the Norwegian sector of the North Sea with the exception of West Navigator;
|- |  | ---------------------------------------------------------------------------------------------------------



| |  | West Navigator had assignments in the United Kingdom and Mauritania; and
|- |  | ------------------------------------------------------------------------



| |  | the utilization rate of our mobile units averaged 89%.
|- |  | ------------------------------------------------------



In December 2002 we decided to sell the third-generation semi-submersible drilling unit Ocean Vanguard. The purpose of the divestment was to release
capital for new investment and focus on modern and technologically advanced drilling units for harsh environment and deep waters.



19



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In 2004 and 2003, our Mobile Units division accounted for approximately 38% and 42% of our revenues.
Operating profit for the division in 2004 was NOK 89 million as compared to a operating profit of NOK 129 million in 2003. The decrease in operating profit was mainly due to a lower dayrate, a lower U.S.$/NOK exchange rate and the fact that the
first half of 2003 included a contribution related to the management of the leased-back semi-submersible rig Ocean Vanguard.



West Alpha. During 2004 the fourth-generation semi-submersible rig West Alpha worked for Statoil on the Heidrun and Kristin fields in the Norwegian
Sea. In March 2004, the rig had a 40-day yard-stay in connection with a five-year mandatory classification survey. The unit is on a firm contract with Statoil until August 2005, but the contract with Statoil contains options to extend the period
until February 2006. In September, Smedvig entered into an agreement to acquire the remaining 50 percent ownership interest in West Alpha, increasing Smedvigs ownership share to 100 percent with effect from July 1, 2005. The purchase price is
U.S.$ 75 million combined with an additional payment dependent on the price development of Smedvigs Class A share in the period prior to December 31, 2005. The additional payment is capped at U.S.$ 5 million. In March 2005, we were awarded a
letter of intent by Statoil, on behalf of a consortium consisting of Norsk Hydro, Eni Norge, Norske Shell and Statoil, for West Alpha. The drilling assignment has a three-year duration. Commencement of operations is in direct continuation of present
operations, scheduled for February 2006. Under the letter of intent, West Alpha will be mainly drilling exploration wells on the Norwegian continental shelf.



West Epsilon. In 2004, the jack-up rig West Epsilon continued the current contract with BP on the Valhall field in the Norwegian sector. As a
result of a dispute between the Norwegian Shipowners Association and the Federation of Oil Workers Trade Unions (OFS), the activity on the jack-up was shut down from September to October. Over the course of the year BP exercised several of their
options to extend the contract. The current firm contract is expected to keep the unit employed until October 2005. In addition, there is an option in the contract which, if exercised, would keep the unit employed until May 2007.



West Venture. In 1996, we, in close cooperation with Norsk Hydro,
developed a new fifth-generation semi-submersible drilling rig concept intended for efficient development drilling in deep water and harsh environments. In February 1997, we ordered West Venture from Hitachi Zosen, the Japanese yard, on the basis of
a long-term contract with Norsk Hydro. West Venture is one of the worlds first fifth-generation rigs and is equipped with a dual drilling derrick system (RamRig), a full dynamic positioning system and a deepwater capability of 5,500 feet. Its
drilling efficiency exceeds that of our other existing drilling rigs and the dual drilling system is especially advantageous in completion of subsea production wells. The rig was delivered in February 2000. The investment cost increased due to the
delayed delivery and totaled U.S.$340 million (approximately NOK 2,620 million).



Since March 2000, the rig has been drilling on the Troll field offshore Norway for Norsk Hydro and has demonstrated substantial drilling efficiency improvements in drilling and completion operations compared to
conventional drilling. In January 2004, we signed an agreement with Norsk Hydro to extend the duration of the drilling contract for the unit. The extension of the drilling contract has a firm duration of two years and annual renewal options for five
additional years. In March 2004, the unit had a short yard-stay in order to repair one of the columns of the hull after a supply vessel delivering supplies ran into and caused minor damage to the hull.



West Navigator. In February 2000, we took delivery of West Navigator.
Immediately after delivery, the ship began drilling operations for Statoil in the Norwegian sector of the North Sea. This vessel is equipped with RamRig, a full dynamic positioning system, a high deck load capacity and a deepwater drilling
capability of 8,200 feet. We have operational responsibility for, and a 50% ownership interest in, the drillship, in which Statoil ASA has the remaining 50% ownership interest. The investment cost for the drillship was approximately U.S.$660 million
at delivery, a significant increase from the original estimate of U.S.$250 million. The increase in cost was primarily due to design modifications, weight increases, delays in equipment deliveries, equipment for deeper waters and tight time
schedules.



In 2002, the drillship was written down by NOK
1,313 million. The write-down was triggered by our impairment analysis under the new Norwegian accounting standard for impairment of assets, implemented by us in 2002. For additional information on this write-down, you should read note 6 to the
consolidated financial statements.



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##### Table of Contents

Over the course of the year, the drillship West Navigator, was docked in Algeciras, Spain, until the unit
commenced operations for Statoil in the Norwegian Sea. In May 2004, West Navigator moved to U.K. waters to perform drilling services for ChevronTexaco and Amerada Hess. Thereafter, the drillship returned to West Africa for an 11-month contract with
Woodside offshore Mauritania. In March 2004, we were awarded a letter of intent by A/S Norske Shell to employ West Navigator in the Ormen Lange field in the Norwegian Sea. The assignment includes drilling eight deepwater wells, with options for four
additional wells. The commencement is scheduled in October 2005. The drilling period for the firm part of the contract is estimated at 740 days, while the option period could have a duration up to one year. In fourth quarter 2004, we purchased
Statoils 50% ownership in the drillship for U.S.$175 million in cash. The purchase agreement provided that we received 100% of West Navigators cash flow from May 1, 2004 until November 15, 2004 as part of the purchase price. Cash flow
from November 15, 2004 is part of our operating profit.



The
following table sets forth certain information concerning our mobile drilling units:



Mobile Drilling Units



|                                |  |             |  |                                     |  |                         |  |                     |  |                                |  |                             |  |                                                 
|------------------------------- |  | ----------- |  | ----------------------------------- |  | ----------------------- |  | ------------------- |  | ------------------------------ |  | --------------------------- |  | ------------------------------------------------
|Type and Name                   |  | Ownership % |  | Maximum Water Depth Capability (ft) |  | Variable Deck Load (MT) |  | Attributes          |  | Year Built/ Latest Enhancement |  | Customer as of June 1, 2005 |  | Estimated Contract Expiration as of June 1, 2005
|Semi-submersibles               |  |             |  |                                     |  |                         |  |                     |  |                                |  |                             |  |                                                 
|West Venture (fifth-generation) |  | 100.0       |  | 5,500                               |  | 5,000                   |  | DP, DD,TDS4M 15K    |  | 2000/-05                       |  | Norsk Hydro                 |  | August 2006/Options forfurther fiveyears        
|                                |  |             |  |                                     |  |                         | 
|West Alpha (fourth-generation)  |  | 53.4        |  | 2,500                               |  | 5,000                   |  | SP, TDS,3M, 15K     |  | 1986/-99                       |  | Statoil                     |  | February2009                                    
|                                |  |             |  |                                     |  |                         | 
|Drillship                       |  |             |  |                                     |  |                         |  |                     |  |                                |  |                             |  |                                                 
|West Navigator                  |  | 100.0       |  | 8,200                               |  | 5,800                   |  | DP, DD, 3M,TDS, 15K |  | 2000/-04                       |  | Woodside                    |  | September2005                                   
|                                |  |             |  |                                     |  |                         |  |                     |  |                                |  | Shell                       |  | Second halfof 2007/Options forone
furtheryear   
|Ultra-large Jack-up             |  |             |  |                                     |  |                         |  |                     |  |                                |  |                             |  |                                                 
|West Epsilon                    |  | 100.0       |  | 380                                 |  | 3,350                   |  | IC, SO, TDS,3M, 15K |  | 1993                           |  | BP                          |  | October 2005Options for13 wells                 



Attributes



|                         |  |                                       |  |                                 |  |                                    
|------------------------ |  | ------------------------------------- |  | ------------------------------- |  | -----------------------------------
|DP = Dynamic Positioning |  | IC = Independent-Leg Cantilevered
Rig |  | SP = Self-Propelled             |  | 4M = Four Mud Pumps                
|DD = Dual Derrick        |  | SP = Skid-Off Capability              |  | TDS = Top-Drive Drilling System |  | 3M = Three Mud Pumps               
|                         |  |                                       |  |                                 |  | 15K = 15,000 psi Blow-Out Preventer



We generally seek to
secure long-term contracts for our mobile drilling units under favorable market conditions that allow for attractive fixed and incentive-type dayrate structures. Our contracts for mobile drilling units provide for a basic drilling dayrate and some
provide for a lower or zero dayrate during periods of mobilization or when drilling operations are interrupted or restricted by equipment breakdowns, adverse environmental conditions or other conditions beyond our control. The contracts also contain
clauses pursuant to which the customer assumes responsibility for all or a substantial part of any changes in personnel, insurance or other costs, subject to certain limitations. The initial terms of our current mobile drilling contracts generally
expire on the estimated expiration date specified in the table above, which our customers may extend through the exercise of options provided for in certain of the contracts. There can be no assurance that such contracts will be renewed or extended
following their expiration or termination, that new contracts will be available or, if contracts are available, that they will provide revenues adequate to cover all fixed and variable costs associated with the rigs. At December 31, 2004, we had 15
months of average contract coverage for our mobile units, compared to nine months at December 31, 2003.



21



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##### Table of Contents

The following table sets forth certain information of our rig utilization during the past three years,
ending December 31, 2004:



Mobile Drilling Fleet Utilization
(1)



|                                    |  |                                      |   |  |      |   |  |      |  
|----------------------------------- |  | ------------------------------------ | - |  | ---- | - |  | ---- | -
|                                    |  | Averages for Year Ended December 31, |  
|                                    |  | 2004                                 |   |  | 2003 |   |  | 2002 |  
|Fifth-Generation Semi-submersibles  |  |                                      |   |  |      |   |  |      |  
|Supply(2)                           |  | 1.0                                  |   |  | 1.0  |   |  | 1.0  |  
|Utilization                         |  | 96                                   | % |  | 99   | % |  | 84   | %
|Fourth-Generation Semi-submersibles |  |                                      |   |  |      |   |  |      |  
|Supply                              |  | 1.0                                  |   |  | 1.0  |   |  | 1.0  |  
|Utilization                         |  | 83                                   | % |  | 91   | % |  | 52   | %
|Other Semi-submersibles             |  |                                      |   |  |      |   |  |      |  
|Supply                              |  | 0.0                                  |   |  | 0.0  |   |  | 1.0  |  
|Utilization                         |  |                                     |   |  |     |   |  | 100  | %
|Jack-ups                            |  |                                      |   |  |      |   |  |      |  
|Supply                              |  | 1.0                                  |   |  | 1.0  |   |  | 1.0  |  
|Utilization                         |  | 98                                   | % |  | 99   | % |  | 83   | %
|Drillships                          |  |                                      |   |  |      |   |  |      |  
|Supply                              |  | 1.0                                  |   |  | 1.0  |   |  | 1.0  |  
|Utilization                         |  | 80                                   | % |  | 67   | % |  | 67   | %

---

|(1) | Data for each period is based on all rigs operated during such period. Statistics have been determined under the revenue method, which is the ratio of the contractual
revenue actually generated to the maximum potential revenue obtainable pursuant to the operating contract.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Supply figures represent the number of active vessels in Smedvigs fleet adjusted for the percentage of the year in service under Smedvigs ownership.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



Tender Rigs Division



We are one of the worlds leading operators of self-erecting tender
rigs. Through our wholly owned subsidiary, Smedvig Asia Ltd., we have more than 30 years of offshore operating experience in the Southeast Asia region, where we are one of the largest operators of self-erecting tender rigs used for production
drilling and well maintenance. We aim to further increase our involvement in production drilling in Southeast Asia. This strategy entails an organic expansion of the tender rig fleet to maintain our market position. We anticipate that the market in
Southeast Asia will demand more advanced units in the longer term due to the development of new and improved technology and drilling in deeper waters that requires higher drilling and deck load capabilities than traditional tender rigs. In order to
meet this challenge, we took delivery of one advanced semi-submersible tender rig in 2004 and have one under construction together with the Singaporean shipyard Keppel Shipyard, which we expect to be delivered in the third quarter of 2005. The new
semi-submersible tender rig will initially be partially owned by each of Keppel FELS and Smedvig and operated and managed by Smedvig for a ten-year period, during which time Smedvig will have an option to acquire 100% of the rig at an agreed price.
An additional semi-submersible tender rig was ordered in 2005 for delivery in 2006 at the same conditions as the semi-submersible tender rig now being built.



As of December 31, 2004, we operated a fleet of ten self-erecting tender drilling rigs, which represents approximately 48% of the worlds fleet of
this type of drilling unit. We wholly own six of the units, while Varia Perdana owns the remaining four.



Self-erecting tender rigs allow for drilling operations to be performed from fixed platforms without permanently installed drilling facilities. Prior to
start up of drilling operations, a heavy-lift crane onboard the tender



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##### Table of Contents

rig lifts the modularized drilling equipment onto the platform. After completion of the drilling operations, the
equipment is removed in a similar manner. The tender contains living quarters, a helicopter deck, storage for drilling supplies, power supply and support systems for running the drilling operations.



There are two types of self-erecting tender rigs: the traditional mono-hull
purpose-built barge and the newer, semi-submersible tender rig (semi-tender). The semi-tender has a hull design that allows for operations in rougher weather conditions. There are four units of the semi-submersible design worldwide, three of which
are owned and operated by us (West Pelaut, West Menang and West Alliance). Historically, the use of self-erecting tender rigs has been important in Southeast Asia because it allows development and workover operations to be done on small fixed
platforms, without the need for permanently installed drilling packages.



The average utilization rate for the units was 90% as compared to 94% in 2003 due to mandatory five-year classification surveys, yard-stays and temporary lay-up periods for various tender rigs during the year.
Operating profit decreased to NOK 233 million from NOK 326 million in 2003 due to lower utilization of the tender rig fleet and a lower U.S.$/NOK exchange rate.



In 2004, the market conditions for tender rigs experienced a temporary slow-down as several development projects in Southeast Asia were pushed out in
time. Nevertheless we secured new contracts for our available units, in addition, several oil companies exercised options to extend the duration of certain contracts for our units.



Currently, eight of our tender rigs are employed in Southeast Asia, while two have operation in West Africa. At December 31,
2004, the average contract coverage for our tender rigs was 18 months, compared to 24 months at December 31, 2003.



The table below sets forth certain information concerning our tender rig fleet:



Tender Rig Fleet



|                 |  |            |  |                          |  |                             |  |                                                     
|---------------- |  | ---------- |  | ------------------------ |  | --------------------------- |  | ----------------------------------------------------
|Rig Designation  |  | Ownership% |  | Year Built/LatestUpgrade |  | Customer as of June 1, 2005 |  | Estimated Contract Expiration as of June 1, 2005 (1)
|T-3(2)           |  | 49         |  | 1980/1998                |  | PTT                         |  | December 2006/Option for six additional months      
|T-4              |  | 100        |  | 1981/2003                |  | Unocal                      |  | April 2008                                          
|T-6(2)           |  | 49         |  | 1983/1998                |  | Petronas Carigali           |  | January 2006                                        
|T-7              |  | 100        |  | 1983/1995                |  | Unocal                      |  | July 2006                                           
|T-8              |  | 100        |  | 1982/1998                |  | Total                       |  | December 2005/Option for three additional months    
|T-9(2)           |  | 49         |  | 2004                     |  | Esso                        |  | January 2006/Option for one additional year         
|Teknik Berkat(2) |  | 49         |  | 1991                     |  | Petronas                    |  | July 2005                                           
|West Pelaut      |  | 100        |  | 1994                     |  | Shell Brunei                |  | April 2009/With 5 one-year options                  
|West Menang      |  | 100        |  | 1999                     |  | Total                       |  | August 2006/Option for eighteen additional months   
|West Alliance    |  | 100        |  | 2001                     |  | Shell                       |  | January 2005/Option for six additional months       
|West Setia       |  | 100        |  | 2005                     |  | Newbuilding                 |  | December 2007                                       

---

|(1) | The duration of the contracts depends on the oil companies drilling programs. The above-mentioned dates are therefore estimated ending dates.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Varia Perdana, a Malaysian joint-venture company in which we own a 49% interest, wholly owns the company Crest Tender Rigs, who owns the rigs T-3, T-6, T-9 and Teknik Berkat.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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T-2. In 2004, tender rig T-2 worked for Exxon Mobile Exploration and Production Malaysia Inc
(EMEPMI) in Malaysia until the unit was replaced by T-9 in July 2004. As a consequence of the condition and the age of the barge it was resolved to retire T-2 as of July 2004.



T-3. In 2004, tender rig T-3 continued its work for Petronas Carigali in Malaysia until July and was thereafter
laid-up in Malaysia for the remainder of the year. In February 2005, following a mandatory five-year classification survey, the unit commenced a three-month operation for Unocal in Thailand. Thereafter the tender rig commenced an 18 month contract,
with options for an additional six months, in Thailand for PTT Exploration and Production Company.



T-4. In 2004, T-4 continued its work for Unocal in the Gulf of Thailand under a long-term contract that runs until April 2008.



T-6. In 2004, T-6 continued its work for Petronas Carigali in
Malaysia. The long-term contract was extended by one year to January 2006.



T-7. In 2004, T-7 continued drilling operations in Thailand for Unocal. The long-term contract ends in the third quarter of 2006.



T-8. During the first months of 2004, T-8 undertook a five-year mandatory classification survey. The tender rig was
thereafter relocated to Congo, West Africa, where the unit commenced operations for Total in May. The assignment for T-8 has been extended to December 2005.



T-9. In June 2004, the newbuilt tender barge T-9 was delivered and subsequently replaced the T-2 unit. T-9 continued the contract with ExxonMobil
in Malaysia, a contract that in the fourth quarter was extended by 12 months from January 2005 to January 2006.



Teknik Berkat. In January 2004, Teknik Berkat was added to the Crest Tender Rigs fleet. The tender rig worked for Petronas Carigali through the
year with the exception of a short lay-up period from late September to November. The current contract with Petronas Carigali extends to July 2005.



West Pelaut. In 2004, the semi-tender West Pelaut continued the operations for Brunei Shell under a long-term contract that extends until April
2009.



West Menang. During the first months of 2004,
West Menang undertook a five-year mandatory classification survey. The tender rig was thereafter relocated to Congo, West Africa, where the unit commenced operations for Total in June. The firm contract extends until August 2006 with options for
Total to extend the assignment by another 550 days.



West
Alliance. In 2004, the semi-tender West Alliance performed deepwater operations for Unocal offshore east Borneo in Indonesia, the first deepwater assignment ever for a self-erecting tender rig. The original contract with Unocal was supposed to
last until February 2006. However, due to postponed installation of the second TLP on the West Seno field, Smedvig was notified by Unocal of an early termination of the contract with effect from December 2004. In January 2005, the semi-tender
commenced a new 12 months contract with Shell and is currently operating offshore Sarawak. Shell has an option to extend the contract for a further six months.



West Setia. In March 2004, the Company announced a co-operation agreement with Keppel Shipyard for the purpose of building a new semi-tender.
Total capital expenditure is estimated at U.S.$ 94 million, of which Smedvigs share is approximately U.S.$ 29 million. The agreement is based on the principle that Keppel shall build and own the hull, while Smedvig shall own the derrick
equipment set. For a period of ten years, Smedvig shall be responsible for marketing, managing and operating the rig. Smedvig has an option to purchase the hull at a pre-agreed price at any time during the management period. West Setia is
particularly well suited for deepwater drilling operations in combination with floating wellhead platforms. Delivery is scheduled for August 2005. Smedvig has an option to build another semitender based on a similar co-operation arrangement.



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In February 2005, Smedvig was awarded an 800-day contract for West Setia by Murphy for deep waters in
Malaysia. Commencement is scheduled for September/October 2006. This project will be the first ever to utilize a tender rig for drilling from a Spar platform. In April 2005, we were awarded a letter of intent by Shell in Brunei for West Setia with a
firm duration of six months and an option for another six months. Commencement of operations is scheduled for August 2005, following delivery of the rig from the yard Keppel FELS.



The following table sets forth certain information of the utilization of our tender rig for the last three years:



Tender Rig Utilization (1)



|            |  |         |   |  |         |   |  |         |  
|----------- |  | ------- | - |  | ------- | - |  | ------- | -
|            |  | 2004    |   |  | 2003    |   |  | 2002    |  
|            |  | Company |   |  | Company |   |  | Company |  
|Supply(2)   |  | 10      |   |  | 9       |   |  | 9       |  
|Utilization |  | 90      | % |  | 94      | % |  | 99      | %

---

|(1) | Data for each period is based on all rigs owned and operated during such period. Statistics have been determined under the working method, which is the ratio of the
number of rig days in operation to the total number of rig days available.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Supply figures represent the number of active vessels in Smedvigs fleet adjusted for the percentage of the year in service under Smedvigs ownership.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------



Well Services Division



We aim to maintain our strong positions in the platform production drilling
and the well services markets in the Norwegian sector of the North Sea as well as pursue selected international opportunities. We target to deliver safe, innovative and efficient well services through experienced and skilled employees and quality
management systems. In this process, long-term relationships with oil companies are essential. The Company targets a growing market for upgrading, maintenance and modification work of drilling equipment, facilities and related systems.



In 2004, we performed production drilling and maintenance activities on
several fixed installations in the Norwegian and UK sector of the North Sea. In addition:



| |  | we conducted well service operations from a number of mobile drilling rigs and fixed installations; and
|- |  | -------------------------------------------------------------------------------------------------------



| |  | we completed several projects to modify and upgrade equipment on fixed installations.
|- |  | -------------------------------------------------------------------------------------



In 2004, the Well Services division accounted for approximately 31% of our revenues, compared to 28% in 2003. The increase
was mainly a result of the commencement of the platform drilling contract with Shell in the UK sector as well as start-up of operations for Statoil on the Gullfaks platforms. Operating profit increased to NOK 92 million in 2004 from NOK 88 million
in 2003.



Statfjord (Statoil).Over the course of 2004,
drilling and maintenance operations as well as modification and upgrading of drilling equipment were performed for Statoil on the A, B and C platforms on the Statfjord field. We have been involved in operations on the Statfjord field since 1982. In
the third quarter, we were awarded a four-year contract extension by Statoil for the Statfjord platforms.



Gullfaks (Statoil). In June 2004, we were awarded a new four-year platform drilling contract by Statoil for the Gullfaks A, B and C platforms. The
commencement of the platform drilling and maintenance operations on the Gullfaks A, B and C platforms took place in October 2004.



Veslefrikk (Statoil). Veslefrikk was the first field in the Norwegian North Sea to be developed with a floating production unit. A semi-submersible
drilling rig was converted to a production unit, complete with living quarters and processing equipment, and renamed Veslefrikk B. In addition to our drilling crew, the Veslefrikk B complement consists of our maritime crew, which serves in the
maritime control room. This room is similar to the bridge on a ship and is responsible for mooring, positioning, ballasting and operating cranes. The drilling equipment



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is installed on a fixed wellhead platform, Veslefrikk A. In 2003, we conducted drilling operations on the A platform and
supplied maritime personnel on the B platform for Statoil. The contract on Veslefrikk has a duration through the field lifetime, currently estimated to extend to 2015.



Ula/Valhall (BP). In 2004, we performed drilling and maintenance operations on the Ula and Valhall fields. The
work-scope included extensive upgrading project work in preparation for drilling as well as supporting BP with personnel for the new Valhall water injection platform. The contract with BP for the Ula and Valhall fields was extended to the end of
2005. In addition, BP has options for one-year extensions.



Gyda (Talisman). In 2004, we continued drilling operations and maintenance work on Gyda. The contract with Talisman Energy was extended by one year from December 2004 to December 2005.



United Kingdom (Shell). In April 2004, we were awarded a contract for
platform drilling services and maintenance by Shell UK Limited on 12 fixed installations on the UK continental shelf. The drilling assignment has an initial term of four years with two options to renew for two years each. The contract employs
approximately 200 people, who mainly are recruited locally. The operations are managed from a newly-established office in Aberdeen and include platform drilling on Brent A, B, C and D, Nelson, Auk, Cormorant Alpha, Dunlin, Eider, Fulmar, North
Cormorant and Tern.



Wireline Services. We provide
wireline well intervention for the purpose of electronically or mechanically processing or obtaining data from live wells. The wireline business performed operations for ConocoPhillips, Norsk Hydro, Pertra, Schlumberger, Shell and Statoil. In 2004,
the business showed a seven percent growth in revenues and operating profit in the order of seven percent. At year-end, the average contract coverage for wireline services was 12 months.



The following table sets forth the status of our contracts for fixed well service projects:



Fixed Installations



|                       |  |          |  |                     |  |                                                 
|---------------------- |  | -------- |  | ------------------- |  | ------------------------------------------------
|Field                  |  | Customer |  | Contract Awarded    |  | Estimated Contract Expiration as of June 1, 2005
|Norway                 |  |          |  |                     |  |                                                 
|Statfjord A, B and C   |  | Statoil  |  | July 1982/June 2004 |  | September 2008                                  
|Gullfaks A, B and C    |  | Statoil  |  | June 2004           |  | September 2008/Three additional two-year options
|Veslefrikk A and B     |  | Statoil  |  | July 1987           |  | Field lifetime (1)                              
|Ula/Valhall            |  | BP       |  | March 2000          |  | December 2005/Option for one additional year    
|Gyda                   |  | Talisman |  | March 2000          |  | December 2005/Option for one additional year    
|                       |  |          | 
|United Kingdom         |  |          |  |                     |  |                                                 
|12 fixed installations |  | Shell UK |  | April 2004          |  | June 2008/Two additional two-year options       

---

|(1) | Expected to be until 2015.
|--- | --------------------------



Sales and marketing



Our marketing staff and our senior executives in each division are in regular contact with our existing and potential customers. We respond to requests for tenders and proposals through both informal discussions and formal presentations. In
addition, we actively seek opportunities to promote the use of our assets and services.



Customers



In the last five years, we have
provided offshore drilling and other services to many leading international oil and gas companies, including Statoil, Norsk Hydro, Phillips Petroleum, Esso, Total, Amerada Hess, BP, Unocal, Shell, Petronas, ExxonMobil, Thaipo and PTTEP. Our three
largest customers in 2004 were Statoil, Norsk Hydro,



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and BP, which accounted for 28%, 17% and 13% of our consolidated revenues, respectively. Our three largest customers
during 2003 were Statoil, Norsk Hydro and BP, which accounted for 23%, 22% and 20% of our consolidated revenues, respectively, while our three largest customers during 2002 were Norsk Hydro, BP and Statoil, which accounted for 28%, 14% and 14% of
our consolidated revenues, respectively.



Our contracts



Our preference is to employ our assets on the basis of long-term contractual
arrangements. In a market where dayrates are profitable and rising, we seek long-term contracts only, while in weaker markets we generally accept only short-term contracts. Long-term contracts require less mobilization/demobilization costs, decrease
volatility of return on assets, require less management time and, in our opinion, enhance customer relationships. Although this strategy affords some protection against the negative effects of cyclicality and/or volatility in the industry, this
preference for long-term asset utilization also limits our ability to participate fully in short-term upswings in the market. We believe these advantages offset the possible foregone revenues caused by dayrates that in some periods may be lower than
short-term market peaks.



Contracts for services of our Mobile
Units division, Tender Rigs division and Well Services division are typically multi-year. Actual contract duration generally varies depending on the number of wells involved and the time required for the particular project. Contracts generally
provide an established dayrate structure, payable monthly, and some provide for lower dayrates during periods of immobilization or under certain circumstances when operations are interrupted or restricted. Under some contracts, we are entitled to
additional payments for exceeding performance goals. The contracts also provide for the assumption by the customer of responsibility for changes in certain costs. Many contracts are extendable at the option of the other party. Such options may
involve re-setting the dayrate based on current market rates. The contracts may be terminated by the customer upon the occurrence of certain events, including force majeure, and some contracts permit termination by the customer at any time without
cause, subject to the payment of termination fees that are generally intended to minimize the financial impact of such termination on us. In addition, some of the operating contracts for the units under construction may be terminated and provide for
liquidated damages if we fail to deliver the units within the time frames specified in the contract.



Competition



We are
faced with competition that may vary in nature with regard to each of our business divisions. While consolidation in the offshore drilling and oil services industry has decreased the number of competitors over the past few years, some of our
competitors have significantly greater financial, marketing, personnel and other resources than we do. As a result, such competitors in some cases may be better able to withstand cyclical fluctuations in demand for offshore drilling and oil services
or to compete for existing demand for certain services.



Our
Mobile Units division, Tender Rigs division and Well Services division operate in the offshore drilling industry, which historically has been highly cyclical, with periods of high demand, short rig supply and high dayrates followed by periods of low
demand, excess rig supply and low dayrates. The market for mobile drilling and tender rigs is characterized by high capital costs, long lead times for construction of new rigs and significant competition for relatively few customers. The offshore
drilling business is influenced by many factors, including the current and anticipated prices of oil and gas (which affect the expenditures by oil and gas companies for exploration and production) and the availability of drilling units. Drilling
contracts are traditionally awarded on a competitive bid basis. While an operator selecting a rig may consider, among other things, the quality of service and equipment, price competition is often the primary factor in determining who, among
qualified contractors, is awarded a job. However, it is not unusual for contracts for technically advanced drilling units to be awarded on a negotiated basis rather than through competitive bidding.



REGULATION



Many aspects of our operations are affected by domestic and foreign political
developments and are subject to numerous domestic and foreign laws and regulations that may relate directly or indirectly to the offshore drilling



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and oil services industry, including, without limitation, laws and regulations controlling the discharge of materials
into the environment, requiring removal and cleanup or otherwise relating to environmental protection, and certification, licensing, safety and training and other requirements imposed by treaties, laws, regulations and conventions in the
jurisdictions in which we operate. The offshore drilling and oil services industry is dependent on demand for services from the oil and gas exploration industry and, accordingly, is affected by changing taxes, regulations and other laws relating to
the oil and gas industry generally.



In recent years, concern
over protection of the environment has increased. Offshore drilling in certain areas has been opposed by environmental groups and, in certain areas, has been restricted. To date, we have not had material operations in any areas where offshore
drilling has been subject to such opposition or restriction. Accordingly, such opposition and restriction has not had a material impact on our operations. However, 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 and the offshore drilling industry in particular, our business and prospects
could be adversely affected.



Our operations 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 we conduct operations have generally become more stringent. Such laws and regulations may
expose us to liability for the conduct of or conditions caused by others, or for our acts which were in compliance with all applicable laws at the time such acts were taken. While we do not believe that environmental regulations have materially
increased our capital expenditures or had a material adverse effect on our results of operations or competitive position, we have invested and will continue to invest in capital expenditures necessary for the protection of life, health and the
environment. However, the modification of existing laws or regulations or the adoption of new laws or 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 our operations. We cannot predict the extent to which future earnings may be affected by compliance with any such new legislation or regulations. In addition, we may become
subject to additional laws and regulations as a result of future rig relocations.



Whenever possible, we generally seek to obtain indemnity agreements from our customers requiring such customers to hold us harmless in the event of liability for pollution that originates below the water surface, and
maintain marine liability insurance and additional expense coverage which affords limited protection to us. There can be no assurance that such contractual indemnification or insurance coverage will be sufficient or effective to protect us from
liability or exposure to additional expense.



The majority of
our mobile units and tender rigs as well as our drillship are taxed according to the Norwegian tax scheme for shipowning and offshore companies. According to the principles of the scheme, no income tax is assessed on the operating results of those
companies that qualify and decide to participate in the scheme. Under the scheme, taxation will occur when dividends are paid by companies within the scheme or when a company decides to withdraw from the scheme. In addition, some of our net
financial items are subject to ordinary Norwegian taxation. We joined the tax scheme with effect from 1996 for the majority of our fleet. For companies entering the scheme, deferred tax on temporary differences are reversed. Since we deem it
preferable to stay within the scheme in the long term and available taxed funds for distribution are expected to be sufficient to cover expected dividend payments in the long term, no provision for taxes has been provided for those companies within
the scheme.



Through the EEA agreement, most rules and
regulations in the EU bind Norway. For state subsidies the EU has set up certain guidelines known as the State Aid Guidelines. These guidelines have recently been revised with a deadline for implementing the amendments in the national legislation
set at June 30, 2005. One element in the revised guidelines is the definition of activities known as maritime transport. In this connection, some uncertainty has been introduced as to whether mobile units in the offshore oil and gas
industry will qualify as maritime transport in the future.



On March 11, 2005 the Norwegian Ministry of Finance issued a discussion paper with proposed changes to the Norwegian tax scheme for ship and rig owning companies. The paper states that mobile drilling units will no longer qualify as
maritime transport. Furthermore, it is suggested and anticipated that companies that do not qualify to stay in the tax scheme will be given a transitional period to the end of 2005 to facilitate adjustments to the



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proposed changes. The Company is of the opinion that this change is of such significance that transitional rules to
mitigate the tax burden of being excluded from the tax scheme must be evaluated carefully by the Ministry of Finance. Smedvig will take an active part in a process to establish such transitional rules. If no transitional rules are provided for, the
Company will recognize income tax expenses of approximately NOK 850 million, which will be payable based on the declining balance method at 20 percent per annum. At December 31, 2004, the Company had a tax asset derived from tax loss carry forwards
amounting to NOK 179 million. This tax asset may be utilized to reduce the effect of any increase in payable taxes. On June 17, 2005, the Norwegian Parliament requested that the Government propose transitional rules that do not result in an
unreasonably high impact on the annual income tax expense or the financial position of rig owning companies during the transition years. It is unclear how this will impact the Company at this time. The proposal must be presented as part of the
Norwegian Government budget for 2006.



PROPERTY, PLANTS AND
EQUIPMENT



Our principal offices are located in Stavanger,
Norway. Smedvig Offshore has entered into leases with A/S Veni for the complex at Dusavik and for the offices in Stavanger expiring at the end of December 2007. The offices are also the location of Smedvig asa. A/S Veni is a real estate company
wholly owned by Peter T. Smedvig and other members of the Smedvig family. See Item 7: Major Shareholders and Related Party Transactions. Our other leased facilities are located in Stavanger and Bergen, Norway, Singapore, Kuala Lumpur,
Malaysia, and Bangkok, Thailand. We believe that all of our owned and leased properties are well maintained and are suitable and adequate for our present activities. You should read Business Overview above for additional
information on our equipment.



ITEM 5: OPERATING AND FINANCIAL REVIEW AND PROSPECTS



Introduction



The following discussion should
be read in conjunction with our audited consolidated financial statements, the notes to such statements and the other information included elsewhere in this annual report. Our consolidated financial statements have been prepared in accordance with
Norwegian GAAP, which differs in certain significant respects from U.S. GAAP. For a discussion of differences between Norwegian GAAP and U.S. GAAP and a reconciliation of net income for each of the years in the three-year period ended December 31,
2004, and shareholders equity as of December 31, 2004, 2003 and 2002 from Norwegian GAAP to U.S. GAAP, you should read note 29 to our consolidated financial statements.



We are exposed to risks and uncertainties which could have a material adverse effect on our business, financial condition,
liquidity, results of operations or prospects. Such risks and uncertainties relate to, among other things:



| |  | trends in the oil and gas industry;
|- |  | -----------------------------------



| |  | the political and economic environments of the countries in which we operate;
|- |  | -----------------------------------------------------------------------------



| |  | our exposure to currency exchange rate fluctuations; and
|- |  | --------------------------------------------------------



| |  | the capital-intensive nature of our business.
|- |  | ---------------------------------------------



You should read Item 3: Key InformationRisk Factors for a more detailed discussion of these risks and uncertainties. In addition, this
Item 5 contains forward-looking statements. You should read Introduction: Cautionary statement regarding forward-looking statements in this annual report on Form 20-F for a more detailed discussion of forward-looking statements.



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Analysis of Business



Geographic segments. Approximately 65%, 69% and 65% of our revenues for the years ended December 31, 2004, 2003 and 2002, respectively, were
attributable to our North Sea activities. In 2004, 2003 and 2002, 92%, 97% and 86%, respectively, of such North Sea revenues were generated in Norway. Revenues attributable to activities in the Congo represented approximately 8% of our revenues for
the year ended December 31, 2004, while we had no operation there in 2003 and 2002. Revenues attributable to Thailand represented approximately 7%, 9% and 10% of our revenues for the years ended December 31, 2004, 2003 and 2002. Revenues
attributable to Brunei represented approximately 6%, 11% and 9% of our revenues for the years ended December 31, 2004, 2003 and 2002. Revenues attributable to UK represented approximately 5%, 2% and 6% of our revenues for the years ended December
31, 2004, 2003 and 2002. Revenues attributable to Indonesia represented approximately 5%, 4% and 0% of our revenues for the years ended December 31, 2004, 2003 and 2002. Revenues attributable to Malaysia represented approximately 5%, 5% and 12% of
our revenues for the years ended December 31, 2004, 2003 and 2002. Revenues from activities elsewhere represented approximately 5%, 1% and 8% of our revenues for the years ended December 31, 2004, 2003 and 2002. You should read note 3 to our
consolidated financial statements for additional information on our revenues.



Industry segments. As of December 31, 2004, we had three divisions: Mobile Units, Tender Rigs and Well Services. For accounting purposes only, we also maintain a fourth division, Discontinued Activities.



The following table sets forth the revenues and operating
profit (loss) by division and consolidated cash flow information for the periods indicated:



|                                                    |  |                         |   |  |       |   |  |       |  
|--------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ----- | -
|                                                    |  | Year ended December 31, |  
|                                                    |  | 2004                    |   |  | 2003  |   |  | 2002  |  
|                                                    |  | (NOK in millions)       |  
|Revenues                                            |  |                         |   |  |       |   |  |       |  
|Mobile Units                                        |  | 1,168                   |   |  | 1,287 |   |  | 1,423 |  
|Tender Rigs                                         |  | 955                     |   |  | 911   |   |  | 1,076 |  
|Well Services                                       |  | 958                     |   |  | 838   |   |  | 855   |  
|Discontinued Activities (1)                         |  |                        |   |  | 1     |   |  |      |  
|                                                    |  |                         |   |  |       |   |  |       |  
|Total revenues                                      |  | 3,081                   |   |  | 3,037 |   |  | 3,354 |  
|                                                    |  |                         |   |  |       |   |  |       |  
|Operating Profit (loss)                             |  |                         |   |  |       |   |  |       |  
|Mobile Units                                        |  | 89                      |   |  | 129   |   |  | (87   | )
|Tender Rigs                                         |  | 233                     |   |  | 326   |   |  | 443   |  
|Well Services                                       |  | 92                      |   |  | 88    |   |  | 63    |  
|Discontinued Activities (1)                         |  |                        |   |  | (13   | ) |  | (6    | )
|                                                    |  |                         |   |  |       |   |  |       |  
|Total operating profits                             |  | 414                     |   |  | 530   |   |  | 413   |  
|                                                    |  |                         |   |  |       |   |  |       |  
|Cash Flow                                           |  |                         |   |  |       |   |  |       |  
|Net cash flow provided by operating activities      |  | 587                     |   |  | 271   |   |  | 645   |  
|Net cash provided by (used in) investing activities |  | (1,425                  | ) |  | (472  | ) |  | 101   |  
|Net cash provided by (used in) financing activities |  | 608                     |   |  | 610   |   |  | (999  | )

---

|(1) | The only activity remaining under Discontinued Activities is the Balder litigation.
|--- | -----------------------------------------------------------------------------------



Mobile Units  Market and Prospects



In 2004, the demand for high-quality shallow water jack-up capacity remained strong with worldwide utilization for harsh environment jack-ups at
approximately 96% at year-end. For deepwater units, particularly ultra-deepwater units, the market improved sharply in 2004. At year-end, the utilization for deepwater units was approximately 89% while the utilization for the ultra-deepwater rigs
was 100%. For semi-submersibles and drillships, the worldwide utilization rate improved from 75% to 83%. In the North Sea the utilization rate for semi-submersible units climbed from 55% in 2003 to 83% in 2004, and at the end of 2004 the utilization
in Norway was 94%.



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We consider the outlook for the mobile units business to be favorable. This view is based on the fact
that oil companies have significantly increased their spending on both exploration and development drilling activities and that the supply of modern mobile units is limited. As a result of years of declining reserve replacement/production ratio for
oil companies which has coincided with a strong increase in world demand for oil and gas (and consequently higher oil and gas prices), it is expected that oil companies will need to spend more on drilling in the years to come.



Tender Rigs  Market and Prospects



In 2004, the overall market for tender rigs experienced a temporary slowdown
as several drilling projects in Southeast Asia were transferred to a later stage. As a result, we had two units laid up for short periods during the year. As of May 2005, all of the our tender rigs are on contract. Based on already discovered oil
and gas reserves as well as planned field developments in Southeast Asia and West Africa, we believe that the demand for tender rig capacity will increase over the next years. As a supplement to the tender-rig operations in conventional water
depths, indications are that the application of tender assisted drilling operations in deeper waters is on an upward trend. Tender rigs, in combination with floating platforms such as tension leg platforms (TLPs) and Spars, will provide the oil
companies with a cost-effective drilling solution in developing deepwater fields in benign environments. Feedback from oil companies suggests that several field developments based on this concept are being evaluated. A deepwater market for tender
rigs will provide an opportunity for longer term organic growth of the tender rig business.



In 2004, the utilization rate was 90%, down from 94% in 2003. The decrease was due to mandatory five-year classification surveys, yard-stays and temporary lay-up periods for various tender rigs during the year. Based
on our expectations, T-3, T-6 and Teknik Berkat will have classification surveys during 2005.



Well Services  Market and Prospects



In recent years, field developments in the North Sea have increasingly been based on floating production and sub-sea production solutions that require production drilling by mobile units. Despite this trend, the
demand for traditional platform drilling services has remained solid. The continued focus on research and development in the oil and gas industry has pushed the recovery rate for existing and new fields to new highs, resulting in significantly
extending the production lifespan of many existing fields. In addition, oil prices have increased sharply from the lows observed in the late 1990s. The combination of access to new cost efficient technologies and high oil prices has made it
increasingly attractive for oil companies to reinvest in existing infrastructure as well as to upgrade existing drilling facilities in order to produce more of the oil and gas reserves in mature fields. Based on the worlds increased
consumption of energy, we believe the demand for additional drilling and well services for mature fields in the North Sea will continue to remain at a high level in the years to come. As a result of the extended lifespan for mature fields, demand
for services related to the upgrade and modification of drilling facilities is expected to increase.



Material Risks and Uncertainties



Impact of trends in oil and natural gas prices and other operational risk. Demand for our services depends on oil and gas industry activity and expenditure levels that are directly affected by trends in oil and
natural gas prices. Prices for oil and natural gas are subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and gas, market uncertainty and a variety of other economic and political factors that
are beyond our control. Demand for our drilling units and services is particularly sensitive to the level of development, production and exploration activity of, and the corresponding capital spending by, oil and natural gas companies. Any prolonged
reduction in oil and natural gas prices would depress the level of exploration, development and production activity. Lower levels of such activity would result in a corresponding decline in the demand for our drilling units and services and a
decrease in our utilization rates and dayrates, which could have a material adverse effect on our revenues and profitability.



Our operations are subject to hazards inherent in the drilling of offshore oil and gas wells. Moreover, operations may be suspended because of equipment
breakdowns, abnormal drilling conditions and failure of subcontractors to supply goods or perform services. The drilling contracts include clauses that give the customer the



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right to terminate the contracts under certain circumstances. Such early termination may significantly impact our
earnings and financial position. However, the contracts usually contain clauses that provide us with some financial compensation in the event of early termination not attributable to circumstances caused by us.



Impact of foreign currency risk. We generate most of our revenues in
U.S. dollars and our assets are valued in U.S. dollars. Consequently, we benefit from a strong U.S. dollar. In order to limit our currency risk, we finance our assets through the issuance of U.S. dollar-denominated debt. At year-end, the long-term
interest-bearing debt totaled U.S.$632 million, corresponding to NOK 3,828 million. Our interest payment obligations under the loan agreements are based on floating rates. In order to mitigate the interest rate exposure, we have entered into
fixed-rate agreements for some of our debt. The operations normally generate a surplus of U.S. dollars, and we therefore depend on selling U.S. dollars to cover expenses in Norwegian kroner and other currencies.



You should read Operating ResultsYear ended December 31,
2003 compared to year ended December 31, 2002Revenues below for information on the impact of the lower U.S. dollar/Norwegian kroner exchange rate on our revenues in 2004 and 2003.



OPERATING RESULTS



Overview



The following table sets forth certain income and expense items as a percentage of total revenues for the periods indicated:



|                                  |  |                         |   |  |      |   |  |      |  
|--------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                  |  | Year ended December 31, |  
|                                  |  | 2004                    |   |  | 2003 |   |  | 2002 |  
|Revenues                          |  | 100                     | % |  | 100  | % |  | 100  | %
|Operating Expenses:               |  |                         |   |  |      |   |  |      |  
|Personnel costs                   |  | 47                      |   |  | 45   |   |  | 44   |  
|Other operating expenses          |  | 28                      |   |  | 26   |   |  | 31   |  
|Depreciation                      |  | 12                      |   |  | 12   |   |  | 13   |  
|                                  |  |                         |   |  |      |   |  |      |  
|Total operating expenses          |  | 87                      |   |  | 83   |   |  | 88   |  
|                                  |  |                         |   |  |      |   |  |      |  
|Operating profit:                 |  | 13                      |   |  | 17   |   |  | 12   |  
|                                  |  |                         |   |  |      |   |  |      |  
|Interest income                   |  | 0                       |   |  | 0    |   |  | 1    |  
|Interest expense                  |  | (4                      | ) |  | (4   | ) |  | (7   | )
|Other financial items             |  | 1                       |   |  | 2    |   |  | 1    |  
|                                  |  |                         |   |  |      |   |  |      |  
|Net financial items               |  | (3                      | ) |  | (1   | ) |  | (5   | )
|                                  |  |                         |   |  |      |   |  |      |  
|Other items                       |  | 7                       |   |  | (22  | ) |  | (39  | )
|Gains on sale of assets           |  | 1                       |   |  |     |   |  | 11   |  
|                                  |  |                         |   |  |      |   |  |      |  
|Income (loss) before income taxes |  | 18                      |   |  | (6   | ) |  | (21  | )
|                                  |  |                         |   |  |      |   |  |      |  
|Income tax expense (benefit)      |  | (3                      | ) |  | 3    |   |  | (3   | )
|                                  |  |                         |   |  |      |   |  |      |  
|Net income (loss)                 |  | 15                      |   |  | (3   | ) |  | (24  | )
|                                  |  |                         |   |  |      |   |  |      |  



Revenues



Revenue recognition. Substantially all of our revenues are derived
from drilling contracts, production contracts or other service contracts. Revenues from contracts are recognized during the period in which the services are rendered at the rate structures stipulated in the contracts. Revenues are primarily a
function of dayrates and utilization, which can vary considerably over time depending on market demand. The terms of service contracts in each of our Mobile Units, Tender Rigs and Well Services divisions are typically multi-year. Actual contract
duration generally varies depending on the number of wells involved and the time required for the particular project. Contracts generally provide an established dayrate structure, payable monthly, and some provide for lower dayrates during periods
of mobilization or under certain circumstances when operations are interrupted or restricted. Under



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some contracts, we are entitled to additional payments for exceeding performance targets. The contracts also provide for
the assumption by the customer of responsibility for changes in certain costs. Many contracts are extendable at the option of the other party. Such options may involve re-setting the dayrate based on current market rates. The contracts may be
terminated by the customer upon the occurrence of certain force majeure events and some contracts permit termination by the customer at any time without cause, subject to the payment of termination fees.



Mobile Units Division. We derived approximately 38%, 42% and 42% of
our revenues for the years ended December 31, 2004, 2003 and 2002, respectively, from our Mobile Units division. Our Mobile Units division generated approximately NOK 1,168 million, NOK 1,287 million and NOK 1,423 million in revenues for the fiscal
years ended December 31, 2004, 2003 and 2002, respectively. Our Mobile Units division had NOK 89 million in operating profit, NOK 129 million in operating profit and NOK 87 million in operating loss for the fiscal years ended December 31, 2004, 2003
and 2002, respectively.



All of our semi-submersible and
jack-up rigs are currently employed offshore Norway, while the drillship is employed offshore Mauritania. We believe that the employment of our mobile drilling assets under contract will reduce our exposure to market variations and fluctuations in
oil prices over the next year. Revenues are also affected by rig mobilizations, demobilizations and time out-of-service. The termination of certain contracts, or their expiration if not renewed or replaced, can also adversely affect our results of
operations and liquidity. You should read the table captioned Mobile Drilling Units under Item 4: Information on the CompanyBusiness OverviewBusiness divisionsMobile Units Division for additional information on our
Mobile Units division.



Tender Rigs Division.
Substantially all of our revenues from tender rig operations are derived from Congo, Thailand, Brunei, Indonesia and Malaysia. We derived approximately 31%, 30% and 32% of our revenues for the years ended December 31, 2004, 2003 and 2002,
respectively, from our Tender Rigs division. Tender rig contracts generated approximately NOK 955 million, NOK 911 million and NOK 1,076 million in revenues and approximately NOK 233 million, NOK 326 million and NOK 443 in operating profit for the
years ended December 31, 2004, 2003 and 2002.



We believe that
the market outlook for tender rigs in Southeast Asia should remain stable due in part to rising energy consumption and an anticipated increase in new field developments in the region. However, future developments in this market are difficult to
predict. We own a 49% interest in Varia Perdana, which owns four tender rigs. In April 2004, we entered into an agreement with Keppel FELS, Malaysia Shipyard and Engineering for the purpose of building a new tender rig. The unit is scheduled for
delivery in the third quarter of 2005, and capital expenditure is estimated to be U.S.$94 million (NOK 569 million). You should read Item 4: Information on the CompanyBusiness OverviewBusiness divisionsTender Rigs
Division for additional information on the operations of our Tender Rigs division.



Well Services Division. We have a portfolio of high quality, long-term contracts for well service operations in the North Sea. We derived approximately 31%, 28% and 26% of our revenues for the years ended
December 31, 2004, 2003 and 2002, respectively, from our Well Services division. Our Well Services division generated approximately NOK 958 million, NOK 838 million and NOK 855 million in revenues and NOK 92 million, NOK 88 million and NOK 63
million in operating profit for the years ended December 31, 2004, 2003 and 2002, respectively.



The market for well services is relatively mature. However, we believe that the current level of activity on fixed installations can be maintained by
expanding our traditional line of drilling and maintenance services to include well workovers from existing platforms and new methods to increase the recovery rate of existing fields or to access untapped areas in the reservoirs. You should read the
table captioned Fixed Installations under Item 4: Information on the CompanyBusiness OverviewBusiness divisionsWell Services Division for additional information on the operations of our Well Services division.



Discontinued Activities. The only activity reported
under Discontinued Activities is expenses related to the Balder litigation in 2003.



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Operating expenses



Our operating expenses, which consist of personnel, other operating expenses (repair and maintenance, insurance and administrative costs, amortization and
depreciation), generally vary from region to region. Operating expenses are generally higher in Norway and the North Sea than in Southeast Asia, due to the harsh environment in the North Sea and to higher personnel costs resulting from higher North
Sea wages and other worker benefits. In general, operating expenses are not affected by changes in dayrates or significantly impacted by fluctuations in utilization, but tend to be higher during periods when rigs are operated under shorter term
contracts. The largest expense items are personnel costs and depreciation. Personnel costs vary depending on headcount, geographic region and complexity of operations. We are generally able to offset in part the impact of pay increases for crews
employed in well services and for mobile drilling operations under long-term contracts since most of our contracts for such services contain clauses that entitle us to an increase in dayrates corresponding to relevant pay increases.



Costs for periodic rig overhauls, which are generally conducted every fifth
operating year for semi-submersibles, jack-up rigs, drillship and tender rigs, are capitalized when incurred and amortized over a period of five years, the anticipated period between such periodic overhauls. The costs may vary in accordance with the
schedule for rig overhauls and actual disbursements. In addition, our depreciation costs are affected by acquisitions, upgradings and disposals of assets.



Due to the capital intensive nature of our business, the depreciation we record has an important impact on our financial results. Fixed assets are
depreciated on a straight-line basis over the estimated economic life of the assets. Our mobile rigs, drillship, tender rigs and semi-tenders are depreciated over 25 years. Towards the end of a units operating life, we may in certain
situations decide to upgrade a unit in order to extend the life of the unit or modify it for alternative employment. In such instances, the associated cost is capitalized and depreciated over the new remaining life of the unit. The carrying amount
of a fixed asset is periodically reviewed in order to assess whether or not the fair value of the asset is lower than the carrying value. If the fair value is lower than the carrying value and this is not considered temporary, the fixed asset is
written down to fair value. In addition, our depreciation costs are affected by acquisitions, upgradings and disposals of assets. Drilling equipment and fixtures are depreciated over a period of three to ten years depending upon their estimated
useful lives.



Operating profit



Operating profit is a function of revenues and operating expenses.
Fluctuations in operating profit are primarily caused by changes in revenues, since normal operating expenses tend to be relatively constant, except when rigs are operated under shorter term contracts or experience extended periods of inactivity.



Interest income



Interest income is earned on our interest-bearing current assets, which
primarily consist of bank deposits and bonds.



Interest expense



Interest expense comes primarily from long-term
interest-bearing debt, of which 86% is denominated in U.S. dollars, and is dependent on U.S. dollar interest rates. The remaining debt is Norwegian kroner-denominated. You should read Liquidity and Capital Resources for additional
information on our long-term interest-bearing debt. Interest expenses relating to upgradings and newbuildings are capitalized.



Other financial items



Other financial items consist primarily of currency gains and losses resulting mainly from fluctuations in the exchange rate of the U.S. dollar against
the Norwegian kroner. Gains or losses from the sale of shares and interests from holdings which are accounted for according to the equity method are also included in other financial items.



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Other items (gain (loss) on sale of assets)



As part of our strategy, we acquire and dispose of assets. From time to time our gains (losses) on sales of assets and
termination expenses have had a significant impact on our net income. In 2004, other items include the reversal of impairment charge of West Navigator of NOK 209 million. In addition, we recorded gains on sales of T-9 and T-2 totalling to NOK 15
million. In 2003, other items of NOK 668 million reflect the ruling in the litigation with Esso concerning the sale of the Balder FPU. In 2002, we wrote-down the book value of West Navigator by NOK 1,313 million, as the carrying amount was higher
than the market value. In 2002, we sold Ocean Vanguard, built in 1982, and generated a gain of NOK 351 million.



Income taxes



We are subject to income taxes in all countries where we operate and the tax burden varies based on taxation basis and applicable tax rates. In addition
to taxes payable, income taxes consist of changes in deferred taxes and liabilities.



The majority of our mobile units and tender rigs are taxed according to the Norwegian tax scheme for shipowning and offshore companies. According to this scheme, no income tax is assessed on the operating results of
those companies that qualify and decide to participate in the scheme. Under the scheme, taxation will occur when dividends are paid by companies within the scheme or when a company decides to withdraw from the scheme. Since we deem it preferable to
stay within the scheme in the long term, no provision for taxes has been made. In addition, some of our net financial items are subject to ordinary Norwegian taxation. You should read Item 4: Information on the CompanyRegulation.



Non-financial performance indicators



Our average backlog for mobile units has increased from 9 months at year-end
2003 to 15 months at year-end 2004. The corresponding numbers for tender rigs decreased from 24 months at year-end 2003 to 18 months at year-end 2004.



Year ended December 31, 2004 compared to year ended December 31, 2003



Revenues



In 2004, our consolidated revenues increased by NOK 44 million, or 1%, to NOK 3,081 million from NOK 3,037 million in 2003. A lower U.S. dollar/Norwegian
kroner exchange rate affected our revenues negatively.



Mobile Units Division. In 2004, revenues from our Mobile Units division decreased by NOK 119 million, or 9.2%, to NOK 1,168 million, down from NOK 1,287 million in 2003. A significant portion of the decrease was due to the sale of
Ocean Vanguard in 2003 and a lower U.S. dollar/Norwegian kroner exchange rate. The utilization rate for 2004 was 89%, in line with 2003. The contract terms for the new assignments during the year were agreed in a strong market at favourable rates.



Tender Rigs Division. In 2004, revenues from our Tender
Rigs division increased by NOK 44 million, or 4.8%, to NOK 955 million, up from NOK 911 million in 2003. The increase was primarily attributable to one more rig, partly offset by a lower utilization rate of the fleet of 90% compared to 94% in 2003,
as well as a significant strengthening of the Norwegian kroner versus the U.S. dollar. The lower utilization was due to mandatory five-year classification surveys, yard-stays, and temporary lay-up periods.



Well Services Division. In 2004, revenues from our Well Services
Division increased by NOK 120 million, or 14.3%, to NOK 958 million, from NOK 838 million in 2003. The principal cause of the increase in revenues was the commencement of the new contracts on the Gullfaks field and the UK sector of the North Sea,
which increased the revenues by approximately NOK 71 million and NOK 78 million, respectively, in 2004. The revenues from the operation on the Veslefrikk field increased by NOK 8 million to NOK 158 million due to higher drilling activity than in the
preceding year. Revenues from the operation on the Statfjord field and in the Ula, Gyda and Valhall fields decreased by NOK 29 million to NOK 240 million and by NOK 25 million to NOK 242 million, respectively. The revenues from the operation within
the wireline services increased by NOK 10 million to NOK 154 million.



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Operating expenses



In 2004, our total operating expenses increased by NOK 160 million, or 6.4%, to NOK 2,667 million from NOK 2,507 million in 2003. This increase was due
primarily to an overall increased activity within the Tender Rigs division and the Well Services division. Personnel expenses increased by NOK 103 million, or 7.6%, to NOK 1,450 million from NOK 1,347 million in 2003. The increase related to an
increased activity level within the Tender Rigs division and the Well Services division. Other operating expenses increased by NOK 66 million, or 8.3%, to NOK 865 million from NOK 799 million in 2003. The increase was primarily due to higher
activity and higher costs as a result of major yard-stays. Depreciation expense decreased by NOK 9 million, or 2.5%, to NOK 352 million from NOK 361 million in 2003. The lower depreciation was due to the strengthening of the Norwegian kroner versus
U.S. dollar, partly offset by higher depreciation within the Tender Rigs division due to the increased fleet of tender rigs.



Mobile Units Division. In 2004, personnel and other operating expenses for units in our Mobile Units division decreased by NOK 56 million, or 6.0%,
to NOK 874 million from NOK 930 million in 2003. The lower operating expenses was mainly due to the sale of Ocean Vanguard in 2003. West Alpha was on operation for Statoil and undertook a 40 days yard-stay in connection with a five-year mandatory
classification survey in March 2004. In early 2004, West Navigator undertook yard-stay in connection with a five-year mandatory classification survey, which resulted in lower operating costs. West Venture had a short yard-stay after a supply vessel
ran into and damaged a column of the rig. West Epsilon continued operations for BP without any unexpected cost, but was shut down from September to October due to a labor dispute. Personnel costs decreased modestly, as did ordinary repair and
maintenance costs. Depreciation expense decreased by NOK 23 million, or 10.1%, to NOK 205 million from NOK 228 million in 2003. The decrease was a result of a strengthened Norwegian kroner versus U.S. dollar, which reduced the book value of our
mobile units and, correspondingly, depreciation expense, partly offset by the increased depreciation of West Navigator due to the reversal of impairment charge and acquisition of the remaining 50% ownership share from Statoil.



Tender Rigs Division. In 2004, personnel and other operating expenses
in the Tender Rigs division increased by NOK 125 million, or 26.6%, to NOK 595 million from NOK 470 million in 2003. The rig move, yard-stay and start-up cost in connection with the new contracts in Congo, West Menang and T-8 increased their
expenses by NOK 50 million and NOK 20 million, respectively, compared to 2003. A full year of operation increased the expenses of T-4 by NOK 13 million. The rig fleet increased by one rig increasing expenses in the division. In 2004, West Pelaut
experienced a higher cost than 2003 mainly due to yard-stay. The other units reduced their expenses primarily due to a stronger Norwegian kroner versus U.S. dollar. Depreciation expense increased by NOK 12 million, or 10.4%, to NOK 127 million from
NOK 115 million in 2003. Depreciation of the upgrade of T-4 and the accelerated depreciation of the old derrick on West Pelaut that was replaced during 2004 increased depreciation by NOK 2 million and NOK 4 million, respectively in 2004. The
aquisition of Teknik Berkat and T-9 increased the depreciation by NOK 9 million and NOK 10 million, respectively. For the other units we experienced reduced depreciation due to lower book value following a strong Norwegian kroner versus U.S. dollar.



Well Services Division. In 2004, personnel and other
operating expenses in our Well Services division increased by NOK 114 million, or 15.6%, to NOK 846 million from NOK 732 million in 2003. The increase was due to new operations on the UK sector and the Gullfaks field. The wireline services increased
the activity and the number of employees during the year. In 2004, depreciation expenses for our Well Services division increased by NOK 2 million, to NOK 20 million, from NOK 18 million in 2003.



Discontinued Activities. In 2004, there were no operating expenses
from Discontinued Activities, compared to litigation expenses related to the Balder dispute of NOK 13 million in 2003.



Operating profit



In 2004, our operating profit decreased by NOK 116 million, or 21.9%, to NOK 414 million from NOK 530 million in 2003. The reduction was mainly due to
yard-stay during classification surveys and a weaker U.S. dollar versus Norwegian kroner.



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Mobile Units Division. The decrease from our Mobile Units division was NOK 40 million from an
operating profit of NOK 129 million to NOK 89 million in 2004. The decrease in the profit was partly a result of the strengthened Norwegian kroner versus U.S. dollar. In 2004, West Epsilon experienced a shut down due to a labor conflict resulting in
a decrease in operating profit by NOK 21 million. West Alpha was on contract to Statoil in 2004 and reduced the utilization rate to 83% in 2004 from 91% in 2003, mainly due to a mandatory classification survey, increasing the operating loss by NOK 4
million to an operating loss of NOK 27 million. In 2004, West Navigator had higher dayrates on the new contracts and higher utilization. In the aggregate, the operating profit of the unit increased by NOK 51 million. West Venture activities
decreased the operating profit by NOK 30 million primarily due to lower utilization in 2004. Ocean Vanguard had an operating profit of NOK 24 million under a leasing contract in 2003. In total, only West Navigator increased operating profit and
utilization in 2004 compared to 2003.



Tender Rig
Division. Our Tender Rig division had a decrease in operating profit of NOK 93 million, or 28.5%, to NOK 233 million in 2004 from NOK 326 million in 2003. An overall decrease in utilization rate to 90% from 94% in 2003 contributed to the
decrease as well as U.S. dollar/Norwegian kroner fluctuations. In 2004, West Menang and T-8 were relocated to West Africa, a region with higher operating costs than the average in Southeast Asia, resulting in decreased operating profit of NOK 85
million and NOK 24 million, respectively. T-3 experienced an off-hire period which decreased the operating profit by NOK 40 million. In 2004, the new units T-9 and Teknik Berkat contributed with an operating profit of NOK 15 mill each. In 2004, West
Alliance and T-4 increased the operating profit by NOK 18 million and NOK 13 million, respectively. T-2 was sold after half a year in operation and resulting in a decrease in operating profit of NOK 25 million. Our remaining units delivered a stable
performance in line with the results in 2003.



Well Services
Division. Our Well Services division increased its operating profit by NOK 4 million, or 4.5%, to NOK 92 million from NOK 88 million in 2003. The increase was primarily due to the new operations in the UK which contributed with NOK 3 million in
operating profit and better performance by wireline services, which increased by NOK 2 million. In 2004, Tampen decreased operating profit by NOK 6 million. For the operations on the other platforms, the operating profit was in line with the
preceding year.



Discontinued Activities. The
Discontinued Activities, which consists of costs related to the Balder litigation had no costs in 2004, compared to a operating loss NOK 13 million in 2003.



Interest income



In 2004, our interest income decreased by NOK 4 million, or 26.7%, to NOK 11 million from NOK 15 million in 2003. The decrease was due primarily to lower
interest rates.



Interest expense



In 2004, our interest expense increased by NOK 1 million, or 0.8%, to NOK
129 million from NOK 128 million in 2003. Even though we increased the interest-bearing debt in 2004, the generally lower interest rates offset increased interest costs.



Other financial items



In 2004, our profit from other financial items decreased by NOK 47 million to NOK 28 million from a profit of NOK 75 million in 2003. The decrease was due
primarily to a foreign exchange currency loss of NOK 60 million, compared to a loss of NOK 15 million in 2003. Other financial items also included gains on our U.S. dollar/Norwegian kroner forward currency contracts of NOK 75 million in 2004,
compared to a gain of NOK 80 million in 2003. Under other financial items we also recorded a profit of NOK 10 million from the associated company, Lisme AS in 2004, compared to NOK 12 million in 2003.



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Other items



In 2004, we recorded gains under other items from a partial reversal of the impairment charge of West Navigator of NOK 209 million, and gains on sale of
T-2 and a share of T-9 of NOK 15 million. In 2003, we recorded a loss under other items from the ruling in the Balder litigation of NOK 668 million.



Income taxes



In 2004, our income tax expense was NOK 97 million compared to a tax benefit of NOK 88 million in 2003. As we still benefit from the Norwegian tax regime
for ship owning and offshore companies a major part of our operating profits as well as gain/loss on sale and write-down of assets are not subject to taxes. You should read Item 4: Information on the CompanyRegulation for
additional information about the Norwegian tax regime including new developments. However, we are obligated to pay income taxes on parts of the net financial items and on our operations in other jurisdictions. In 2004, we incurred payable taxes of
NOK 91 million compared to NOK 58 million in 2003. The increase in payable taxes in 2004 was mainly a result of an assessment paid related to a disputed tax claim of NOK 38 million involving the rig West Alpha, which the company is actively trying
to recover.



In 2003, the ruling in the Balder litigation
resulted in reduced tax expenses of NOK 187 million which is the primary reason why income taxes show a benefit of NOK 88 million in 2003.



Net income (loss)



We reported consolidated net income of NOK 451 million in 2004, a NOK 539 million increase compared to a loss of NOK 88 million in 2003. This improved
performance as compared to 2003 was mainly due to the Balder litigation in 2003 and the partial reversal of the write-down of West Navigator in 2004.



Minority interests



In 2004, minority interests reflected no income, compared to an income of NOK 30 million in 2003 due to the allocation to the minority holders of net
expenses from KS Smedvig Production Contracting.



Year ended December 31,
2003 compared to year ended December 31, 2002



Revenues



In 2003, our consolidated revenues decreased by NOK 317 million, or 9%,
to NOK 3,037 million from NOK 3,354 million in 2002. A lower U.S. dollar/Norwegian kroner exchange rate affected our revenues negatively.



Mobile Units Division. In 2003, revenues from our Mobile Units division decreased by NOK 136 million, or 9.6%, to NOK 1,287 million, down from NOK
1,423 million in 2002. A significant portion of the decrease was due to the completion of the bareboat contract for Ocean Vanguard, a lower U.S. dollar/Norwegian kroner exchange rate and lower dayrates on new contracts due to a general weakening of
the market characterized by lower demand for offshore drilling services. The decrease was partly offset by an increase in the utilization rate, which was 89% in 2003 compared to 76% in 2002. The contract terms for the new assignments during the year
were agreed in a market of strong competition. The utilization rates for all the mobile units, other than West Navigator, were higher in 2003 than in 2002.



Tender Rigs Division. In 2003, revenues from our Tender Rigs division decreased by NOK 165 million, or 15.3%, to NOK 911 million, down from NOK
1,076 million in 2002. The decrease was primarily attributable to lower utilization of the fleet, 94% compared to 99% in 2002, as well as a significant strengthening of the Norwegian kroner versus the U.S. dollar. The lower utilization was due to
scheduled yard-stays for T-4, West Alliance and West Pelaut. Except for West Menang, which received a demobilization fee to cover costs related to the termination of the contract, the revenues for all other units decreased in 2003 due to the
strengthening of the Norwegian kroner versus the U.S. dollar. You should read Item 4: Information on the CompanyBusiness OverviewBusiness divisionsTender Rigs Division for additional information on the activities of our
Tender Rigs division.



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Well Services Division. In 2003, revenues from our Well Services Division decreased by NOK 17
million, or 2.0%, to NOK 838 million, down from NOK 855 million in 2002. The principal cause of the decrease in revenues was the expiration of the Ekofisk contract, which reduced the revenues generated under this contract to NOK 7 million in 2003,
down from NOK 77 million in 2002. The largest increase, NOK 23 million, was achieved under the contract with BP for operations in the Ula, Gyda and Valhall fields (note that Talisman acquired the Gyda field from BP and took over as operator in
September 2003). The revenues from the operation on the Veslefrikk field increased by NOK 12 million to NOK 150 million due to higher drilling activity than in the preceding year. Revenues from the operation on the Statfjord field and within the
wireline services decreased by NOK 1 million to NOK 269 million and increased by NOK 18 million to NOK 145 million, respectively.



Discontinued Activities. Revenues from Discontinued Activities were NOK 1 million in 2003 and there were no revenues in 2002.



Operating expenses



In 2003, our total operating expenses decreased by NOK 434 million, or 14.8%, to NOK 2,507 million from NOK 2,941 million in
2002. This decrease was due primarily to a general decrease in operating expenses for the mobile units, the effect of the disposal of the semi-submersible Ocean Vanguard, and an overall decreased activity within the Tender Rigs division and the Well
Services division. Personnel expenses decreased by NOK 118 million, or 8.1%, to NOK 1,347 million from NOK 1,465 million in 2002. The decrease related to a decreased activity level within all of the divisions, partly offset by a modest general
increase in salaries and associated expenses. Other operating expenses decreased by NOK 226 million, or 22.0%, to NOK 799 million down from NOK 1,025 million in 2002. The decrease was primarily due to lower cost as a result of no major yard-stays,
the disposal of Ocean Vanguard and more focus on cost-effectiveness. Depreciation expense decreased by NOK 90 million, or 20.0%, to NOK 361 million from NOK 451 million in 2002, reflecting lower depreciation due to the write-down of West Navigator
in December 2002, a strengthening of the Norwegian kroner versus U.S. dollar and the sale of Ocean Vanguard in 2002.



Mobile Units Division. In 2003, personnel and other operating expenses for units in our Mobile Units division decreased by NOK 257 million, or
21.7%, to NOK 930 million from NOK 1,187 million in 2002. None of West Alpha, West Epsilon or West Venture undertook any significant yard-stays during 2003, compared to a total cost of NOK 52 million related to yard-stays in 2002. West Alpha was on
operation for Britannia, Pertra and Statoil, without any major unexpected costs. In 2003, West Navigator experienced a three month lay-up, which resulted in lower operating costs. Personnel costs decreased modestly, as did ordinary repair and
maintenance costs. Depreciation expense decreased by NOK 95 million, or 29.3%, to NOK 228 million from NOK 323 million in 2002. The decrease was a result of the write-down of West Navigator in 2002, which results in lower depreciation in future
years, together with a strengthened Norwegian kroner versus U.S. dollar, which reduced the book value of our mobile units and, correspondingly, depreciation expense, as well as the sale of Ocean Vanguard in 2002.



Tender Rigs Division. In 2003, personnel and other operating expenses
in the Tender Rigs division decreased by NOK 53 million, or 10.1%, to NOK 470 million from NOK 523 million in 2002. Due to scheduled yard-stays, West Pelaut and West Menang reduced their expenses by NOK 16 million and NOK 14 million, respectively,
compared to 2002. The other units, except for West Alliance, reduced their expenses primarily due to a stronger Norwegian kroner versus U.S. dollar. West Alliance experienced increased expenses due to a higher cost level in Indonesia. Depreciation
expense increased by NOK 5 million, or 4.5%, to NOK 115 million from NOK 110 million in 2002. Depreciation of the upgrade of T-4 and the accelerated depreciation of the old derrick on West Pelaut increased depreciation by NOK 6 million and 8
million, respectively. For the other units we experienced reduced depreciation due to lower book value following a strong Norwegian kroner versus U.S. dollar.



Well Services Division. In 2003, personnel and other operating expenses in our Well Services division decreased by NOK 42 million, or 5.4%, to
NOK 732 million from NOK 774 million in 2002. The decrease, which was due to a reduction in the number of employees during the year and an decrease in other operating expenses, primarily related to the expiry of the contract on Ekofisk. Depreciation
expenses for our Well Services division was NOK 18 million, unchanged from last year.



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Discontinued Activities. In 2003, operating expenses in Discontinued Activities consisting of the
litigation expenses related to the Balder dispute, accounted for NOK 13 million compared to NOK 6 million in 2002.



Operating profit



In 2003, our operating profit increased by NOK 117 million, or 28.3%, to NOK 530 million from NOK 413 million in 2002. This was mainly due to a
significant improvement in the average dayrate for the fleet of mobile units as result of higher utilization.



Mobile Units Division. The increase from our Mobile Units division was NOK 216 million from an operating loss of NOK 87 million to NOK 129 million.
West Epsilon increased the operating profit by NOK 93 million due to increased utilization and a decrease in non-recurring operating expenses. West Alpha was on contract for several customers in 2003 and improved the utilization rate to 91% in 2003
from 53% in 2002, decreasing the operating loss of NOK 46 million by NOK 23 million to an operating loss of NOK 23 million. In 2003, as in 2002, West Navigator had low dayrates on the new contracts and low utilization due to off-hire periods. In the
aggregate, the operating profit of the unit increased by NOK 44 million. West Venture increased the operating profit by NOK 51 million primarily due to higher utilization in 2003. Ocean Vanguard was sold in 2002, but we operated the unit under a
leasing contract in the first half of 2003. In total, operating profit related to Ocean Vanguard decreased by NOK 47 million due to a shorter operating period.



Tender Rig Division. Our Tender Rig division decreased the operating profit by NOK 117 million, or 26.4%, to NOK 326 million from NOK 443
million in 2002. An overall decrease in the utilization rate to 94% from 99% in 2002 contributed to the decrease as well as U.S. dollar/Norwegian kroner fluctuations. In 2003, West Alliance had a short yard-stay, compared to last year when it was
fully utilized and therefore its operating profit decreased by NOK 77 million. West Menang experienced an early termination of its contract followed by a scheduled mandatory overhaul in 2003, causing a decrease in operating profit by NOK 23 million.
After a yard-stay due to upgrading, T-4 was on contract from April 2003 and increased operating profit by NOK 39 million. Our remaining units delivered a stable performance in line with the results in 2002.



Well Services Division. Our Well Services division increased its
operating profit by NOK 25 million, or 39.7%, to NOK 88 million from NOK 63 million in 2002. The increase was primarily due to more extensive drilling operations on the Ula, Gyda and Valhall fields, better performance by wireline services, which
increased by NOK 8 million and NOK 9 million and improved cost control. Veslefrikk improved its result by NOK 5 million. For the operations on the other platforms the operating profit was substantially in line with the preceding year.



Discontinued Activities. The operating loss in our Discontinued
Activities, which consists of costs related to the Balder litigation, increased to NOK 13 million in 2003 compared to NOK 6 million in 2002.



Interest income



In 2003, our interest income decreased by NOK 13 million, or 46.4%, to NOK 15 million from NOK 28 million in 2002. The decrease was due primarily to lower
interest rates.



Interest expense



In 2003, our interest expense decreased by NOK 96 million, or 42.9%, to NOK
128 million from NOK 224 million in 2002. The decrease was due to generally lower interest rates and a gain on interest swap agreements of NOK 3 million in 2003, while we had a loss on our interest swap agreements of NOK 37 million in 2002.



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Other financial items



In 2003, our profit from other financial items increased by NOK 48 million to NOK 75 million from a profit of NOK 27 million in 2002. The increase was due
primarily to gains on our U.S. dollar/Norwegian kroner forward currency contracts of NOK 80 million in 2003, compared to a gain of NOK 120 million in 2002. Other financial items also included a foreign exchange currency loss of NOK 15 million,
compared to a loss of NOK 56 million in 2002. Under other financial items we also recorded a profit of NOK 12 million from the associated company Lisme AS in 2003, and NOK 8 million in 2002 related to Roxar, which is included in Lisme in 2003.



Other items



In 2003, we recorded a loss under other items from the ruling in the Balder
litigation of NOK 668 million. In 2002, we recorded a write-down of West Navigator of NOK 1,313 million, partly offset by the gain on sale of Ocean Vanguard of NOK 351 million.



Income taxes



In 2003, our income tax was a benefit of NOK 88 million compared to a tax expense of NOK 84 million in 2002. We normally benefit from the Norwegian tax
regime for ship owning and offshore companies whereby a major part of our operating profits as well as gain/loss on sale and write-down of assets are not subject to taxes in the foreseeable future. However, we are obligated to pay income taxes on
our operations in other jurisdictions and in 2003 we incurred payable taxes of NOK 58 million.



In 2003, the ruling in the Balder litigation resulted in reduced tax expenses of NOK 187 million. This is the main reason why income taxes show a benefit of NOK 88 million in 2003. In 2002, the write-down of West
Navigator of NOK 1,313 million as well as the gain on sale of Ocean Vanguard of NOK 351 million were not included in the calculation of income taxes as these items were not subject to taxation according to the rules of the tax regime for shipowning
and offshore companies. This is the main reason for the income tax expense of NOK 84 million despite the fact that we had a loss before income taxes of NOK 718 million in 2002.



Net income (loss)



We reported a consolidated net loss of NOK 88 million in 2003, a NOK 714 million decrease compared to a loss of NOK 802 in 2002. This improved performance
as compared to 2002 was due to increased operating profit from our Mobile Units division and the write-down of the book value of West Navigator in 2002, offset partially by the Balder litigation in 2003.



Minority interests



In 2003, minority interests amounted to an income of NOK 30 million, compared to an income of NOK 1 million in 2002 due to
the allocation to the minority holders of net expenses from KS Smedvig Production Contracting.



LIQUIDITY AND CAPITAL RESOURCES



We expect to fund capital expenditures, day-to-day cash requirements, required debt repayments and interest payments requirements for 2004 through our cash flow from operations, our U.S.$ 750 million aggregate amount of revolving credit
facilities described below, additional borrowings, including unsecured commercial paper notes borrowings, sale of assets, additional funds raised in the capital markets or a combination of these sources.



Cash Flow



|                                                                         |  |                         |   |  |      |   |  |      |  
|------------------------------------------------------------------------ |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                                         |  | Year Ended December 31, |  
|                                                                         |  | 2004                    |   |  | 2003 |   |  | 2002 |  
|                                                                         |  | (NOK in millions)       |  
|Net cash flow provided by operating activities                           |  | 587                     |   |  | 271  |   |  | 645  |  
|Net cash provided by (used in) investing activities                      |  | (1,425                  | ) |  | (472 | ) |  | 101  |  
|Net cash provided by (used in) financing activities                      |  | 608                     |   |  | 610  |   |  | (999 | )
|Effect on cash and cash equivalents of changes in foreign exchange rates |  | (17                     | ) |  | (14  | ) |  | (79  | )
|Net change in cash and cash equivalents                                  |  | (247                    | ) |  | 395  |   |  | (332 | )
|Cash and cash equivalents at beginning of year                           |  | 993                     |   |  | 598  |   |  | 930  |  
|Cash and cash equivalents at end of year                                 |  | 746                     |   |  | 993  |   |  | 598  |  



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Net cash provided by our operating activities increased to NOK 587 million in 2004 from NOK 271 million
in 2003. The fluctuation is primarily due to the payments related to the ruling in the Balder litigation.



Net cash used in our investing activities in 2004 was NOK 1,425 million, compared to NOK 472 million in 2003. In 2004, our capital expenditures including
long term maintenance increased to NOK 1,723 million from NOK 582 million in 2003 primarily due to the acquisition of the remaining 50% share in West Navigator for NOK 1,120 million. In addition we finished the building of the tender rig, T-9 and
started the building of a new tender, West Setia, for which we used NOK 158 million and NOK 116 million, respectively, in 2004. At the beginning of 2004 we purchased a 49% share of the tender Teknik Berkat for NOK 81 million. In 2004, we upgraded
our mobile units which utilized cash of NOK 119 million. We also upgraded the tender rigs West Pelaut, West Menang and T-8 for NOK 24 million, NOK 35 million and NOK 29 million, respectively. In 2004, proceeds from the sale of fixed assets totaled
NOK 253 million, compared to NOK 6 million in 2003, primarily due to the partial sale of T-9.



Net cash provided by our financing activities amounted to NOK 608 million in 2004, compared to NOK 610 million in 2003. In 2004, we repaid NOK 591 million of our long-term debt and we borrowed NOK 1,369 million,
compared to repaying NOK 315 million and borrowing NOK 1,025 million in 2003. The cash provided by long-term debt was primarily used to pay for the 50% share in West Navigator and the building of West Setia and T-9. As of December 31, 2004, we had
cash, cash equivalents and short-term investments of NOK 746 million compared to NOK 993 million at December 31, 2003, and our long-term interest-bearing debt was NOK 3,828 million compared to NOK 3,323 million at December 31, 2003.



Long-term interest-bearing debt at December 31, 2004 is payable as follows:



|      |  |                  
|----- |  | -----------------
|Year  |  | (NOK in millions)
|2005  |  |                 
|2006  |  | 397              
|2007  |  | 249              
|2008  |  | 473              
|2009  |  | 297              
|2010  |  | 227              
|2011  |  | 2,185            
|      |  |                  
|Total |  | 3,828            
|      |  |                  



Our principal funding
requirements are for capital expenditures. Our estimated capital expenditures scheduled for the year ending December 31, 2004, are approximately NOK 1,232 million. A significant portion of such expenditures, NOK 611 million, consists of payments for
West Setia, our new building project, payments for the remaining 50% of West Alpha, NOK 488 million and payments for minor upgrades of West Venture and West Epsilon. We expect these payments to be covered mainly by our U.S.$ 750 million revolving
credit facility described below. We also plan to invest approximately NOK 70 million in new well services equipment. In addition, we expect to spend approximately NOK 200 million on long-term maintenance in 2005.



From time to time we also review possible acquisitions of or investments in
businesses, drilling units and other assets, and may in the future make capital commitments for such purposes. Any such acquisition could involve the payment of substantial amounts of cash from cash flows from operations, the issuance of additional
equity or the incurrence of additional indebtedness.



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Financing Activities



In 2001, we entered into a new secured Reducing and Revolving Credit Loan Facility Agreement which was amended in 2003 and 2004 (U.S.$ 500 million RRCF).
The main changes of the amended facility relate to price and profile:



| |  |  | The term was extended by 33 months, maturing in 2011 with a 20-year repayment profile.
| | - |  | --------------------------------------------------------------------------------------



| |  |  | The margin was reduced to LIBOR plus 95 basis points until the end of the second quarter 2006. Thereafter the margin will be set at LIBOR plus a level between 75 and 120 basis
points dependent on the financial leverage of the Company.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In November 2004, we entered into a new secured seven-year U.S.$ 250 million Reducing and Revolving Credit Loan Facility Agreement (U.S.$ 250 million RRCF) with a 20-year repayment profile. The price and condition
under the U.S.$ 250 million RRCF are in line with the conditions for the U.S.$ 500 million RRCF described above.



The amended loan and the new loan (The Facilities) have a total limit of U.S.$ 750 million (NOK 4,540 million) at December 31, 2004. U.S.$ 519 million
(NOK 3,142 million) and U.S.$ 419 million (NOK 2,802 million) were drawn at December 31, 2004 and 2003, respectively. Actual interest rates ranged from 2.6 percent to 3.5 percent in 2004 and from 2.6 percent to 2.8 percent in 2003. At June 28, 2005,
U.S.$ 539 million (NOK 3,518 million) was drawn of the facilities.



Our share of a five-year long-term interest-bearing loan in the proportionately consolidated company Varia Perdana Group amounted to NOK 161 million (U.S.$ 27 million) and NOK 21 million (U.S.$ 3 million) for the years ended December 31,
2004 and 2003 respectively. In 2004, the interest rate was LIBOR plus 140 basis points and at December 31, 2004 the interest rate was 3.94 percent. Condensed financial information for the companies and partnerships that have been proportionally
consolidated is included in note 23. Under U.S. GAAP the Companys ownership interest in these companies and partnerships would be accounted for under the equity method.



We raised NOK 75 million through bonds issued in the Norwegian market in 2004, with a four-year maturity. The bonds were
issued at a premium, which gives an effective interest rate at NIBOR plus 1.25 percent. The effective interest rate at December 31, 2004 was 3.00 percent.



At December 31, 2004, we had NOK 555 million in bonds issued in 2001 and 2003. The NOK 230 million tranche issued in 2001 has a five-year maturity and a
floating interest rate at three-month NIBOR plus 2%. The NOK 325 million tranche issued in 2003 has a five-year maturity. NOK 225 million of this tranche has a floating interest rate at three-month NIBOR plus 2.75%, while NOK 100 million, has a
fixed interest rate of 7.5%. At February 14, 2005, we raised U.S.$ 30 million in bonds with a seven-year maturity and a floating interest rate at LIBOR plus 163 basis points.



Weighted average interest rates on Norwegian bonds at December 31, 2004 and 2003 was approximately 5.0 percent and 5.7
percent, respectively.



Long-term interest-bearing debt totaled
NOK 3,828 million and NOK 3,323 million at December 31, 2004 and 2003, respectively, and was used to finance the rig fleet. Except for the NOK 555 million bond issue, all the remaining long-term debt is denominated in U.S. dollars.



Long-term interest-bearing debt at December 31, 2004 is payable as described
above under Cash Flow.



We have covenants in our
loan agreements. The Facilities contain the following main covenants:



| |  |  | To maintain a minimum value adjusted assets to total liabilities of 1.5:1.
| | - |  | --------------------------------------------------------------------------



| |  |  | To maintain a minimum liquidity balance (cash and cash equivalents) of U.S.$ 50 million.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | To maintain the ratio of funded debt to earning before interest, taxes, depreciation and amortization (EBITDA) of 6.5:1 until May 15, 2005 and for the rest of the loan period 5.5:1.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Not to enter into any merger unless we will be the surviving entity, remain bound by the terms of the original Facilities and such merger would not reasonably be expected to
adversely affect the ability to comply with the financial covenants under the Facilities.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our bonds contain the following main covenants, based on financial statements, which require:



| |  |  | To maintain an adjusted shareholders equity equal to or greater than U.S.$ 300 million.
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | To maintain an adjusted shareholders equity equivalent to a minimum of 40% of our total liabilities. For these purposes, the term adjusted shareholders
equity means the adjusted value of our total consolidated assets less total consolidated liabilities with the addition or subtraction of the difference between market value and book value of our rigs and offshore vessels.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We were in compliance with our debt covenants at
December 31, 2004.



For the years ended December 31, 2004, 2003
and 2002, interest costs incurred were NOK 132 million, NOK 131 million and NOK 224 million, respectively. Interest cost of NOK 3 million, NOK 3 million and NOK 0 million were capitalized as part of the financing cost for assets under construction
and upgrading of drilling rigs for the years December 31, 2004, 2003 and 2002, respectively.



The accounting effects of our interest swap agreements are included in Other financial items and amounted to a gains of NOK 5 million and NOK 3 million for the year ended December 31, 2004 and 2003, respectively and
losses of NOK 37 million for the year ended December 31, 2002.



At December 31, 2004, we had NOK 200 million outstanding in commercial paper. We plan to renew these securities at market rates as they mature. We intend to refinance our unsecured commercial paper notes with cash from operations and new
issuances of short-term commercial paper notes. In June, 2005, the amount increased by NOK 100 million to NOK 300 million.



At December 31, 2004, our existing cash balances and available credit facilities were NOK 2,327 million, consisting of NOK 1,398 million from our RRCF,
NOK 183 million, which had not been drawn down from our NOK 200 million short-term credit facility, and NOK 746 million of existing cash.



WORKING CAPITAL



Working capital (current assets less current liabilities) was NOK 667 million as at December 31, 2004, NOK 858 million as at December 31, 2003 and NOK 608
million as at December 31, 2002. We believe that, taking into consideration our existing cash balances and our available credit facilities (described above) and access to capital markets, we have sufficient liquidity and working capital to meet our
present and foreseeable future requirements.



Future
acquisitions or investments, a material decrease in our cash flow from operations or inability to issue short-term commercial paper notes are circumstances which could affect our liquidity and working capital as well as impact our ability to comply
with our covenants under our credit facilities and other debt instruments.



CONTRACTUAL OBLIGATIONS



The following summarizes our principal contractual obligations at December 31, 2004.



|                                      |  |                       |  |                 |  |           |  |           |  |              
|------------------------------------- |  | --------------------- |  | --------------- |  | --------- |  | --------- |  | -------------
|                                      |  | Payment due by period
|                                      |  | Total                 |  | Less than 1year |  | 1-3 years |  | 4-5 years |  | After 5 years
|Contractual payment obligations(1)    |  |                       |  |                 |  |           |  |           |  |              
|Long-term debt and estimated interest |  | NOK 5,174             |  | NOK 172         |  | NOK 1,595 |  | NOK 779   |  | NOK 2,628    



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|                                    |  |                       |  |                 |  |           |  |           |  |              
|----------------------------------- |  | --------------------- |  | --------------- |  | --------- |  | --------- |  | -------------
|                                    |  | Payment due by period
|                                    |  | Total                 |  | Less than1 year |  | 1-3 years |  | 4-5 years |  | After 5 years
|Operating leases                    |  | 56                    |  | 18              |  | 38        |  |          |  |             
|Capital (finance) lease obligations |  |                      |  |                |  |          |  |          |  |             
|Purchase obligations                |  | 600                   |  | 600             |  |          |  |          |  |             
|Other long-term liabilities         |  | 211                   |  |                |  |          |  |          |  | 211          
|                                    |  |                       |  |                 |  |           |  |           |  |              
|Total                               |  | 6,041                 |  | 790             |  | 1,633     |  | 779       |  | 2,839        
|                                    |  |                       |  |                 |  |           |  |           |  |              

---

|(1) | The table does not include planned, but not committed, contractual obligations in respect of capital expenditure amounting to approximately NOK 600 million, payments of which are
budgeted to be due by December 31, 2005.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of
December 31, 2004, we had issued guarantees in favor of third parties amounting to NOK 586 million. The majority of the guarantees are limited to performance guarantees issued to our customers.



Long-term debt comprises borrowings with an original maturity of greater than
one year. It is expected that all contractual commitments be funded from future operating cash flows and additional borrowings. It is expected that we will need to refinance our revolving credit facility when the final installment reaches maturity
in 2011. For a description of our revolving credit facility, see Item 5: Operating Results and Financial Review and ProspectsOperating ResultsLiquidity and Capital ResourcesFinancing Activities.



Off-Balance Sheet Arrangements



There are no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.



OTHER ISSUES



Critical accounting policies



Our significant accounting policies are discussed in note 1 to the
consolidated financial statements. These policies, along with the underlying assumptions and judgments made by our management in their application, have a significant impact on our consolidated financial statements. We believe that the following
accounting policies, applied by us in the preparation of our consolidated financial statements, involve a higher degree of judgment and complexity which in turn could materially affect our financial statements if various assumptions were changed
significantly.



Mobile units, tender rigs and other tangible
assets. All long-lived 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 dayrates, utilization rates and profit margins. Assumptions used in these cash flows are consistent with internal forecasts.



Capitalization of costs relating to upgrade of a unit. Costs relating
to the upgrade of a unit are capitalized and depreciated on a straight line basis over the economic life of the asset. Costs for normal repair and maintenance are expensed and charged to other operating expenses.



Management must make significant judgments to determine whether an upgrade of
a unit constitutes a betterment and, consequently, the costs should be capitalized and depreciated or whether the upgrade constitutes



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normal repair and maintenance and, consequently, the costs should be expensed. In respect of those upgrades which are
betterments, management must also make significant judgments as to the period of time over which the costs should be amortized.



Revenue recognition. The substantial majority of our revenues is derived from dayrate based drilling contracts or other service contracts. Revenues
are recognized in the period during which the services are rendered and at the rates established in the contracts. Under some contracts, we are entitled to additional payments for exceeding performance targets. When there is uncertainty as to the
ultimate realization of such bonus payments, revenue for such additional payments is not recognized until after completion of such program or when an uncertainty is resolved and the bonus becomes due and payable.



Pension costs, pension obligations and pension plan assets.
Calculation of pension costs and net pension obligations (the difference between pension obligations and pension plan assets) are made based on a number of estimates and assumptions. Our pension plan benefits are determined based on a combination of
years of service and earnings. The pension benefits that are expected to be paid are expensed over the employees expected service period. We must make many assumptions to measure our annual pension and retiree medical expense, including the
interest rate used to determine the present value of liabilities, the expected return on assets, the rate of salary increases, and employee turnover, retirement age and mortality.



Our assumptions reflect our historical experience and managements best judgment regarding future expectations. Since
pension liabilities are measured on a discounted basis, the discount rate is a significant assumption. It is based on interest rates for high-quality, long-term corporate debt at each measurement date. The expected return on pension plan assets is
based on our historical experience, our pension plan investment guidelines, and our expectations for long-term rates of return. Our pension plan investment guidelines are established based upon an evaluation of market conditions, tolerance for risk
and cash requirements for benefit payments.



Changes in, and
deviations from, estimates and assumptions (actuarial gains and losses) affect fair value of net pension liabilities, but are not recorded in our financial statements unless the accumulated effect of such changes and deviations exceed 10% of the
higher of our pension benefit obligations and our pension plan assets at the beginning of the year. An amount in excess of 10% is recognized in the profit and loss statement over the estimated average remaining service period. As of December 31,
2003, we had unrecognized actuarial gains of NOK 26 million, which have decreased during 2004 to NOK 6 million as of December 31, 2004. The actuarial gains relate to our Norwegian defined benefit plans and were approximately 4% of our pension
benefit obligations as of December 31, 2004.



The decrease in
actuarial gains in 2004 was mainly due to the reduction in our discount rate at the end of the year and the expected return on plan assets for the year. Our key assumptions for our Norwegian defined benefit plans, which constitute the major part of
our pension plans, are evaluated each year. In 2004, we reduced our discount rate from 6.0% to 5.5% and the expected return on plan assets 7.0% to 6.5% as of December 31, 2004. As of December 31, 2004, our assumptions were: 5.5% discount rate, 6.5%
expected annual return on plan assets, 3.5% annual rate of compensation increase, 3.0% expected annual increase in the social security base amount, 3.0% annual adjustments to pensions and a 16-year estimated average remaining service period. Changes
in these assumptions, as well as deviations from these assumptions and other actuarial assumptions, may affect the estimated net present value of our net pension obligations, actuarial gains and losses and future years pension expenses.



The table below shows an estimate of the potential effects of a one
percentage point change in our key assumptions for our defined benefit plans. As of December 31, 2004, we estimate our pension expense for 2005 for our defined benefit plans to be approximately NOK 100 million. Such expenses were NOK 82 million of
our total pension expenses of NOK 83 million in 2004.



The
following estimates and our estimated pension expense for 2005 are based on amounts and conditions as of December 31, 2004. Actual results may deviate from these estimates.



|                                                                                                    |  |                   |   |                  |     |  |                            |  |                             |   |  |     |   |  |     |  |     |  |     |  
|--------------------------------------------------------------------------------------------------- |  | ----------------- | - | ---------------- | --- |  | -------------------------- |  | --------------------------- | - |  | --- | - |  | --- |  | --- |  | --- | -
|                                                                                                    |  | Discountrate      |   | Compensationrate |     |  | Social Securitybase amount |  | Annualadjustment topensions |  
|                                                                                                    |  | +1%               |   |                  | -1% |  | +1%                        |  | -1%                         |   |  | +1% |   |  | -1% |  | +1% |  | -1% |  
|                                                                                                    |  | (NOK in millions) |  
|Changes in pension:                                                                                 |  |                   |   |                  |     |  |                            |  |                             |   |  |     |   |  |     |  |     |  |     |  
|Liabilities                                                                                         |  | (31               | ) |                  | 33  |  | 25                         |  | (23                         | ) |  | (16 | ) |  | 17  |  | 21  |  | (19 | )
|Unrecognized actuarial losses                                                                       |  | (77               | ) |                  | 75  |  | 56                         |  | (58                         | ) |  | (38 | ) |  | 38  |  | 46  |  | (47 | )
|Expenses due to amortization of actuarial losses                                                    |  | (2                | ) |                  | 4   |  | 3                          |  | (2                          | ) |  | (2  | ) |  | 1   |  | 2   |  | (1  | )
|Net periodic benefit cost including effect due to amortization of actuarial losses (as shown above) |  | (32               | ) |                  | 33  |  | 25                         |  | (24                         | ) |  | (16 | ) |  | 16  |  | 20  |  | (20 | )



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Valuation Allowance for deferred tax assets and tax exposure items. Significant judgment is
required in determining our allowance for deferred tax assets and in evaluating our tax positions. We establish reserves when, despite our belief that our tax return positions are fully supportable, we believe that certain positions are likely to be
challenged and that we may not succeed in utilizing them. We adjust these reserves, in light of changing facts and circumstances, such as the progress of tax audits. We establish valuation allowances for our deferred tax assets when we believe
expected future taxable income is not likely to support the use of a deduction or credit in that tax jurisdiction. The factors we consider in making such an assessment include, but are not limited to, past performance and our expectations of future
taxable income, issues facing our industry, existing contracts and backlogs and our ability to project future results.



Exposure to currency fluctuations



We are exposed to the risk of fluctuations in foreign currency exchange rates due to the international nature and scope of our operations. A substantial
portion of our revenues and expenses are denominated in U.S. dollars. We also incur certain expenses in local currencies of the other countries in which we operate, although such expenses, except for those in Norwegian kroner, do not constitute a
material portion of our expenses. In general, a weakening of the Norwegian kroner against other currencies in which we conduct operations tends to affect operating income positively, while a strengthening of the Norwegian kroner against such other
currencies tends to affect operating income negatively. Our foreign currency risks arise from:



| |  | the translation of U.S. dollar-denominated debt and other monetary assets and liabilities to Norwegian kroner. The translation of the substantial portion of the U.S. dollar debt is
recorded as Foreign exchange translation in shareholders equity, however, a minor part of our U.S. dollar debt resulting in gain or loss is recorded as other financial income or expense;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our foreign currency forward contracts which are recorded as other financial income or expense;
|- |  | -----------------------------------------------------------------------------------------------



| |  | the impact of fluctuations in exchange rates on the reported amounts of our revenues and expenses which are contracted in foreign currencies (primarily the U.S. dollar); and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our net investment in certain foreign subsidiaries, which is recorded as Foreign exchange translation in shareholders equity.
|- |  | --------------------------------------------------------------------------------------------------------------------------------



Primarily, we use U.S. dollar-denominated forward exchange contracts and
foreign currency options to manage a portion of our foreign currency exposure. While we engage in certain foreign exchange transactions with respect to our foreign currency exposure, there can be no assurance that these transactions will protect us
from the effects of future exchange rate fluctuations. Such derivatives do not qualify as hedges for accounting purposes.



As the majority of our activities in Mobile Units and Tender Rigs are conducted in U.S. dollar, we use the U.S. dollar as the functional currency for our
subsidiary which holds our U.S. dollar debt and a substantial portion of our fixed assets. Accordingly, the impact of the translation of our U.S. dollar debt into Norwegian kroner reflected as a component of our shareholders equity. You should
read Item 11: Quantitative and Qualitative Disclosures About Market Risk Financial Instruments and Risk Management and note 19 to our consolidated financial statements for additional information on our exposure to currency
fluctuations.



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Interest rate risk management



We use certain financial instruments, including interest rate swap agreements, to manage our exposure to changes in interest
rates. Our management determines the amount and nature of interest rate swap agreements which we utilize based upon an analysis of relevant factors, such as future cash flow forecasts, the amount and nature of our financing activities and prevailing
market conditions. The derivatives that we utilize to manage interest rate risk do not qualify as hedges for accounting purposes. You should read Item 11: Quantitative and Qualitative Disclosures About Market Risk Financial Instruments
and Risk Management and note 19 to consolidated financial statements for additional information on our interest rate risk management.



Net operating loss tax carry forwards



At December 31, 2004, we had net tax loss carry forwards of NOK 638 million. The loss carry forwards expire in varying amounts between 2008 and 2013. We
believe it is probable that such loss carry forwards will be utilized due to our projected levels of taxable income. Norway introduced a new tax scheme for shipowning and offshore companies which came into effect in 1996 for parts of our activities.
Under this scheme, operating profit from qualifying activities is not taxed.



Inflation



Inflation has not had a significant
impact on our operations and results during the periods presented. Inflation in Norway as measured by the general consumer price index during the years ended December 31 2004, 2003 and 2002 were 1.1%, 0.5% and 2.8%, respectively.



Reconciliation of Norwegian GAAP to U.S. GAAP



Our consolidated financial statements are prepared in accordance with
Norwegian GAAP, which differs in certain significant respects from U.S. GAAP. For a discussion of the principal differences see note 29 to the consolidated financial statements. The most significant difference relates to deferred taxes.



Under Norwegian GAAP, we had income tax expenses of NOK 97 million for
2004. For the years 2003 and 2002 we recorded income tax benefit of NOK 88 million and income tax expenses of NOK 84 million, respectively. However, the tax calculation in accordance with U.S. GAAP for 2004 resulted in an income tax expense of NOK
214 million, an income tax expense of NOK 92 million in 2003 and an income tax benefit of NOK 70 million in 2002. The deferred tax liability as of December 31, 2004 calculated in accordance with U.S. GAAP was NOK 814 million compared to a deferred
tax liability of NOK 26 million calculated in accordance with Norwegian GAAP. The difference in income taxes and tax liability/asset was due primarily to the non-recognition by us under Norwegian GAAP of any deferred taxes on income generated from
our activities that participate in a Norwegian tax scheme for shipowning and offshore companies. However, under U.S. GAAP, a deferred tax liability and related tax charge must be recognized on such income at Norwegian statutory income tax rates,
because it is a domestic subsidiary of the group and is not exempt from deferred taxation on unremitted earnings. You should read note 7 to the consolidated financial statements for additional information on our income taxes.



In September 2004, we entered into a letter of intent with Statoil to
purchase the 50% share of West Navigator which we did not own. The fair value of this part of West Navigator was NOK 209 million higher than the carrying value of our part. As a result NOK 209 million of the impairment charge recognized in 2002 was
reversed under Norwegian GAAP, as the fair value of the related asset increased above its adjusted carrying value. Under U.S. GAAP, for assets held and used, an impairment charge results in a new carrying value of the asset and cannot be reversed
when market conditions improve.



International Financial Reporting Standards



Regulations of the European Union (EU) require publicly
listed companies within the EU to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) by 2005. Due to the European Economic Area (EEA) agreement, to which Norway is a party, this also
applies to Norwegian listed companies. We will be reporting according to IFRS in the 2005 quarterly reports with comparable figures for 2004.



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We have made an evaluation of the differences between our current accounting principles according to
Norwegian GAAP and IFRS principles based on managements current understanding of these standards. There is inherent uncertainty around the interpretation and implementation of IFRS. Accordingly, several pronouncements and interpretations may
be issued during 2005 which could affect our results under IFRS. Consequently, changes in our understanding of IFRS may result in revisions or other differences than those identified below. Audited IFRS figures will be reported in the financial
statements for the year ended December 31, 2005.



We have
identified the following items which will be affected by the implementation of IFRS:



| |  |  | Dividends not recorded as deduction to equity before it is declared
| | - |  | -------------------------------------------------------------------



| |  |  | The income tax effect of translating the U.S. dollar denominated debt into Norwegian kroner
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Pensions, including the discount rate used
| | - |  | ------------------------------------------



| |  |  | Share-based payments
| | - |  | --------------------



| |  |  | Tangible and intangible assets including depreciation, amortization and write-downs
| | - |  | -----------------------------------------------------------------------------------



| |  |  | Financial investments and liabilities
| | - |  | -------------------------------------



| |  |  | Goodwill
| | - |  | --------



| |  |  | Translation adjustment.
| | - |  | -----------------------



The most significant effect of the transition to IFRS on our net income for 2004 according to IFRS compared to Norwegian GAAP is the income tax effect of
translating the U.S. dollar denominated debt into Norwegian kroner. The most significant effect on shareholders equity as of January 1, 2004 is that dividends are not recorded as deduction to equity before they are declared and that net
actuarial losses on pensions are charged against shareholders equity. In addition, presentation and note disclosures will be affected.



Restatement of Deferred Taxes in our Financial Statements of 2004



In the Norwegian government budget for 2005, there was a decision to eliminate the taxation of unrealized foreign exchange differences within the tonnage
tax system. We believed that the change in the regulation impacted the accumulated unrealized foreign exchange gains at December 31, 2004 and reduced related deferred taxes by NOK 196 million which resulted in a corresponding increase in
shareholders equity as of December 31, 2004. After our 2004 consolidated financial statements were issued, we determined that the new regulation applied only to foreign exchange gains arising after January 1, 2005. Accordingly, under Norwegian
GAAP the consolidated balance sheet included herein and consolidated shareholders equity have been adjusted to appropriately reflect a deferred tax liability of NOK 196 million on unrealized foreign currency gains as of December 31, 2004
resulting in a corresponding reduction of shareholders equity.



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The following summarizes the restatement under Norwegian GAAP.



|                                                         |  |                         |  |                
|-------------------------------------------------------- |  | ----------------------- |  | ---------------
|                                                         |  | As of December 31, 2004
|                                                         |  | Previouslyreported      |  | Restatednumbers
|                                                         |  | (NOK in millions)      
|Deferred tax assets                                      |  | 170                     |  | 0              
|Total retained earnings and foreign currency adjustments |  | 624                     |  | 428            
|Deferred tax liabilities                                 |  | 0                       |  | 26             



Under U.S. GAAP,
deferred taxes were also restated resulting in an increase in the deferred tax liability of NOK 196 million as of December 31, 2004 with a corresponding increase in deferred income tax expense for 2004 and a related reduction of shareholders
equity as of December 31, 2004. Corresponding earnings per share data has also been restated.



The following summarizes the restatement under U.S. GAAP as of and for the year-ended December 31, 2004:



|                                   |  |             |  |         
|---------------------------------- |  | ----------- |  | --------
|                                   |  | As Reported |  | Restated
|                                   |  | (NOK)      
|Shareholders equity (in millions) |  | 2,304       |  | 2,108   
|Net income (in millions)           |  | 333         |  | 137     
|Basic earnings per share           |  | 4.13        |  | 1.70    
|Diluted earnings per share         |  | 4.10        |  | 1.69    



New U.S. GAAP accounting standards
implemented in 2004



During 2004, we adopted FASB
Interpretation No. 46 (Revised) (FIN 46R), Consolidation of Variable Interest Entities (VIE), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. We did not identify any VIEs based upon our review and analysis of potential VIEs.



Accounting standards issued but not yet adopted



In December 2004, the FASB Issued Statement No. 123 (Revised 2004), Share-Based Payment: an amendment of FASB Statements 123 and 95, December 2004 (SFAS
123R). SFAS 123R requires an entity to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees in the income statement. SFAS 123R eliminates an entitys ability to account for share-based
compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issues to Employees, which was permitted under FASB Statement No. 123. SFAS 123R also addresses the classification of awards between
liabilities and shareholders equity.



Upon adoption of
SFAS 123R, an entity must choose between two transition methods, the modified prospective method or the modified retrospective method. Under the modified prospective method, awards that are granted, modified or settled after
the date of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS 123, except that
amounts must be recognized in the income statement. Under the modified retrospective approach, the previously-reported amounts are restated (either to the beginning of the year of adoption or for all periods presented) to reflect the SFAS 123
amounts in the income statement. In April 2005, the U.S. Securities and Exchange Commission issued a rule delaying the effective date of Statement No. 123R until the beginning of the fiscal year that follows June 15, 2005. The Company is now
required to adopt Statement No. 123R as of January 1, 2006. Beginning from January 1, 2006, the Company will recognize expense over the service period for the fair value of all grants issued as well as expense attributable to the remaining service
period for all prior grants that have not fully vested by that date. We have not yet determined which transition method we will utilize, and accordingly have not yet calculated the impact of adopting SFAS 123R in 2005.



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TREND INFORMATION



You should read Item 4: Information on the CompanyIndustry for information about trends in the offshore
drilling and oil services industry reasonably likely to have a material effect on our financial condition.



ITEM 6: DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES



DIRECTORS AND SENIOR MANAGEMENT



Our directors and principal executive officers at May 1, 2005, were:



|                   |  |     |  |                                           |  |                                                            |  |                                                            
|------------------ |  | --- |  | ----------------------------------------- |  | ---------------------------------------------------------- |  | -----------------------------------------------------------
|Name               |  | Age |  | Position                                  |  | Date first electedor appointeddirector orexecutive officer |  | Date of next reappointment of directors by shareholders (1)
|Peter T. Smedvig   |  | 58  |  | Chairman of board of directors            |  | 1989                                                       |  | April 26, 2007                                             
|Raymond De Smedt   |  | 66  |  | Director                                  |  | 1994                                                       |  | April 24, 2006                                             
|Siri B. Hatlen     |  | 48  |  | Director                                  |  | 2001                                                       |  | April 26, 2007                                             
|J. Larry Nichols   |  | 62  |  | Director                                  |  | 1996                                                       |  | April 24, 2006                                             
|Andrew C. Salvesen |  | 58  |  | Director                                  |  | 1990                                                       |  | April 24, 2006                                             
|Kjell E. Jacobsen  |  | 48  |  | Chief executive officer                   |  | 1991                                                       |  |                                                            
|Stein Diesen       |  | 59  |  | Managing director, Mobile Units Division  |  | 1989                                                       |  |                                                            
|Alf Ragnar Løvdal  |  | 48  |  | Managing director, Well Services Division |  | 1987                                                       |  |                                                            
|Ståle Rød          |  | 54  |  | Managing director, Tender Rigs Division   |  | 1989                                                       |  |                                                            
|Alf C. Thorkildsen |  | 48  |  | Chief financial officer                   |  | 2002                                                       |  |                                                            

---

|(1) | Date when director will seek reappointment in the normal course.
|--- | ----------------------------------------------------------------



Peter T. Smedvig has served as chairman of our board of directors since 1989 and as chairman of the board of the private Smedvig companies since
1977. In connection with the private Smedvig companies venture capital activity, he serves as non-executive director of Deltex Medical Group Plc, a company listed on AIM (LSE). In 1986 and 1987, Mr. Smedvig served as president of the Norwegian
Shipowners Association. Mr. Smedvig was introduced to the oil and gas industry through his internships with Petrofina in 1971 and Elf Aquitaine in 1972 to 1973. Mr. Smedvig earned a Bachelor of Arts degree from the University of Newcastle upon Tyne
in 1970 and a Master of Business Administration degree from the Wharton School of Finance and Commerce, University of Pennsylvania, in 1972.



Raymond De Smedt has been a director of Smedvig since 1994. Mr. De Smedt is co-founder, vice-chairman and president of Trefoil Oil Ltd., a
privately held company involved in oil and gas exploration primarily in South America. Mr. De Smedt has more than 40 years of experience in the international oil service industry, including several senior executive positions within the Schlumberger
group in various global regions during the period from 1963 to 1994. Mr. De Smedt is a civil engineer who graduated from the University of Mons in Belgium in 1962.



Siri B. Hatlen has been a director of Smedvig since 2001. She has 15 years of experience in the oil and gas industry,
mainly within project management and worked for Statoil from 1984 to 1995. From 1995 she has been acting chief executive officer responsible for turnaround processes in various companies. She is chairman of the board of Helse Øst, RHF, SIVA
and Statens Lånekasse and serves as Director of various boards such as Kongsberg Gruppen, Interconsult ASA, Blom ASA, ECO Vannkraft AS, Mesta AS and NTNU. Ms. Hatlen graduated from the Norwegian Technical Institute in process
engineering/operations research in 1980 and earned a Master of Business Administration from INSEAD, Fontainebleau in 1991.



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J. Larry Nichols has been a director of Smedvig since 1996. He is chairman and chief executive
officer of Devon Energy Corporation, a public U.S. oil and gas exploration and production company listed on the New York Stock Exchange. Mr. Nichols co-founded Devon in 1971. Mr. Nichols serves on the board of directors of Baker Hughes Incorporated
and he holds a geology degree from Princeton University and a law degree from the University of Michigan. He served as law clerk to Mr. Chief Justice Earl Warren and Mr. Justice Tom Clark of the U.S. Supreme Court.



Andrew C. Salvesen has been a director of Smedvig since 1990.
Following three and a half years in the merchant navy, Mr. Salvesen joined Christian Salvesen plc, a large diversified Scottish company in 1970, and was responsible for the development of that companys oil field service interests headquartered
in Aberdeen over a 17-year period. He was a director from 1989 until 1997 and joined the board of Aggreko plc following the spin-off of that company from Christian Salvesen plc in September 1997. Mr. Salvesen is chairman of Roxar ASA and director of
Eurohostels Ltd. Mr. Salvesen was born in Edinburgh and educated in Scotland.



Kjell E. Jacobsen is chief executive officer of Smedvig. After having served as acting chief executive officer since the end of 2001, Mr. Jacobsen was appointed chief executive officer in June 2002. He has been
managing director of Smedvig Offshore AS, the principal operating subsidiary for the Mobile Units division and Well Services division. He joined Smedvig in 1991. Previously, he worked for Statoil from 1981 to 1986 and Citibank in Oslo and London
from 1986 to 1991. Mr. Jacobsen graduated from the Norwegian Naval Academy in 1976 and from the Norwegian School of Economics and Business Administration in 1981.



Alf C. Thorkildsen is chief financial officer of Smedvig. Mr. Thorkildsen joined Smedvig in February 2002. Prior to
joining Smedvig, he worked for more than 20 years at Shell in various senior positions, most recently as treasurer and controller of the Global EP business. Mr. Thorkildsen has a degree in economics from the Norwegian School of Business
Administration and a Master of Business Administration from Arizona State University in 1980.



Stein Diesen is managing director of the Mobile Units division. Mr. Diesen joined Smedvig in 1989 and has held various senior positions including project manager for the construction of the West Venture
drilling rig. Prior to joining Smedvig, Mr. Diesen worked for 12 years at Statoil in various positions within project management and operations. Mr. Diesen earned a degree in electrical engineering and a degree in business administration from the
Norwegian School of Business Administration in 1974.



Alf
Ragnar Løvdal is managing director of the Well Services division. Mr. Løvdal joined Smedvig in 1987 and served as quality and safety manager from 1989 to 1992. From 1992 to 2002, he served in various managerial positions including
general manager operations for the Mobile Units and Well Services divisions. Prior to starting at Smedvig, Mr. Løvdal held various positions within different oil service companies, including five years of offshore field experience with
Schlumberger. Mr. Løvdal graduated as a mechanical engineer from Horten Engineering Academy in Norway in 1980.



Ståle Rød is managing director of the Tender Rig division. Mr. Rød joined Smedvig in 1981. From 1987 to 1996, Mr. Rød
held various executive positions as general manager, chief operating officer and chief financial officer. From 1996, he has been serving as managing director of the Tender Rig division, only interrupted by a short period, from 1998 to 1999, during
which he served as interim chief executive officer. Mr. Rød earned a degree in engineering and a degree in economics from the Norwegian School of Business Administration. He received a Master of Business Administration from the University of
Wisconsin in 1980.



COMPENSATION OF DIRECTORS AND OFFICERS



The aggregate amount of compensation paid by our
subsidiaries and ourselves for the year ended December 31, 2004 to all our directors, members of our administrative, supervisory or management bodies and principal



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executive officers as a group (10 persons in 2004) was approximately NOK 14 million. For the year ended December 31,
2004, the chief executive officer was paid approximately NOK 4.1 million in remuneration. The chief executive officer was granted 70,000 options in 2004. Pursuant to his employment agreement he will receive compensation corresponding to 24
months salary, if he, at the request of the board of directors, resigns.



In 2004, we set aside a total amount of approximately NOK 1 million for pension benefits to our directors and officers.



BOARD PRACTICES



You should read the table above under Directors and Senior Management for the period during which each executive officer and director has
served in that office and for the date of expiration of the current term of office.



Directors have no other service agreements with us other than the agreement governing their responsibilities as board members.



Compensation Commitee



We currently do not have any compensation committee.



Audit Commitee



In 2005, we established an audit committee composed of all the members of the board. It is the audit committees task to support the board of
directors in fulfilling its responsibilities with respect to financial reporting, internal accounting controls and auditing matters and to report to the board of directors in connection with the related procedures on an annual basis. With respect to
auditing matters, the audit committee is in particular responsible for making recommendations to the board and the general assembly with respect to the appointment, compensation, retention, termination and oversight of the work of the external
auditors. It is also responsible for fulfilling the responsibilities set forth in the Audit and Permitted Non-Audit Services Pre-Approval Policies and Procedures. For more information on these procedures, you should read Item 16C: Principal
Accountant Fees and Services. Moreover, the audit committee shall assist the board with regard to the management of operational and financial risks and is responsible for dealing with complaints regarding accounting, internal accounting
controls or auditing matters. The audit committee shall meet as and when it deems appropriate, at a minimum, however, three times a year and it may ask the Chief Executive Officer or other members of management to attend the meetings, as necessary.
The board has determined that Mr. Martin N. Larsen qualifies as a financial expert and Mr. Larsen has been retained as a consultant to serve as the audit committees financial expert.



Our primary listing is on the Oslo Stock Exchange. This listing is governed
by Norwegian securities legislation. Our American Depositary Shares, which represent our ordinary shares, are listed on the New York Stock Exchange (NYSE). We adhere to requirements applicable in the countries where our shares are listed, and
implement corporate governance initiatives deemed beneficial to the companys development.



EMPLOYEES



We employed
an average of 3,751 people worldwide in fiscal year 2004. The tables below describe the distribution of the average number of employees for the last three fiscal years by geographical area and by divisions.



|                                               |  |           |  |               
|---------------------------------------------- |  | --------- |  | --------------
|                                               |  | In Norway |  | Outside Norway
|Average number of employees during fiscal 2004 |  | 1,921     |  | 1,830         
|Average number of employees during fiscal 2003 |  | 1,685     |  | 1,120         
|Average number of employees during fiscal 2002 |  | 1,784     |  | 1,316         



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|                                               |  |              |  |             |  |              
|---------------------------------------------- |  | ------------ |  | ----------- |  | -------------
|                                               |  | Mobile Units |  | Tender Rigs |  | Well Services
|Average number of employees during fiscal 2004 |  | 949          |  | 1,453       |  | 1,349        
|Average number of employees during fiscal 2003 |  | 899          |  | 1,120       |  | 786          
|Average number of employees during fiscal 2002 |  | 949          |  | 1,316       |  | 835          



Approximately 1,750 of
our employees in Norway are represented by unions pursuant to industry-wide collective bargaining arrangements. We consider our employee relations to be good.



We have a strong commitment to health, safety and environment, and had no fatal accidents during 2004.



SHARE OWNERSHIP



The following section sets forth certain information regarding the beneficial
ownership and control of the Class A ordinary shares and Class B ordinary shares as of June 1, 2005, by all persons known to us who own, directly or indirectly, more than 5% of our outstanding voting shares and our directors and members of our
administrative, supervisory or management bodies.



|                                     |  |                |  |                 |  |            |  |                
|------------------------------------ |  | -------------- |  | --------------- |  | ---------- |  | ---------------
|                                     |  | Class A Shares |  | Class B Shares 
|                                     |  | Numberheld     |  | Percent ofClass |  | Numberheld |  | Percent ofClass
|Peter T. Smedvig, chairman           |  | 21,708,854     |  | 40.76           |  | 3,214,562  |  | 12.39          
|Folketrygdfondet                     |  | 4,118,500      |  | 7.73            |  | 4,046,300  |  | 15.60          
|Third Avenue Management LLC          |  | 3,433,700      |  | 6.45            |  |           |  |               
|Raymond De Smedt, director           |  | 34,000         |  | 0.06            |  | 11,300     |  | 0.04           
|Siri B. Hatlen, director             |  |               |  |                |  |           |  |               
|J. Larry Nichols, director           |  | 20,000         |  | 0.04            |  |           |  |               
|Andrew C. Salvesen, director         |  |               |  |                |  |           |  |               
|Kjell E. Jacobsen, CEO               |  | 8,000          |  | 0.02            |  |           |  |               
|Alf C. Thorkildsen, CFO              |  |               |  |                |  |           |  |               
|Stein Diesen, managing director      |  |               |  |                |  |           |  |               
|Alf Ragnar Løvdal, managing director |  |               |  |                |  | 1,000      |  | 0.00           
|Ståle Rød, managing director         |  | 8,000          |  | 0.02            |  | 82,000     |  | 0.32           



The Smedvig family
controls 40.8% of the Class A shares and 12.4% of the Class B shares, corresponding to 31.5% of the total share capital. The family intends to maintain a significant shareholding. Peter T. Smedvig is chairman of the board.



SHARE INCENTIVE PROGRAMS



We currently have different share incentive programs. As of June 1, 2005, a
total of 1,910,000 options, which are exercisable for an aggregate of 1,910,000 Class B shares, were outstanding under such plans. They comprised the following numbers of allocated stock options as of June 23, 2004.



|                            |  |            |  |            |  |            |  |           
|--------------------------- |  | ---------- |  | ---------- |  | ---------- |  | ----------
|                            |  | 2005       |  | 2004       |  | 2003       |  | 2002      
|Class B shares              |  | 610,000    |  | 595,000    |  | 565,000    |  | 440,000   
|Subscription price (in NOK) |  | 89.00      |  | 54.00      |  | 29.00      |  | 34.90     
|Expiration                  |  | 12.31.2010 |  | 12.31.2009 |  | 12.31.2007 |  | 12.31.2005



Options allocated
under our 2002 program have a subscription price of NOK 34.90 and may be exercised until December 31, 2005. One option confers the right to subscribe for one Class B share. These options were allocated to senior management and key employees.



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Options allocated under our 2003 program have a subscription price of NOK 29.00 and may be exercised
until December 31, 2007. One option confers the right to subscribe for one Class B share. These options were allocated to senior management and key employees.



Options allocated under our 2004 program have a subscription price of NOK 54.00 and may be exercised until December 31, 2009. One option confers the
right to subscribe for one Class B share. These options were allocated to senior management and key employees.



Options allocated under our 2005 program have a subscription price of NOK 89.00 and may be exercised until December 31, 2010. One option confers the right
to subscribe for one Class B share. These options were allocated to senior management and key employees.



All options have been allocated free of charge and are tied to the holders continued employment with us. The options are not transferable and are
redeemable if the holder decides to leave us.



The following
table sets forth options held by our directors and officers as of June 1, 2005.



|                   |  |                      
|------------------ |  | ---------------------
|Owner              |  | Number ofOptions Held
|Peter T. Smedvig   |  |                     
|Raymond De Smedt   |  |                     
|Siri B. Hatlen     |  |                     
|Andrew C. Salvesen |  |                     
|J. Larry Nichols   |  |                     
|Kjell E. Jacobsen  |  | 290,000              
|Alf C. Thorkildsen |  | 190,000              
|Stein Diesen       |  | 70,000               
|Alf R. Løvdal      |  | 70,000               
|Ståle Rød          |  | 190,000              



Options issued under
our 2002 and 2003 programs are exercisable as of June 1, 2005. You should read note 18 to our consolidated financial statements for additional information on our share incentive program.



ITEM 7: MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS



Other than as described under Item 6: Directors, Senior Management and EmployeesShare Ownership, we do not believe that we are directly or indirectly owned or controlled by any major shareholder, by
another corporation or by any government. For information regarding shareholders that are the beneficial owners of 5% or more of our voting securities, including their names, the number of shares that they hold and the percentage of outstanding
shares by class that they hold, see Item 6: Directors, Senior Management and EmployeesShare Ownership.



Other than as described below, we do not believe that we have undertaken any material transactions or loans with a related party.



We have signed miscellaneous lease agreements with A/S Veni and Peder Smedvig
Capital Ltd. Both companies are wholly owned by the Smedvig family which is the largest shareholder in Smedvig asa. The lease agreements primarily relate to office premises and expire at various dates through 2007. The lease payments to A/S Veni for
the years ended December 31, 2004, 2003 and 2002 were NOK 7 million, NOK 7 million and NOK 7 million.



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ITEM 8: FINANCIAL INFORMATION



CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION



Financial statements



You should read
Item 18: Financial Statements for our financial statements.



Legal proceedings



Balder



In late 1995, we sold the production vessel Balder FPU to Esso. In March
1997, the vessel was delivered to Esso for final completion by Esso in Scotland. In October 1997, Esso notified us that it was terminating the contract to operate the production vessel, along with the remaining portion of the contract to sell the
vessel.



In April 1998, we brought a formal claim against Esso
before the Stavanger City Court in Norway for unjustified termination and willful breach of the sales contract as well as the operating contract for the vessel. Esso rejected our claim and brought counterclaims totaling more than NOK 4 billion
against us, which it subsequently reduced to approximately NOK 2.75 billion. In addition, Esso has claimed legal costs amounting to NOK 320 million, with respect to which we made certain counter-claims.



In July 2003, the Stavanger District Court awarded Esso a compensation of NOK
667 million in connection with this dispute. Both parties decided not to appeal the ruling, but Esso filed a complaint with the Appeal Court concerning the Courts distribution of the parties litigation costs. This complaint was later
withdrawn. As a result of the ruling, the Company had to write off a receivable of NOK 175 million related to the Balder FPU and make a payment of NOK 667 million to Esso in 2003.



In September 1997, we initiated arbitration proceedings against Keppel FELS in relation to the building contract for Balder
FPU. The purpose of this proceeding was to determine a procedure for enforcing the warranty provisions of the building contract between Smedvig and Keppel FELS.



In January 2004, Smedvig reached a settlement with Keppel FELS. Under this agreement, Smedvig received NOK 174 million in cash. In addition, Smedvig
received two options from Keppel FELS, each to have one self-erecting semi-submersible tender rig built at a pre-determined price. The first option was exercised in April 2004, the second option is still outstanding and will expire 30 days prior to
the delivery of the first tender rig. The first rig is expected to be completed in the third quarter of 2005.



West Alpha tax



In 2004, the Norwegian Tax Authorities changed the previously accepted tax treatment of our 50% ownership interest in West Alpha. The new tax assessment presented us with an additional tax expense of NOK 38 million, all of which was payable
tax. Even though we are of the opinion that it is unlikely that the Tax Authorities have a justified claim, the disputed tax claim has been paid. We are actively trying to recover the amount.



Dividends and dividend policy



As part of our financial strategy we intend to distribute an annual
dividend. The dividend for each year will depend on our earnings and financial situation, with growth in net income also providing the basis for an increase in dividend. The dividend for 2004 was increased to NOK 1.50 per share, up from NOK 1.25 in
2003. The RISK amount per January 1, 2004, which applies only to shareholders subject to Norwegian taxation, is NOK 0.13 per share. You should read Item 3: Key InformationSelected Consolidated Financial Information for
additional information on our dividends.



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SIGNIFICANT CHANGES



None.



ITEM 9: THE OFFER AND LISTING



The principal trading market for our ordinary shares is the Oslo Stock Exchange, where the Class A shares have been listed since September 1990 under the symbol SME. Our Class B shares have been listed on the Oslo Stock Exchange since
August 30, 1996 under the symbol SMEB. Prior to the registered public offering of Class B shares in November 1996, the Class A and Class B shares, in the form of American Depositary Shares (Class A ADSs and Class B ADSs, respectively), were traded
in the over-the-counter market in the United States, although trading had been relatively inactive. The Class A and Class B ADSs have been listed on The New York Stock Exchange since November 8, 1996, under the symbols SMVA (for the Class A ADSs)
and SMVB (for the Class B ADSs).



The following tables set
forth, for the periods indicated, the high and low closing prices on the Oslo Stock Exchange for the Class A and Class B shares and the high and low closing sales prices of ADSs as reported on the New York Stock Exchange composite tape.



|                                |  |                         |  |                           |  |       |  |      
|------------------------------- |  | ----------------------- |  | ------------------------- |  | ----- |  | -----
|                                |  | Class A Shares         
|                                |  | Oslo Stock Exchange     |  | New York Stock Exchange  
|                                |  | Price per Class A Share |  | Price per Class A ADS (2)
|                                |  | High                    |  | Low                       |  | High  |  | Low  
|                                |  | NOK                     |  | NOK                       |  | U.S.$ |  | U.S.$
|2003                            |  |                         |  |                           |  |       |  |      
|First Quarter                   |  | 34.40                   |  | 28.10                     |  | 4.90  |  | 4.20 
|Second Quarter                  |  | 50.00                   |  | 30.00                     |  | 6.85  |  | 4.26 
|Third Quarter                   |  | 56.00                   |  | 43.30                     |  | 7.30  |  | 6.15 
|Fourth Quarter                  |  | 52.00                   |  | 43.50                     |  | 7.60  |  | 6.60 
|                                |  |                         |  |                          
|2004                            |  |                         |  |                           |  |       |  |      
|First Quarter                   |  | 73.50                   |  | 50.50                     |  | 10.50 |  | 7.62 
|Second Quarter                  |  | 73.50                   |  | 58.00                     |  | 10.00 |  | 8.60 
|Third Quarter                   |  | 88.75                   |  | 71.50                     |  | 13.05 |  | 10.40
|Fourth Quarter                  |  | 101.75                  |  | 79.25                     |  | 16.05 |  | 12.40
|                                |  |                         |  |                          
|2005                            |  |                         |  |                           |  |       |  |      
|First Quarter                   |  | 122.50                  |  | 95.50                     |  | 20.15 |  | 15.30
|Second Quarter (through June 1) |  | 129.00                  |  | 104.00                    |  | 20.45 |  | 16.71
|                                | 
|                                |  | Class B Shares         
|                                |  | Oslo Stock Exchange     |  | New York Stock Exchange  
|                                |  | Price per Class B Share |  | Price per Class B ADS (2)
|                                |  | High                    |  | Low                       |  | High  |  | Low  
|                                |  | NOK                     |  | NOK                       |  | U.S.$ |  | U.S.$
|2003                            |  |                         |  |                           |  |       |  |      
|First Quarter                   |  | 30.00                   |  | 24.20                     |  | 4.24  |  | 3.30 
|Second Quarter                  |  | 42.50                   |  | 26.40                     |  | 5.65  |  | 3.90 
|Third Quarter                   |  | 46.00                   |  | 37.00                     |  | 6.00  |  | 5.22 
|Fourth Quarter                  |  | 43.50                   |  | 36.50                     |  | 6.30  |  | 5.30 



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|                                |  |                         |  |                           |  |       |  |      
|------------------------------- |  | ----------------------- |  | ------------------------- |  | ----- |  | -----
|                                |  | Class B Shares         
|                                |  | Oslo Stock Exchange     |  | New York Stock Exchange  
|                                |  | Price per Class B Share |  | Price per Class B ADS (2)
|                                |  | High                    |  | Low                       |  | High  |  | Low  
|                                |  | NOK                     |  | NOK                       |  | U.S.$ |  | U.S.$
|2004                            |  |                         |  |                           |  |       |  |      
|First Quarter                   |  | 60.50                   |  | 42.20                     |  | 8.42  |  | 6.20 
|Second Quarter                  |  | 60.00                   |  | 47.30                     |  | 8.18  |  | 6.90 
|Third Quarter                   |  | 73.00                   |  | 59.25                     |  | 9.91  |  | 8.35 
|Fourth Quarter                  |  | 82.25                   |  | 64.75                     |  | 12.84 |  | 10.00
|                                |  |                         |  |                          
|2005                            |  |                         |  |                           |  |       |  |      
|First Quarter                   |  | 101.00                  |  | 77.75                     |  | 16.37 |  | 12.26
|Second Quarter (through June 1) |  | 106.25                  |  | 86.00                     |  | 16.54 |  | 13.03
|                                | 
|                                |  | Class A Shares         
|                                |  | Oslo Stock Exchange     |  | New York Stock Exchange  
|                                |  | Price per Class A Share |  | Price per Class A ADS (2)
|                                |  | High                    |  | Low                       |  | High  |  | Low  
|                                |  | NOK                     |  | NOK                       |  | U.S.$ |  | U.S.$
|2000                            |  | 100.00                  |  | 45.00                     |  | 11.00 |  | 4.53 
|2001                            |  | 107.00                  |  | 59.00                     |  | 11.81 |  | 6.50 
|2002                            |  | 80.00                   |  | 28.00                     |  | 9.65  |  | 4.00 
|2003                            |  | 56.00                   |  | 28.10                     |  | 7.60  |  | 4.20 
|2004                            |  | 101.75                  |  | 50.50                     |  | 16.05 |  | 7.62 
|                                | 
|                                |  | Class B Shares         
|                                |  | Oslo Stock Exchange     |  | New York Stock Exchange  
|                                |  | Price per Class B Share |  | Price per Class B ADS (2)
|                                |  | High                    |  | Low                       |  | High  |  | Low  
|                                |  | NOK                     |  | NOK                       |  | U.S.$ |  | U.S.$
|2000                            |  | 88.00                   |  | 41.25                     |  | 9.50  |  | 5.31 
|2001                            |  | 95.00                   |  | 48.00                     |  | 9.59  |  | 5.25 
|2002                            |  | 68.00                   |  | 24.30                     |  | 8.12  |  | 3.40 
|2003                            |  | 46.00                   |  | 24.20                     |  | 6.30  |  | 3.30 
|2004                            |  | 82.25                   |  | 42.20                     |  | 12.84 |  | 6.20 
|                                | 
|                                |  | Class A Shares         
|                                |  | Oslo Stock Exchange     |  | New York Stock Exchange  
|                                |  | Price per Class A Share |  | Price per Class A ADS (2)
|                                |  | High                    |  | Low                       |  | High  |  | Low  
|                                |  | NOK                     |  | NOK                       |  | U.S.$ |  | U.S.$
|December 2004                   |  | 101.75                  |  | 89.75                     |  | 16.05 |  | 14.60
|January 2005                    |  | 107.75                  |  | 95.50                     |  | 17.10 |  | 15.30
|February 2005                   |  | 118.00                  |  | 102.25                    |  | 18.91 |  | 15.85
|March 2005                      |  | 122.50                  |  | 110.50                    |  | 20.15 |  | 18.30
|April 2005                      |  | 129.00                  |  | 110.25                    |  | 20.45 |  | 18.10
|May 2005                        |  | 114.75                  |  | 104.00                    |  | 17.90 |  | 16.71



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|              |  |                         |  |                           |  |       |  |      
|------------- |  | ----------------------- |  | ------------------------- |  | ----- |  | -----
|              |  | Class B Shares         
|              |  | Oslo Stock Exchange     |  | New York Stock Exchange  
|              |  | Price per Class B Share |  | Price per Class B ADS (2)
|              |  | High                    |  | Low                       |  | High  |  | Low  
|              |  | NOK                     |  | NOK                       |  | U.S.$ |  | U.S.$
|December 2004 |  | 82.25                   |  | 73.00                     |  | 12.84 |  | 11.91
|January 2005  |  | 89.00                   |  | 77.75                     |  | 13.40 |  | 12.26
|February 2005 |  | 96.00                   |  | 84.50                     |  | 15.30 |  | 13.00
|March 2005    |  | 101.00                  |  | 92.00                     |  | 16.37 |  | 14.80
|April 2005    |  | 106.25                  |  | 89.50                     |  | 16.54 |  | 14.97
|May 2005      |  | 94.50                   |  | 86.00                     |  | 15.62 |  | 13.03

---

|(1) | Each Class A ADS represents one Class A share.
|--- | ----------------------------------------------

|(2) | Each Class B ADS represents one Class B Share.
|--- | ----------------------------------------------



We have entered into two deposit agreements with Citibank, N.A. as depositary, and the holders from time to time of American Depositary Receipts issued
thereunder pursuant to which a separate sponsored American Depositary Receipt facility was made available with respect to each of the Class A shares and the Class B shares.



Based upon information available from the Norwegian share registry, Verdipapirsentralen or VPS, as of June 22, 2005, we had
2,072 holders of record of Class A shares, of which 70 had registered addresses in the United States and held a total of 7,823,618 Class A shares, and 1,526 holders of record of Class B shares, of which 13 had registered addresses in the United
States and held a total of 1,863,387 Class B shares. Citibank, N.A., as custodian, is the registered holder for holders of Class A ADSs representing 546,897 Class A shares and the holders of Class B ADSs representing 657,310 Class B shares.
According to Citibanks registry, there was two registered holder of Class A ADSs and there were five registered holders of Class B ADSs. Holders of record of Class A shares and Class B shares having registered addresses in the United States,
together with the registered holders of Class A ADSs and Class B ADSs in Citibanks registry, held an aggregate of approximately 14.3% and 5.9% of the total number of Class A shares and Class B shares outstanding on such date, respectively. The
above numbers may not be representative of the actual number of U.S. beneficial holders or the number of Class A shares and Class B shares beneficially held by U.S. persons.



ITEM 10: ADDITIONAL INFORMATION



MEMORANDUM AND ARTICLES OF ASSOCIATION



We are
a public limited company organized under the laws of Norway. Our registration number in the Norwegian Register of Business Enterprises is 953 114 828. We were incorporated on September 14, 1989 and registered with the Norwegian Register of Business
on October 25, 1989.



Under section 3 of our articles of
association, the object of the company is oil and gas services, hereunder exploration, drilling, production and well services and other activities related thereto such as trade, real estate and other assets in the support of such activities,
shipping, to invest in securities, participation in other companies of similar category and to offer guarantees and/or pledges its assets as security for third party liability.



Board of directors



Section 6 of our articles of association provides that our board of directors shall be composed of a minimum of three and a maximum of five members. The
members are elected by our shareholders meeting to serve for a term of two years, that expires at the conclusion of our annual general meeting of shareholders in the year in which the two-year period ends. The general meeting appoints the
chairman of our board. In the event a director retires, is removed or is disqualified as a result of personal bankruptcy prior to the end of his/her period of service, and there is no alternate board member, the remaining directors on our board must
arrange for the election at a meeting of our shareholders of a new member of the board of directors for the remainder of the period of service.



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There are no requirements for a board member being qualified to serve in such capacity other than a
requirement under Norwegian law that at least half of the members of our board of directors must reside in the Kingdom of Norway or another state that is a party to of the European Economic Area Agreement, unless the relevant authorities grant an
exemption in an individual case. Section 6 of our articles of association requires a director to retire the year he or she reaches the age of 68.



Our board of directors does not have employee representation. However, our employees are represented on the boards of directors of two subsidiaries of
Smedvig asa: Smedvig Offshore AS and AS Smedvig Prodrill. Pursuant to a decision by the governmental entity on employee representation, these subsidiaries are allowed to have boards of directors consisting of the same members. Their boards of
directors consist of nine members, four of whom are elected by and from among the employees of Smedvig Offshore AS and AS Smedvig Prodrill, and five of whom are elected by the shareholders of Smedvig asa. The decision of the governmental entity was
made on April 27, 2000 and is valid until the employees or Smedvig asa gives notice.



Under Norwegian law, a member of our board of directors may not participate in the discussion or in the decision on any matter in which such board member (or any person affiliated with such board member) has a major
personal or financial interest. In addition, no member of our board may participate in any matter concerning a loan or other credit to such board member or with respect to the pledge of security for such board members debt to us.



Under Norwegian law, our directors have no power to vote on their own
compensation or that of any member of the board. Our shareholders set the remuneration to be received by members of our board of directors, alternate members and observers. Norwegian law also provides that members of our board of directors may not
receive any consideration from parties other than us in connection with their services for us. However, a board member who does not participate in our day-to-day management is not precluded from acting as an agent on behalf of a business carried on
by such board member and receiving a standard agency fee in such capacity, provided that such member does not also represent us in the transaction.



The members of our board of directors owe a fiduciary duty to us and our shareholders. Their principal obligation is to protect the interests of our
shareholders. In addition, they may owe duties to other third parties, such as employees and creditors. Our directors can be held liable for any damage they negligently or intentionally cause to us. Norwegian law permits shareholders to exempt any
such persons from liability, except that the exemption is not binding if substantially correct and complete information was not provided to the shareholders at the general meeting at which such action was taken. In addition, if shareholders have
exempted such persons from liability or decided not to hold such persons liable for a certain matter, shareholders representing at least 10% of the share capital or (if there are at least 100 shareholders) more than 10% of the total number of
shareholders can bring an action on our behalf and in our name. We are not responsible for the cost of any such action. However, this cost can be recovered from any proceeds we receive as a result of the action. If the decision not to hold such
persons liable was adopted by the same majority as required to amend our articles of association, that decision is binding on our minority shareholders.



Neither Norwegian law nor our articles of association contain any provision concerning indemnification by us of the members of our board of directors.



Description of shares



The following is a summary of the material information relating to our share
capital and our shares, including summaries of certain provisions of our articles of association and applicable Norwegian law, including the Norwegian Public Limited Companies Act, in effect as of the date of this annual report.



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General



Under section 4 of our articles of association, Class B shares do not carry a right to vote at general meetings, except as
otherwise set forth under Voting rights, below. Otherwise holders of Class B shares have the same rights and privileges as holders of Class A shares.



At December 31, 2004, our share capital was NOK 822,840,040 divided between 54,314,004 Class A shares and 27,970,000 Class B
shares, with nominal value of NOK 10.00 per share. All our shares are validly issued, fully paid and nonassessable.



The VPS system



Both our Class A shares and our Class B shares are registered with the Norwegian Verdipapirsentralen (the Norwegian Registry of Securities), or the
VPS, which was established under Norwegian law in 1986 and is a certificateless securities registry system. In general terms, the VPS is a computerized bookkeeping system operated by an independent institution in which the ownership of, and all
transactions related to, Norwegian-listed equity securities must be recorded. Our share register has been transferred to the VPS, and our shares are registered in the VPS.



All transactions related to securities registered with the VPS are handled through computerized book entries. The VPS
confirms each entry by sending a transcript to the registered shareholder regardless of beneficial ownership. In order to effect such entries, the individual security holder must establish a securities account or accounts with one or more Norwegian
account agents. Norwegian banks, the Bank of Norway, authorized securities brokers in Norway, bond issuing mortgage companies, unit trust managing companies and Norwegian branches of credit institutions established within the European Economic Area
are allowed to act as account agents. If a security holder does not establish such an account, an account agent will be appointed on the security holders behalf by the issuer of the security in question.



The entry of a transaction in the VPS will generally be decisive in
determining the legal rights of parties as against the issuing company or a third party claiming an interest in a security.



The VPS is strictly liable for any loss suffered as a result of faulty registration or the amending or deletion of rights in respect of registered
securities except in the event of contributory negligence on the part of the aggrieved party, in which case compensation owed by the VPS may be reduced.



A transferee or assignee of shares may not exercise the rights of a shareholder with respect to such shares unless such transferee or assignee has
registered its shareholding or has reported and shown evidence of the share acquisition and the share acquisition is not prohibited by applicable Norwegian law or our articles of association.



Shareholder meetings



Under Norwegian law, we are required to hold our annual general meeting of
shareholders within six months following the end of the fiscal year. In accordance with Norwegian law and section 7 of our articles of association, the following matters must be discussed and voted upon at the annual general meeting:



| |  | approval of our annual accounts and annual report for the prior fiscal year;
|- |  | ----------------------------------------------------------------------------



| |  | election of our board of directors and its chairman when the term of their office expires;
|- |  | ------------------------------------------------------------------------------------------



| |  | election of accountant;
|- |  | -----------------------



| |  | matters listed in the notice convening the annual general meeting; and
|- |  | ----------------------------------------------------------------------



| |  | other matters required by law or by our articles of association.
|- |  | ----------------------------------------------------------------



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In addition to the annual general meeting, extraordinary general meetings of shareholders may be held if
deemed necessary by our board of directors. An extraordinary general meeting must also be convened for the consideration of specific matters at the written demand of our auditors or shareholders representing 5% or more of our share capital.



Our board of directors is responsible for convening a general
meeting of shareholders, including any extraordinary general meeting. A general meeting must be convened by written notice to all shareholders. The notice must state the matters to be discussed and voted upon at the general meeting and must be
issued at least 14 days in advance of the meeting date. Concurrent with the announcement of the annual general meeting, we must send our annual report and accounts together with our auditors report to every shareholder whose address is known.
The articles of association provide that shareholders who intend to participate in the general meeting shall notify us accordingly within a certain period. The period may not expire earlier than 5 days before the meeting.



Neither Norwegian law nor our articles of association provides for any quorum
requirement in order to hold any general meeting.



Shareholders
may request that a matter be discussed at a general meeting. In order to exercise this right, shareholders must deliver written notice to our board of directors in sufficient time in order to include the scheduled matter in the notice convening the
general meeting. If the notice of the general meeting has already been sent, a new notice as to the convening of the general meeting must be sent if at least two weeks remain before the date when the general meeting is scheduled to be held.



Under Norwegian law, shareholders are entitled to attend and
vote at a general meeting, either in person or by a proxy appointed at their own discretion. Under our articles of association, the holders of our Class B shares may not vote at the general assembly, although they do otherwise have the same rights
and privileges as the holders of our Class A shares.



Voting
rights



Holders of our Class A shares (other
than us or any of our subsidiaries) are entitled to one vote per share. Holders of our Class B shares may not vote at the general meetings, except as stated below.



Generally, all matters to be voted upon by shareholders must be approved by a majority of the votes cast by all holders of
Class A shares that are present in person or represented by proxy at the general meeting at which such matters are considered. In the case of elections, the persons who receive more votes are deemed elected.



Certain actions, including resolutions to:



| |  | amend our articles of association,
|- |  | ----------------------------------



| |  | approve a merger or demerger,
|- |  | -----------------------------



| |  | increase or reduce our share capital, and
|- |  | -----------------------------------------



| |  | waive pre-emptive rights in connection with an increase in share capital,
|- |  | -------------------------------------------------------------------------



must be approved by at least two-thirds of the votes cast at the general meeting at which such amendment is considered. In addition, at least two-thirds of the share
capital (including both our Class A shares and Class B shares) represented at such meeting must approve these resolutions.



Any resolution which has the effect of reducing our shareholders right to a dividend or to our assets requires the approval of shareholders
representing more than 90% of our share capital (including both Class A shares and Class B shares) represented at the general meeting at which such action is considered as well as at least two-thirds of the votes cast at that meeting.



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Under Norwegian law, certain matters require the unanimous approval of all our shareholders (both Class A
shares and Class B shares), including the taking of any action that would:



| |  | increase shareholders obligations to us;
|- |  | -----------------------------------------



| |  | restrict the right to transfer, acquire or own shares in us;
|- |  | ------------------------------------------------------------



| |  | subject the shares to compulsory redemption; or
|- |  | -----------------------------------------------



| |  | change the legal relationship among previously equal classes of shares.
|- |  | -----------------------------------------------------------------------



If any such action would affect less than all shareholders, such action would require the unanimous approval of all affected shareholders as well as at
least two-thirds of the votes cast and at least two-thirds of the share capital represented at the general meeting at which such action is considered.



Under Norwegian law, shareholders may not take action by written consent.



The beneficial owners of shares registered in the name of a nominee are generally not entitled to vote under Norwegian law,
nor any persons who are designated in the share registered as holding such shares as nominees.



Corporate assembly



Neither Smedvig asa, nor its subsidiaries Smedvig Offshore AS and AS Smedvig Prodrill, have a corporate assembly.



Dividends



Our Class B shares will rank pari passu with our Class A shares for any dividend which we may declare and pay.



Under Norwegian law, any proposal to pay a dividend must be made by our board
of directors and approved by our shareholders at the general meeting of shareholders. The dividend cannot exceed the amount proposed or consented to by our board of directors. Dividends in respect of a fiscal year are normally determined at the
annual general meeting held in the following year. Any dividend approved at a general meeting accrues to those shareholders that are shareholders at the time of the shareholder approval, unless otherwise stated in the resolution with respect to such
dividend distribution.



Under Norwegian law, the amount of any
dividend distribution with respect to any fiscal year is limited to our income for that year (determined in accordance with the approved profit and loss account for that year) and other equity, after deduction of:



| |  | uncovered losses (i.e., losses from a prior year or years that could not be covered because of insufficient distributable equity);
|- |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  | the capitalized costs of research and development, goodwill and the net deferred tax benefits reflected in the balance sheet for that year;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  | that part of our profit for the year which, by law or in accordance with our articles of association, must be allocated to undistributable reserve or may not be distributed as a
dividend; and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | the total nominal value of our treasury shares.
|- |  | -----------------------------------------------



With respect to any license or entity in which we have an investment valued using proportionate consolidation or the equity method, the difference between
our share of the earnings of the license or entity



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recognized and the dividend received from such license or entity is allocated to the reserve for valuation variances. The
reserve for valuation variances constitutes undistributable equity, and may not be distributed either as a dividend or as a distribution in connection with a reduction in capital.



Norwegian law does not permit the payment of dividends based on interim results of operations.



In accordance with Norwegian law, we may not distribute any dividend if our
balance sheet shows that our equity amounts to less than 10% of our total assets without following a creditor notice procedure for a reduction of the share capital. Furthermore, no dividend may be distributed in any circumstance if it exceeds an
amount that is compatible with prudent and sound business practice and with due consideration of any loss that may have been incurred, or is expected to be incurred, after the balance sheet date.



Dividends have usually been transferred by us to shareholders entitled to
such dividends approximately five to six weeks after they have been approved at the annual general meeting.



Because we pay dividends in Norwegian kroner, exchange rate fluctuations will affect the U.S. dollar amounts received by holders of ADSs upon the
conversion of cash dividends into U.S. dollars by our depositary.



Limitations on the right to own shares



There are no restrictions affecting the right of non-Norwegian residents or citizens to own or exercise voting rights with respect to our shares.



Effective January 1, 1995, legislation harmonizing laws in Norway with the European Union eliminated restrictions on foreign
ownership in Norwegian companies.



Restrictions on
transfer



Except in certain circumstances, no
acquiror of shares is entitled to any of the rights of a shareholder unless and until he has registered the transfer in our share registry in the VPS. Under Norwegian law, the transferor must ensure that the VPS is notified of any change of
ownership immediately after it has taken place.



Section 5 of
our articles of association does not contain any provisions restricting the transferability of shares except that our board of directors may refuse to consent to the transfer of shares. Consent may not be refused for a change of ownership by
inheritance if the transferee is a connected person of the previous owner. Moreover, consent may only be refused on objective grounds of fact. Furthermore our board of directors may take such other steps as may be necessary to prevent shares from
being transferred if such transfer would not occur in accordance with the restrictions, if any, then provided by applicable Norwegian law. If our board of directors does not authorize a transfer of shares, our board must, without delay, notify the
transferee of the decision as well as the reasons for such refusal and our remedy. If the transferee is not notified of a refusal to grant consent within two months of the date of the VPSs receipt of notice of the acquisition, our boards
consent shall be regarded as having been granted. If our board refuses to grant its consent to the acquisition of the shares, the transferee may:



| |  | rescind the purchase agreement with the transferor (unless otherwise provided in such agreement);
|- |  | -------------------------------------------------------------------------------------------------



| |  | dispose of the shares; or
|- |  | -------------------------



| |  | bring a legal action against us with respect to the refusal to grant consent.
|- |  | -----------------------------------------------------------------------------



Any of the foregoing actions must be taken within two months from when the transferee received notice of our boards refusal of consent to the
transfer. If the transferee fails to act in a timely manner, our board of directors may demand that the shares be sold.



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Additional issuances and pre-emptive rights



All issuances of our Class A shares and Class B shares, including bonus
issues, require an amendment of our articles of association (which specifies our share capital) and, as a result, shareholders approval.



Upon any reclassification of our equity, our Class A shareholders will receive additional Class A shares and our Class B shareholders will receive new
Class B shares, unless otherwise provided by resolution of the general meeting.



Under Norwegian law, the holders of our shares have pre-emptive rights to acquire or subscribe for additional shares to be issued for cash. These rights apply regardless of which class of shares the shareholder owns
or the class of the issued shares. Such rights may be waived by a resolution at a general meeting by the same vote as required to approve an amendment to our articles of association. Shareholders may, by the same majority as required for amending
our articles of association, also grant to our board of directors power of attorney to increase our share capital by a new subscription for shares. Such power of attorney must specify, among other things, the amount by which our share capital may be
increased, the duration of the power of attorney, and whether shareholders have pre-emptive rights with respect to such share capital increase. The total nominal amount of shares that may be issued under the board authorisation may not exceed half
the share capital outstanding at the time the authorization is granted. The authorization may not have a duration of more than two years at a time.



Shareholders pre-emptive rights, if any, are pro rata in accordance with their relative holdings in our shares at the time of such issuance.
If not all shareholders exercise their pre-emptive rights, or not all shareholders exercise such rights in full, shareholders who have exercised their pre-emptive rights and intend to acquire additional shares may subscribe for those shares which
have not been subscribed for, generally on a pro rata basis based on the number of shares for which pre-emptive rights have been exercised. Under Norwegian law, pre-emptive rights may not be set aside in our articles of association.



Under Norwegian law, bonus issues (share dividends) of our
shares may be distributed, subject to shareholder approval, from amounts which:



| |  | could otherwise be distributed as dividends; or
|- |  | -----------------------------------------------



| |  | may be created by transferring funds from our share premium reserve or from retained earnings available for dividends.
|- |  | ----------------------------------------------------------------------------------------------------------------------



Such bonus issues or share dividends may be effected either by issuing new
ordinary shares, allotted to our shareholders on a pro rata basis, or by increasing the nominal value of the ordinary shares outstanding.



Redemption of the shares



Our articles of association do not contain any provision regarding the redemption of our ordinary shares. Under Norwegian law, a company may, upon a
resolution by its board of directors and subject to shareholders approval by the same vote as required to approve amendments to its articles of association, reduce its share capital to:



| |  | cover a loss which may not be covered otherwise;
|- |  | ------------------------------------------------



| |  | effect a distribution to shareholders; or
|- |  | -----------------------------------------



| |  | allocate amounts from share capital to reserves to be used in accordance with the resolution adopted by its shareholders.
|- |  | -------------------------------------------------------------------------------------------------------------------------



The reduction in share capital may be implemented by redemption of ordinary
shares or by a reduction in the nominal value of the shares.



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Risks upon dissolution and winding up



Any decision by a Norwegian company to dissolve generally requires the
approval by two-thirds of the votes cast by its Class A shareholders as well as two-thirds of the share capital (including both Class A shares and Class B shares) represented at the general meeting called to vote upon the matter. If any events have
occurred which, in accordance with a companys articles of association, must result in the dissolution of the company, or if the company must be dissolved as a result of a statutory provision, the proposal with respect to the companys
dissolution requires approval by the majority of the votes cast at the general meeting called to vote upon the proposal. In the event of a dissolution, liquidation or winding up, the holders of our ordinary shares are entitled to share all assets
remaining after payment of all of our liabilities on a pro rata basis.



Obligations upon acquiring certain percentages of our shares



Under Norwegian laws, if any person or group acting in concert acquires shares causing the acquirors portion of shares and/or rights to shares reach
or exceed one-twentieth, one-tenth, one-fifth, one-third, one-half, two-thirds or nine-tenths of the share capital or of shares representing an equivalent portion of the voting right in us, the acquiror shall notify the Oslo Stock Exchange of such
acquisitions.



Norwegian law requires any person or group
acting in concert that acquires more than 40% of the voting rights of a Norwegian company listed on the Oslo Stock Exchange, or OSE, to make an unconditional general offer to acquire the whole of the outstanding share capital of that company. The
offer is subject to approval by the OSE before submission of the offer to the shareholders. The offer must be in cash or contain a cash alternative at least equivalent to any other consideration offered. The offering price per share must be at least
as high as the highest price paid by the offeror in the six-month period prior to the date the 40% threshold was exceeded, but equal to the market price if the market price was higher when the 40% threshold was exceeded. A shareholder who fails to
make the required offer must dispose of such number of shares as it is necessary to go below the 40% threshold within four weeks. Otherwise, the OSE may cause the shares exceeding the 40% threshold to be sold by public auction. A shareholder who
fails to make such offer may not, as long as the mandatory offer requirement applies, vote its shares or exercise any rights of share ownership unless a majority of the remaining shareholders approve, other than the right to receive dividends and
preferential rights in the event of an increase in share capital. In addition, the OSE may impose a daily fine upon a shareholder who fails to make the required offer.



If a shareholder, directly or via subsidiaries, acquires shares representing more than 90% of the total number of issued
shares as well as more than 90% of the total voting rights attached to those shares, then the majority shareholder has the right (and each remaining minority shareholder of that company has the right to require the majority shareholder) to effect a
compulsory acquisition for cash of any shares not already owned by the majority shareholder. Upon effecting the compulsory acquisition, the majority shareholder must offer the minority shareholders a specific price per share. The determination of
the price per share will be at the discretion of the majority shareholder. If any minority shareholder does not accept the offered price, such minority shareholder may, within a specified period of not less than two months, request that the price be
set by the Norwegian courts. The cost of the court procedure will normally be charged to the account of the majority shareholder, and the courts would have full discretion in determining the consideration due to the minority shareholder as a result
of the compulsory acquisition.



Treasury shares



According to Norwegian law, Smedvig asa may acquire its
own shares provided that the nominal value of the total holdings of own shares after the acquisition does not exceed 10% of the share capital. In addition, the acquisition must not result in the share capital, less the total nominal value of the
holding of own shares, being lower than the minimum permitted share capital (NOK 1,000,000).



Furthermore, Smedvig asa may only acquire its own shares if its distributable equity, according to the latest approved balance sheet, exceeds the consideration to be paid for the shares. Own shares may not be acquired
in excess of the amount compatible with prudent and sound business practice with due consideration being taken of any loss which may have been incurred after the balance-sheet date or which must be expected to be incurred.



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The decision of acquiring own shares is taken by the general meeting granting the board of directors a
power of attorney to make such acquisition. The power of attorney may not exceed 18 months and cannot include the subscription of new shares in Smedvig asa. The decision by the general meeting requires at least two-thirds of both the votes cast and
the share capital represented at the general meeting.



At the
annual general meeting held on May 11, 2005, the board of directors was authorized to repurchase up to 8,173,400 shares in Smedvig asa. The authorization is valid until June 30, 2006.



MATERIAL CONTRACTS



You should read Item 5: Operating and Financial Review and ProspectsLiquidity and Capital ResourcesFinancing Activities for
information on our U.S.$ 750 million aggregate amount revolving credit facilities.



TAXATION



Norwegian tax matters



This section, in the opinion of Thommessen Krefting Greve
Lund, Norwegian tax counsel to Smedvig, describes the material Norwegian tax consequences that apply to shareholders resident in Norway as well as non-resident shareholders in connection with the acquisition, ownership, and realization of the shares
in Smedvig. This section does not provide a complete description of all tax regulations which might be relevant (i.e. for investors for whom special regulations may be applicable). This section is based on current law and practice. Shareholders
should contact their professional tax advisors for advice concerning individual tax consequences.



Norwegian Shareholders



Taxation of
dividends



Personal shareholders



Dividends distributed to shareholders who are individuals resident in Norway
for tax purposes (Norwegian personal shareholders) are taxable as general income for such shareholders at a rate of 28%. However, Norwegian personal shareholders are entitled to a tax credit under the Norwegian imputation system. The tax
credit corresponds to the tax payable by the shareholder on the dividends received.



Effective as of January 1, 2006, new legislation will be introduced whereby the imputation system is abolished. Dividends distributed to Norwegian personal shareholders will be taxable as general income without the
shareholder being entitled to a tax credit. The shareholders will instead be entitled to deduct a calculated allowance when calculating their taxable dividend income. The allowance will be calculated on a share by share basis, and the allowance for
each share will be equal to the cost price of the share (including RISK-adjustments as of January 1, 2006, described below) multiplied by a determined risk free interest rate.



Corporate shareholders



Dividends distributed to shareholders who are companies resident in Norway for tax purposes (Norwegian corporate shareholders) are not taxable
in Norway on such dividends.



Taxation on realization of Shares



Personal shareholders



Sale, redemption or other disposal of shares is considered a realization for
Norwegian tax purposes. A capital gain or loss generated by a Norwegian personal shareholder through a disposal of shares is taxable or tax deductible in Norway. Such capital gain or loss is included in or deducted from the basis for computation of
general income in the year of disposal. The general income is taxable at a rate of 28%. The gain is subject to tax and the loss is deductible irrespective of the duration of the ownership and the number of shares disposed of.



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The taxable gain or loss is equal to the sales price less transactional expenses and the Norwegian
personal shareholders tax base in the shares. The Norwegian personal shareholders tax base is equal to the cost price of the shares adjusted according to the so-called RISK-rules (RISK is the Norwegian abbreviation for the variation of
the companys retained earnings after tax during the ownership of the shareholder). The RISK amount is computed at the end of each fiscal year, and the adjustment takes place as per January 1 of the following year. If a Norwegian personal
shareholder has received dividends that have not yet led to adjustments under the RISK system prior to a sale of shares, the tax base on such shares will be adjusted for such dividends when calculating the taxable gain or deductible loss.
Correspondingly, if a Norwegian personal shareholder acquires shares where the tax base has been adjusted under the RISK system as a result of dividends distributed to a former shareholder, the acquiring shareholder is entitled to an adjustment for
such dividends when the shares are sold or otherwise disposed of in the future. Shares owned by shareholders not resident in Norway for tax purposes are not subject to RISK adjustments.



Effective as of January 1, 2006, new legislation will be introduced whereby the RISK system will be abolished. From this
date, the capital gain will be calculated as the consideration received less the cost price of the share (including RISK-adjustments as of January 1, 2006). From this capital gain, Norwegian personal shareholders will be entitled to deduct a
calculated allowance when calculating their taxable income. The allowance for each share will be equal to the cost price (including RISK-adjustments as of January 1, 2006) of the share multiplied by a determined risk-free interest rate.



If the shareholder owns shares acquired at different points in time, the
shares that were acquired first will be regarded as the first to be disposed of, on a first-in first-out basis.



Corporate shareholders



Norwegian corporate shareholders are not taxable in Norway on capital gains related to realization of shares, and losses related to such realisation are
not tax deductible.



Net wealth tax



The value of shares is included in the basis for the computation of wealth
tax imposed on Norwegian personal shareholders. Norwegian corporate shareholders are not subject to wealth tax. Currently, the marginal wealth tax rate is 1.1 % of the value assessed. The value for tax assessment purposes of shares listed on the
main list of the Oslo Stock Exchange is 65 % of the listed value as of January 1, in the year of tax assessment.



The Norwegian government has proposed to reduce the net wealth tax rate to 50% of the current level through 2006 and 2007, and to abolish the net wealth
tax entirely in the longer term. It is uncertain if this proposal will be adopted by the Norwegian Parliament.



Non-resident Shareholders



This section summarizes Norwegian tax rules relevant to shareholders who are not resident in Norway for tax purposes (Non-resident shareholders). Non-resident shareholders tax liabilities in their home country or other countries will
depend on applicable tax rules in the relevant country.



Taxation of
dividends



Dividends distributed to shareholders who are
(i) individuals not resident in Norway for tax purposes (Non-resident personal shareholders) or (ii) companies not resident in Norway for tax purposes (Non-resident corporate shareholders) are as a general rule subject to withholding tax at a rate
of 25%. The withholding tax rate of 25% is normally reduced through tax treaties between Norway and the country in which the shareholder is resident. The withholding obligation lies with the company distributing the dividends. However, dividends
distributed to Non-resident corporate shareholders resident within the EEA area for tax purposes are exempt from Norwegian withholding tax.



The 15% withholding rate under the tax treaty between Norway and the United States will apply to dividends paid on shares held directly by U.S. holders
properly demonstrating to the company that they are entitled to the benefits of the convention.



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Nominee registered shares will be subject to withholding tax at a rate of 25% unless the nominee has
obtained approval from the Tax Directorate for the dividend to be subject to a lower withholding tax rate. To obtain such approval the nominee is committed to file a summary with the tax authority including all beneficial owners that are subject to
lower withholding tax. Non-resident shareholders that have suffered a higher withholding tax than set out by an applicable tax treaty may apply to the Norwegian tax authorities for a refund of the excess withholding tax deducted.



If a Non-resident shareholder is carrying on business activities in Norway,
and the relevant shares are effectively connected with such activities, the shareholder will be subject to the same taxation as Norwegian shareholders, as described above.



Taxation on realization of Shares



Gains from the sale or other disposition of shares by a Non-resident shareholder will not be subject to taxation in Norway unless the Non-resident
shareholder (i) is a Non-resident personal shareholder holding the shares in connection with the conduct of a trade or business in Norway or (ii) is a personal shareholder who has been a tax resident of Norway within the five calendar years
preceding the year of the sale or disposition (and whose gains are not exempt pursuant to the provisions of an applicable income tax treaty).



Transfer tax



No stamp or similar duties are currently imposed in Norway on the transfer of shares whether on acquisition or disposal.



United States tax matters



General



This section describes the material United States federal income tax
consequences of owning shares or ADSs. It applies to you only if you hold your shares or ADSs as capital assets for tax purposes.



This section does not apply to you if you are a member of a special class of holders subject to special rules, including:



| |  | dealers in securities,
|- |  | ----------------------



| |  | traders in securities that elect to use a mark-to-market method of accounting for their securities holdings,
|- |  | ------------------------------------------------------------------------------------------------------------



| |  | tax-exempt organizations,
|- |  | -------------------------



| |  | life insurance companies,
|- |  | -------------------------



| |  | persons liable for alternative minimum tax,
|- |  | -------------------------------------------



| |  | persons that actually or constructively own 10% or more of the voting stock of Smedvig,
|- |  | ---------------------------------------------------------------------------------------



| |  | persons that hold shares or ADSs as part of a straddle or a hedging or conversion transaction, or
|- |  | -------------------------------------------------------------------------------------------------



| |  | U.S. holders (as defined below) whose functional currency is not the U.S. dollar.
|- |  | ---------------------------------------------------------------------------------



This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed
regulations, published rulings and court decisions, and the Convention between the United States of America and the Kingdom of Norway for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and
Property (the Treaty). These laws are subject to change, possibly on a retroactive basis. In addition, this section is based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement and any
related agreement will be performed in accordance with its terms. You are a U.S. holder if you are a beneficial owner of shares or ADSs and you are:



| |  | an individual who is a citizen or resident of the United States,
|- |  | ----------------------------------------------------------------



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| |  | a domestic corporation,
|- |  | -----------------------



| |  | an estate whose income is subject to United States federal income tax regardless of its source, or
|- |  | --------------------------------------------------------------------------------------------------



| |  | a trust if a United States court can exercise primary supervision over the trusts administration and one or more United States persons are authorized to control all
substantial decisions of the trust.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



You should consult your
own tax advisor regarding the United States federal, state and local and other tax consequences of owning and disposing of shares or ADSs in your particular circumstances.



Taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing
ADSs, you generally will be treated as the owner of the shares represented by those ADRs. Exchanges of shares for ADRs, and ADRs for shares, generally will not be subject to United States federal income tax.



Taxation of dividends



Under the United States federal income tax laws, and subject to the passive
foreign investment company rules discussed below, if you are a U.S. holder, the gross amount of any dividend paid by Smedvig out of its current or accumulated earnings and profits (as determined for United States federal income tax purposes) is
subject to United States federal income taxation. If you are a noncorporate U.S. holder, dividends paid to you in taxable years beginning before January 1, 2009 that constitute qualified dividend income will be taxable to you at a maximum tax rate
of 15% provided that you hold the shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date and meet other holding period requirements. Dividends paid by Smedvig with respect to the shares or ADSs
will be qualified dividend income. You must include any Norwegian tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of shares, or the
depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other
United States corporations.



The amount of the dividend
distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Norwegian kroner payments made, determined at the spot Norwegian kroner/U.S. dollar rate on the date the dividend distribution is included in
your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date
you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. Such gain or loss generally will be income or loss from sources within
the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to
the extent of your tax basis in the shares or ADSs and, to the extent in excess of your tax basis, will be treated as capital gain.



Subject to generally applicable limitations, the 15% Norwegian tax withheld in accordance with the Treaty and paid over to Norway will be creditable
against your United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the maximum 15% tax rate. To the extent a refund of the tax withheld is
available to you under Norwegian law, the amount of tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability. See TaxationNorwegian tax mattersTaxation of
dividends, above, for the procedures for obtaining a tax refund. The rules governing foreign tax credits are complex and we urge you to consult your tax adviser regarding the availability of the foreign tax credit in your situation.



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Dividends will be income from sources outside the United States. Dividends paid in taxable years
beginning before January 1, 2007, generally will be passive income or financial services income, and dividends paid in taxable years beginning after December 31, 2006 will, depending on your circumstances, be
passive or general income which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to you. Alternatively, you may elect to claim a U.S. tax deduction,
instead of a foreign tax credit, for such Norwegian tax, but only for a year in which you elect to do so with respect to all foreign income taxes.



Taxation of capital gains



Subject to the passive foreign investment company rules discussed below, if you are a U.S. holder and you sell or otherwise dispose of your shares or
ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your shares or ADSs.
Capital gain of a non-corporate U.S. holder that is recognized before January 1, 2009, is generally taxed at a maximum rate of 15% where the property has been held for more than one year. The gain or loss will generally be income or loss from
sources within the United States for foreign tax credit limitation purposes.



Passive foreign investment company (PFIC) rules



We believe that shares or ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If we were to be
treated as a PFIC, unless you elect to be taxed annually on a mark-to-market basis with respect to the shares or ADSs, gain realized on the sale or other disposition of your shares or ADSs would in general not be treated as capital gain. Instead, if
you are a U.S. holder, you would be treated as if you had realized such gain and certain excess distributions ratably over your holding period for the shares or ADSs and would be taxed at the highest tax rate in effect for each such year
to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. With certain exceptions, your shares or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during your holding
period in your shares or ADSs. Dividends that you receive from us will not be eligible for the special tax rates applicable to qualified dividend income if we are treated as a PFIC with respect to you either in the taxable year of the distribution
or the preceding taxable year, but instead will be taxable at rates applicable to ordinary income.



DOCUMENTS ON DISPLAY



It is possible to read and copy documents referred to in this annual report on Form 20-F that have been filed with the SEC at the SECs public reference room located at 100 F Street, NE, Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the public reference room and its copy charges. Smedvigs most recent filings are also available on the internet site maintained by the SEC at www.sec.gov.



ITEM 11: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Financial instruments and risk management



We have operations and assets in a number of countries worldwide. Consequently, our results from operations are affected, when measured in Norwegian kroner, by fluctuations in currency exchange rates, primarily
relative to the U.S. dollar. When the Norwegian kroner appreciates against other currencies, our profits from operations in foreign currencies reported in Norwegian kroner may decrease. Likewise, when the Norwegian kroner depreciates against other
currencies, our profits from operations in foreign currencies reporting in Norwegian kroner may increase. We are also exposed to changes in interest rates. Different financial instruments are used by us to manage these foreign currency and interest
rate risks as summarized below:



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Foreign currency risk management



Our contract portfolio, forward contracts on currencies and foreign currency options are used to reduce the risk associated
with the future value of income and expenses denominated in foreign currencies and the foreign exchange risk of our assets and liabilities. Our foreign currency risks arise from:



| |  | the translation of U.S. dollar denominated debt and other monetary assets and liabilities to Norwegian kroner with the resulting gain or loss recorded as adjustment in
shareholders equity;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | foreign currency forward contracts and foreign currency options which are recorded as other financial items;
|- |  | ------------------------------------------------------------------------------------------------------------



| |  | the impact of fluctuations in exchange rates on the reported amounts of our revenues and expenses which are contracted in foreign currencies (primarily the U.S. dollar); and
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | net investment in certain foreign subsidiaries which is recorded as a cumulative translation adjustment in shareholders equity.
|- |  | --------------------------------------------------------------------------------------------------------------------------------



In 2004, other financial items amounted to a net income of NOK 28 million.
Approximately NOK 75 million was related to gains on forward exchange contracts, while the currency losses on balance sheet items amounted to approximately NOK 60 million. In 2003, other financial items amounted to a net income of NOK 75 million of
which approximately NOK 80 million is related to gains on forward exchange contracts. These gains were partly offset by a loss of NOK 15 million related to a currency loss on our receivables and bank deposits. In 2002, other financial items amounted
to a net income of NOK 27 million of which approximately NOK 120 million is related to gains on forward exchange contracts, partly offset by a loss of NOK 56 million related to a currency loss on a debt denominated in U.S. dollars as well as
currency loss on receivables and bank deposits of approximately NOK 40 million. You should read note 5 to our consolidated financial statements for additional information on the other financial items.



Interest rate risk management



The amount and nature of interest rate swap agreements utilized by us is
determined by management based upon an analysis of relevant factors, such as future cash flow forecasts, the amount and nature of our financing activities and prevailing market conditions. The derivatives that we utilize to manage interest rate risk
do not qualify as hedges for accounting purposes. You should read note 19 to our consolidated financial statements for additional information on interest rate risk management.



The extent of the utilization of financial instruments for interest rate risk management is determined by reference to our
net debt exposure and our views regarding future interest rates. At December 31, 2004, approximately 18% of our U.S. dollar-denominated interest-bearing debt was hedged with interest rate swap agreements that do not qualify for hedge accounting
treatment. These contracts expire in 2007.



Sensitivity analysis



The analysis below presents the sensitivity of the market
or fair value of our financial instruments to selected changes in market rates and prices.



Interest rates sensitivity



Our interest-bearing debt totaled U.S.$ 665 million at December 31, 2004 (corresponding to NOK 4,028 million). NOK 755 million was related to commercial paper and bonds with floating rates in the Norwegian market, the
other loans are denominated in U.S. dollars and also have floating rates. A change of one percentage point (100 basis points) in the interest rates as of December 31, 2004, would result in a change of approximately NOK 37 million, excluding our swap
agreements, in our annual interest expense. This effect is somewhat moderated by corresponding changes in interest income from our cash deposits and short-term investments.



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Exchange rate sensitivity



A significant portion of our revenues is generated in U.S. dollars. We have, therefore, financed most of our assets in U.S.
dollars. In addition, virtually all assets are valued in U.S. dollars. A strong U.S. dollar is thus favorable for us.



A 10% change in the Norwegian kroner/U.S. dollar exchange rate for the year ended December 31, 2004, would alter income before income taxes, but excluding
change in forward contracts and currency options, for the year by approximately NOK 56 million or NOK 0.70 per share.



Dayrates



We receive dayrates for drilling units in operations. The dayrates are usually fixed during contract periods. As the units over time complete their
contracts and start on new assignments, the dayrate received by us may change. A U.S.$1,000 change in dayrates for all of our drilling rigs impacts annual revenues by approximately NOK 28 million. Assuming no corresponding change in costs, this
would change income before income taxes by NOK 0.35 per share, per year.



Personnel costs



Personnel costs
account for approximately 63% of our operating expenses, excluding depreciation. For our mobile units and tender rigs, a pay increase of 1%, to the extent not recoverable through increased revenues, would reduce the operating profit by roughly NOK
15 million per year, which corresponds to NOK 0.19 per share.



ITEM12: DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES



Not applicable.



PART II



ITEM 13: DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES



None.



ITEM 14: MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS



None.



ITEM 15: CONTROLS AND PROCEDURES



As of December 31, 2004, an evaluation was performed under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of
our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based on that evaluation, our management, including the chief executive officer and the chief financial officer, concluded that, except as otherwise
discussed below, our disclosure controls and procedures were effective as of December 31, 2004 at the reasonable assurance level. There has been no change in our internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



In June, 2005, after publication of our audited 2004 financial statements, we became aware of a Norwegian tax rule interpretation which clarified that a
change in the taxation of unrealized foreign exchange differences within the Norwegian tonnage tax system should be applied to unrealized foreign exchange gains arising after January 1, 2005 and not to the accumulated balance at December 31, 2004 as
we had previously understood. Consequently we have restated our balance sheet under Norwegian GAAP. The adjustment in our restated balance sheet reflects a decrease of NOK 170 million in deferred tax assets, an increase of NOK 26 million in deferred
taxes resulting in a decrease of NOK 196 million in shareholders equity from that previously reported. These adjustments have no effect on our profit and loss statement under Norwegian GAAP. In the reconciliation of Norwegian GAAP to U.S.
GAAP, these adjustments result in a decrease of NOK 196 million in both shareholders equity and net income under U.S. GAAP from that previously reported. The reports of management with respect to this matter have been reported to the Board of
Directors.



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ITEM 16A: AUDIT COMMITTEE FINANCIAL EXPERT



While the entire board of directors in 2004 served as audit committee, the company established an audit committee in 2005. On June 13, 2005, our board of directors has retained Mr. Martin N. Larsen as an adviser to
serve as the audit committees financial expert within the meaning of Item 16A of Form 20-F. For more information on our audit committee you should read Item 6: Directors, Senior Management and Employees  Board Practices.



ITEM 16B: CODE OF ETHICS



On
March 18, 2003, our board of directors adopted our Code of Ethics, which is applicable to our chief executive officer, chief financial officer, business division managing directors and corporate controller. The Code of Ethics meets the standards
required for a Code of Ethics within the meaning of Item 16B of Form 20-F. In addition, we maintain certain policies and procedures outlined in our management system, which applies to all Smedvig employees, as well as the officers
covered by the Code of Ethics. The Code of Ethics is available on our website at www.smedvig.com.



ITEM 16C: PRINCIPAL ACCOUNTANT FEES AND SERVICES



The following table provides an overview of the fees billed by KPMG AS, our independent auditors in respect of 2004 and 2003, for professional services performed in respect of 2004 and 2003, respectively.



|                   |  |                         |  |     
|------------------ |  | ----------------------- |  | ----
|                   |  | Year ended December 31,
|                   |  | 2004                    |  | 2003
|                   |  | (NOK in millions)      
|Audit Fees         |  | 2.13                    |  | 2.38
|Audit-Related Fees |  | 0.31                    |  | 0.09
|Tax Fees           |  | 0.25                    |  | 0.86
|All Other Fees     |  | 0.00                    |  | 0.06
|                   |  |                        
|Total              |  | 2.69                    |  | 3.39



Audit services.
The following services were billed under the category audit services: audit of financial statements, reviews of quarterly reports, including the formulation of audit opinions and reports, domestic and international statutory audits, tax
services necessary for compliance with generally accepted auditing principles, and support in the preparation and auditing of the documents to be filed. Audit services also included the auditing of information systems and processes and tests which
serve to promote understanding and reliability of systems and internal corporate controls, as well as advice on accounting and reporting issues.



Audit-related services. Audit-related services mainly consisted of services normally performed by the independent accountant in connection with the
auditing of the annual financial statements. Such services included advice on issues of accounting and reporting which were not classified as audit services, support in the interpretation and implementation of new accounting and reporting standards,
information systems audits, regulatory reporting audits and auditing of employee benefit plans.



Tax services. Tax services primarily consisted of services relating to the review of tax compliance and tax advice, mainly outside Norway.



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Other services. Other services consisted of services unrelated to the audits of our financial
statements, such as consultation regarding regulatory reporting and training sessions.



Audit Committees pre-approval policies and procedures. The audit committee is responsible, among other things, for the oversight of our independent auditors. The audit committee nominates our independent
auditors to audit our financial statements. In 2003 our board of directors also adopted a policy requiring management to obtain the board of directors approval before engaging our independent auditors to provide any other audit or permitted
non-audit services to our subsidiaries or ourselves. Pursuant to this policy, which is designed to assure that such engagements do not impair the independence of our auditors, the board of directors pre-approves annually a catalog of specific audit
and non-audit services in the categories audit services, audit-related services and tax services to be performed by our independent auditors. Services falling outside this scope are approved on a case-by-case basis.



All services performed by the independent accountants were subject to the
pre-approval policies and approved in advance, either specifically or generally.



ITEM 16D: EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES



Not applicable.



ITEM 16E: PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS



On April 29, 2003, the general meeting of shareholders authorized the board of directors on behalf of Smedvig to acquire up to 10% of Smedvigs share
capital in the open market, which equals approximately 8,298,000 shares. Between April 29, 2003 and April 27, 2004, Smedvig did not purchase any own shares pursuant to the 2003 share buyback authorization.



On April 27, 2004, the general meeting of shareholders authorized the board
of directors on behalf of Smedvig to acquire up to 10% of Smedvigs share capital in the open market, which equals approximately 8,228,000 shares. This authorization superseded the authorization of April 29, 2003 and is valid until June 30,
2005. Smedvig purchased 1,452,000 own shares pursuant to the 2004 share buyback authorization in 2004, and has purchased an additional 1,075,000 shares pursuant to the 2004 share buyback authorization in 2005.



The table below sets forth the total number of purchases by Smedvig of own shares in 2004,
comprising no shares purchased pursuant to the 2003 share buyback authorization and 1,452,000 shares purchased pursuant to the 2004 share buyback authorization.



ISSUER PURCHASES OF EQUITY SECURITIES



|            |  |                                         |  |                                            |  |                                                                                     |  |                                                                                   
|----------- |  | --------------------------------------- |  | ------------------------------------------ |  | ----------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------
|Period 2004 |  | (a) Total Number ofShares Purchased (3) |  | (b) Average Price Paidper Share in NOK (4) |  | (c) Total Number ofShares Purchased asPart of PubliclyAnnounced Plans orPrograms(1) |  | (d) Maximum Numberof Shares that May YetBe Purchased Under thePlans or Programs(2)
|January     |  |                                        |  |                                           |  |                                                                                    |  | 8,298,000                                                                         
|February    |  |                                        |  |                                           |  |                                                                                    |  | 8,298,000                                                                         
|March       |  |                                        |  |                                           |  |                                                                                    |  | 8,298,000                                                                         
|April       |  |                                        |  |                                           |  |                                                                                    |  | 8,298,000                                                                         
|May         |  | 800,000                                 |  | 55,86                                      |  | 800,000                                                                             |  | 7,428,000                                                                         
|June        |  | 450,000                                 |  | 58,30                                      |  | 450,000                                                                             |  | 6,978,000                                                                         
|July        |  |                                        |  |                                           |  |                                                                                    |  | 6,978,000                                                                         
|August      |  |                                        |  |                                           |  |                                                                                    |  | 6,978,000                                                                         
|September   |  |                                        |  |                                           |  |                                                                                    |  | 6,978,000                                                                         
|October     |  | 102,000                                 |  | 65,35                                      |  | 102,000                                                                             |  | 6,876,000                                                                         
|November    |  | 100,000                                 |  | 67,10                                      |  | 100,000                                                                             |  | 6,776,000                                                                         
|December    |  |                                        |  |                                           |  |                                                                                    |  | 6,776,000                                                                         
|            |  |                                         |  |                                            |  |                                                                                     |  |                                                                                   
|Sum         |  | 1,452,000                               |  | 58,06                                      |  | 1,452,000                                                                           |  |                                                                                   

---

|(1) | Shares purchased from May 2004 onwards were purchased pursuant to the 2004 share buyback authorization which is valid until June 30, 2005.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Up until April 27, 2004, Smedvig was authorized to purchase up to 10% of its own shares (approximately 8,298,000 shares). Since April 27, 2004, Smedvig has been authorized to up to
10% of its own shares (approximately 8,228,000 shares).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | All shares were purchased in the open market and pursuant to the authorizations described above.
|--- | ------------------------------------------------------------------------------------------------

|(4) | Weighted average price per share, calculated for convenience.
|--- | -------------------------------------------------------------



PART III



ITEM 17: FINANCIAL STATEMENTS



Not applicable.



ITEM 18: FINANCIAL STATEMENTS



You should read pages F-1 through F-38 incorporated in this annual report by reference.



ITEM 19: EXHIBITS



The following
exhibits are filed as part of this Annual Report:



Exhibit 1.
Articles of association for Smedvig asa*



Exhibit 4.1 Secured
U.S.$ 600 million Reducing and Revolving Credit Loan Facility Agreement, dated May 10, 2001, between Smedvig Rig AS and a group of banks for which Nordea Bank Norge ASA (formerly known as Christiania Bank og Kreditkasse ASA), Citibank N.A., Den
norske Bank ASA and Skandinaviska Enskilda Banken AB (Publ.) acted as Joint Arrangers*



Exhibit 4.2 First Supplemental Agreement, dated Feburary 15, 2002, to the U.S.$ 600 million Reducing and Revolving Credit Loan Facility, dated May 10, 2001, between Smedvig Rig AS and a group of banks for which Nordea
Bank Norge ASA (formerly known as Christiania Bank og Kreditkasse ASA), Citibank N.A., Den norske Bank ASA and Skandinaviska Enskilda Banken AB acted as Joint Arrangers**



Exhibit 4.3 Second Supplemental Agreement, dated May 9, 2003, to the U.S.$ 600 million Reducing and Revolving Credit Loan
Facility, dated May 10, 2001, between Smedvig Rig AS and a group of banks for which Nordea Bank Norge ASA (formerly known as Christiania Bank og Kreditkasse ASA), Citibank N.A., Den norske Bank ASA and Skandinaviska Enskilda Banken AB acted as Joint
Arrangers**



Exhibit 4.4. Third Supplemental Agreement, dated
June 26, 2003, to the U.S.$ 500 million Reducing and Revolving Credit Loan Facility, dated May 10, 2001, between Smedvig Rig AS and a group of banks for which Nordea Bank Norge ASA (formerly known as Christiania Bank og Kreditkasse ASA), Citibank
N.A., Den norske Bank ASA and Skandinaviska Enskilda Banken AB acted as Joint Arrangers***



Exhibit 4.5 Employment contract between Kjell E. Jacobson and Smedvig asa, dated June 24, 2002**



Exhibit 4.6. Fourth Supplemental Agreement, dated November 2, 2004, to the U.S.$ 500 million Reducing and Revolving Credit Loan Facility, dated May 10,
2001, between Smedvig Rig AS and a group of banks for which DnB NOR Bank ASA, Fokus Bank ASA and Citigroup Global Markets Ltd acted as Joint Arrangers



Exhibit 4.7. Secured U.S.$ 250 million Reducing and Revolving Credit Loan Facility Agreement, dated November 2, 2004, between Smedvig Rig AS and a group
of banks for which DnB NOR Bank ASA, Fokus Bank ASA and Citigroup Global Markets Ltd acted as Joint Arrangers



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Exhibit 8. Subsidiaries



Exhibit 12. Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



Exhibit 13. Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.

---

|* | Incorporated by reference to our annual report on Form 20-F for the year ended December 31, 2000.
|- | -------------------------------------------------------------------------------------------------

|** | Incorporated by reference to our annual report on Form 20-F for the year ended December 31, 2002.
|-- | -------------------------------------------------------------------------------------------------

|*** | Incorporated by reference to our annual report on Form 20-F for the year ended December 31, 2003.
|--- | -------------------------------------------------------------------------------------------------

| | Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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SIGNATURE



The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to
sign this annual report hereby on its behalf.



SMEDVIG ASA(Registrant)By:

/s/ Alf C. ThorkildsenAlf C. ThorkildsenChief Financial Officer




Date: June 29, 2005



78



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SMEDVIG asa AND SUBSIDIARIES



ANNUAL CONSOLIDATED FINANCIAL STATEMENTS



|                                                        |  |     
|------------------------------------------------------- |  | ----
|                                                        |  | Page
|Report of Independent Registered Public Accounting Firm |  | F-2 
|                                                        | 
|Consolidated Income Statements                          |  | F-3 
|                                                        | 
|Consolidated Balance Sheets                             |  | F-4 
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | F-5 
|                                                        | 
|Notes to Consolidated Financial Statements              |  | F-6 



F-1



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors

Smedvig asa



We have audited the consolidated balance sheets of Smedvig asa and subsidiaries as of December 31, 2003 and 2004 and the related consolidated statements
of income and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.



We
conducted our audits in accordance with auditing standards generally accepted in Norway and with 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. An audit includes examining, on a test basis, amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Smedvig asa and subsidiaries as of December 31, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December
31, 2004, in conformity with generally accepted accounting principles in Norway.



As discussed in note 30 to the consolidated financial statements, deferred taxes and shareholders equity have been restated as of December 31, 2004.



Accounting principles generally accepted in Norway vary in certain significant respects from accounting principles generally
accepted in the United States of America. Information relating to the nature and effect of such differences is presented in Note 29 to the Consolidated Financial Statements. As discussed in note 30 to the consolidated financial statements, net
income, related earnings per share data and shareholders equity under generally accepted accounting principles in the United States have been restated as of and for the year ended December 31, 2004.



KPMG AS



Stavanger, Norway

March 16, 2005, except for
Notes 28 and 30,

which are as of June 20, 2005



Aage K. Seldal

State Authorized Public
Accountant



F-2



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



CONSOLIDATED INCOME STATEMENTS



|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|----------------------------------- |  | ----------- | - |  | --------------------------------- | - |  | ------ | - |  | ------ | - |  | ------ | -
|                                    |  |             |   |  | Year ended December 31,           |  
|                                    |  |             |   |  | 2004                              |   |  | 2004   |   |  | 2003   |   |  | 2002   |  
|                                    |  |             |   |  | (U.S.$ Note 1)(unaudited)         |   |  | (NOK)  |   |  | (NOK)  |   |  | (NOK)  |  
|                                    |  |             |   |  | (millions, except per share data) |  
|Revenues                            |  | (Note 3     | ) |  | 507                               |   |  | 3,081  |   |  | 3,037  |   |  | 3,354  |  
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Operating expenses                  |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Personnel expenses                  |  | (Note 4     | ) |  | (239                              | ) |  | (1,450 | ) |  | (1,347 | ) |  | (1,465 | )
|Other operating expenses            |  |             |   |  | (142                              | ) |  | (865   | ) |  | (799   | ) |  | (1,025 | )
|Depreciation                        |  | (Note 8     | ) |  | (58                               | ) |  | (352   | ) |  | (361   | ) |  | (451   | )
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Total operating expenses            |  |             |   |  | (439                              | ) |  | (2,667 | ) |  | (2,507 | ) |  | (2,941 | )
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Operating profit                    |  |             |   |  | 68                                |   |  | 414    |   |  | 530    |   |  | 413    |  
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Financial income and expenses       |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Interest income                     |  |             |   |  | 2                                 |   |  | 11     |   |  | 15     |   |  | 28     |  
|Interest expenses                   |  | (Note 15,16 | ) |  | (21                               | ) |  | (129   | ) |  | (128   | ) |  | (224   | )
|Other financial items               |  | (Note 5     | ) |  | 5                                 |   |  | 28     |   |  | 75     |   |  | 27     |  
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Net financial items                 |  |             |   |  | (14                               | ) |  | (90    | ) |  | (38    | ) |  | (169   | )
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Other items                         |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Other items                         |  | (Note 6     | ) |  | 34                                |   |  | 209    |   |  | (668   | ) |  | (1,313 | )
|Gains on sale of assets             |  | (Note 6     | ) |  | 3                                 |   |  | 15     |   |  |       |   |  | 351    |  
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Total other items                   |  |             |   |  | 37                                |   |  | 224    |   |  | (668   | ) |  | (962   | )
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Income (loss) before income taxes   |  |             |   |  | 91                                |   |  | 548    |   |  | (176   | ) |  | (718   | )
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Income tax benefit (expense)        |  | (Note 7     | ) |  | (16                               | ) |  | (97    | ) |  | 88     |   |  | (84    | )
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Net income (loss)                   |  |             |   |  | 74                                |   |  | 451    |   |  | (88    | ) |  | (802   | )
|                                    |  |             |   |  |                                   |   |  |        |   |  |        |   |  |        |  
|Minority share of net loss (income) |  |             |   |  |                                  |   |  |       |   |  | 30     |   |  | 1      |  
|Earnings (loss) per share           |  | (Note 9     | ) |  | 0.92                              |   |  | 5.60   |   |  | (0.71  | ) |  | (9.74  | )
|Diluted earnings per share          |  | (Note 9     | ) |  | 0.91                              |   |  | 5.55   |   |  | (0.71  | ) |  | (9.74  | )



The accompanying notes
form an integral part of these Consolidated Financial Statements.



F-3



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS



|                                           |  |          |   |  |                                   |  |       |  |      
|------------------------------------------ |  | -------- | - |  | --------------------------------- |  | ----- |  | -----
|                                           |  |          |   |  | Year ended December 31,          
|                                           |  |          |   |  | 2004                              |  | 2004  |  | 2003 
|                                           |  |          |   |  | (U.S.$ Note 1)(unaudited)         |  | (NOK) |  | (NOK)
|                                           |  |          |   |  | (millions, except per share data)
|ASSETS                                     |  |          |   |  |                                   |  |       |  |      
|Long-term assets                           |  |          |   |  |                                   |  |       |  |      
|Deferred taxes (restated, see note 30)     |  | (Note 7  | ) |  |                                  |  |      |  | 26   
|Mobile units and tender rigs               |  | (Note 8  | ) |  | 1,000                             |  | 6,081 |  | 5,377
|Other tangible assets                      |  | (Note 8  | ) |  | 21                                |  | 128   |  | 133  
|Financial fixed assets                     |  | (Note 10 | ) |  | 26                                |  | 158   |  | 163  
|                                           |  |          |   |  |                                   |  |       |  |      
|Total long-term assets                     |  |          |   |  | 1,047                             |  | 6,367 |  | 5,699
|                                           |  |          |   |  |                                   |  |       |  |      
|Current assets                             |  |          |   |  |                                   |  |       |  |      
|Receivables                                |  | (Note 11 | ) |  | 162                               |  | 985   |  | 883  
|Cash and cash equivalents                  |  | (Note 12 | ) |  | 123                               |  | 746   |  | 993  
|                                           |  |          |   |  |                                   |  |       |  |      
|Total current assets                       |  |          |   |  | 285                               |  | 1,731 |  | 1,876
|                                           |  |          |   |  |                                   |  |       |  |      
|Total assets                               |  |          |   |  | 1,332                             |  | 8,098 |  | 7,575
|                                           |  |          |   |  |                                   |  |       |  |      
|SHAREHOLDERS EQUITY AND LIABILITIES       |  |          |   |  |                                   |  |       |  |      
|Shareholders equity                       |  |          |   |  |                                   |  |       |  |      
|Paid-in capital                            |  | (Note 13 | ) |  | 418                               |  | 2,541 |  | 2,545
|Retained earnings (restated, see note 30)  |  | (Note 13 | ) |  | 70                                |  | 428   |  | 517  
|                                           |  |          |   |  |                                   |  |       |  |      
|Total shareholders equity                 |  |          |   |  | 488                               |  | 2,969 |  | 3,062
|                                           |  |          |   |  |                                   |  |       |  |      
|Provisions                                 |  |          |   |  |                                   |  |       |  |      
|Deferred taxes (restated, see note 30)     |  | (Note 7  | ) |  | 4                                 |  | 26    |  |     
|Pensions                                   |  | (Note 14 | ) |  | 35                                |  | 211   |  | 172  
|                                           |  |          |   |  |                                   |  |       |  |      
|Total provisions                           |  |          |   |  | 35                                |  | 237   |  | 172  
|                                           |  |          |   |  |                                   |  |       |  |      
|Long-term liabilities                      |  |          |   |  |                                   |  |       |  |      
|Long-term interest-bearing debt            |  | (Note 15 | ) |  | 630                               |  | 3,828 |  | 3,323
|                                           |  |          |   |  |                                   |  |       |  |      
|Total long-term liabilities                |  |          |   |  | 630                               |  | 3,828 |  | 3,323
|                                           |  |          |   |  |                                   |  |       |  |      
|Current liabilities                        |  |          |   |  |                                   |  |       |  |      
|Short-term interest-bearing debt           |  | (Note 16 | ) |  | 33                                |  | 200   |  | 200  
|Other short-term liabilities               |  | (Note 17 | ) |  | 142                               |  | 864   |  | 818  
|                                           |  |          |   |  |                                   |  |       |  |      
|Total current liabilities                  |  |          |   |  | 175                               |  | 1,064 |  | 1,018
|                                           |  |          |   |  |                                   |  |       |  |      
|Total shareholders equity and liabilities |  |          |   |  | 1,332                             |  | 8,098 |  | 7,575
|                                           |  |          |   |  |                                   |  |       |  |      



The accompanying notes
form an integral part of these Consolidated Financial Statements.



F-4



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|----------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ------ | - |  | ----- | - |  | ----- | -
|                                                                                                |  | Year ended December 31, |  
|                                                                                                |  | 2004                    |   |  | 2004   |   |  | 2003  |   |  | 2002  |  
|                                                                                                |  | (U.S.$ Note 1)Unaudited |   |  | (NOK)  |   |  | (NOK) |   |  | (NOK) |  
|                                                                                                |  | (in millions)           |  
|Cash flows from operating activities                                                            |  |                         |   |  |        |   |  |       |   |  |       |  
|Net income (loss)                                                                               |  | 74                      |   |  | 451    |   |  | (88   | ) |  | (802  | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities:        |  |                         |   |  |        |   |  |       |   |  |       |  
|Depreciation and amortization                                                                   |  | 58                      |   |  | 352    |   |  | 361   |   |  | 451   |  
|Gains on sale of assets                                                                         |  | (2                      | ) |  | (15    | ) |  |      |   |  | (330  | )
|Losses on sales of securities                                                                   |  |                        |   |  |       |   |  |      |   |  | 6     |  
|Reversal of previously recognized impairment loss                                               |  | (34                     | ) |  | (209   | ) |  |      |   |  |      |  
|Amortization expense for periodic overhauls                                                     |  | 14                      |   |  | 83     |   |  | 62    |   |  | 77    |  
|Associated companies                                                                            |  | (1                      | ) |  | (9     | ) |  | (12   | ) |  | (8    | )
|Write-down of assets                                                                            |  |                        |   |  |       |   |  |      |   |  | 1,313 |  
|Pension provisions                                                                              |  | 6                       |   |  | 39     |   |  | (4    | ) |  | 48    |  
|Deferred income taxes                                                                           |  | (1                      | ) |  | (5     | ) |  | (146  | ) |  | 31    |  
|Change in assets and liabilities:                                                               |  |                         |   |  |        |   |  |       |   |  |       |  
|Receivables                                                                                     |  | (14                     | ) |  | (88    | ) |  | 222   |   |  | (115  | )
|Income taxes payable                                                                            |  | 3                       |   |  | 20     |   |  | (12   | ) |  | (3    | )
|Accounts payable                                                                                |  | 4                       |   |  | 27     |   |  | (9    | ) |  | (2    | )
|Other current liabilities                                                                       |  | (10                     | ) |  | (59    | ) |  | (103  | ) |  | (21   | )
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|Net cash provided by operating activities                                                       |  | 97                      |   |  | 587    |   |  | 271   |   |  | 645   |  
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|Cash flows from investing activities                                                            |  |                         |   |  |        |   |  |       |   |  |       |  
|Capital expenditures on mobile units, tender rigs and drilling equipment inventory and fixtures |  | (244                    | ) |  | (1,481 | ) |  | (512  | ) |  | (354  | )
|Capital expenditures on long-term maintenance                                                   |  | (40                     | ) |  | (242   | ) |  | (70   | ) |  | (40   | )
|Cash collection of long-term receivables                                                        |  | 9                       |   |  | 57     |   |  | 76    |   |  | (94   | )
|Proceeds from sale of fixed assets                                                              |  | 42                      |   |  | 253    |   |  | 6     |   |  | 494   |  
|Proceeds from net redemption of securities                                                      |  |                        |   |  |       |   |  | 28    |   |  | 95    |  
|Investments in shares and joint ventures                                                        |  | (2                      | ) |  | (12    | ) |  |      |   |  |      |  
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|Net cash provided by (used in) investing activities                                             |  | (235                    | ) |  | (1,425 | ) |  | (472  | ) |  | 101   |  
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|Cash flows from financing activities                                                            |  |                         |   |  |        |   |  |       |   |  |       |  
|Long-term debt borrowings                                                                       |  | 225                     |   |  | 1,369  |   |  | 1,025 |   |  | 1     |  
|Payments of long-term debt                                                                      |  | (97                     | ) |  | (591   | ) |  | (315  | ) |  | (873  | )
|Treasury shares                                                                                 |  | (11                     | ) |  | (69    | ) |  | (30   | ) |  | (4    | )
|Minoritys share of cash paid in limited partnership                                            |  |                        |   |  |       |   |  | 11    |   |  |      |  
|Dividends                                                                                       |  | (17                     | ) |  | (101   | ) |  | (81   | ) |  | (123  | )
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|Net cash provided by (used in) financing activities                                             |  | 100                     |   |  | 608    |   |  | 610   |   |  | (999  | )
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|Effect of exchange rate changes on cash and cash equivalents                                    |  | (2                      | ) |  | (17    | ) |  | (14   | ) |  | (79   | )
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|Net increase (decrease) in cash and cash equivalents                                            |  | (40                     | ) |  | (247   | ) |  | 395   |   |  | (332  | )
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|Cash and cash equivalents at beginning of year                                                  |  | 163                     |   |  | 993    |   |  | 598   |   |  | 930   |  
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  
|Cash and cash equivalents at end of year                                                        |  | 123                     |   |  | 746    |   |  | 993   |   |  | 598   |  
|                                                                                                |  |                         |   |  |        |   |  |       |   |  |       |  



The accompanying notes
form an integral part of these Consolidated Financial Statements.



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Note 1 
Summary of Significant Accounting Policies



The
accompanying consolidated financial statements present the financial position of Smedvig asa and consolidated subsidiaries (the Company or Smedvig). The accounts have been prepared in accordance with generally accepted
accounting principles in Norway (Norwegian GAAP). These accounting principles vary in certain significant respects from accounting principles generally accepted in the United States (U.S. GAAP). See note 29 for a discussion of the principal
differences between Norwegian GAAP and U.S. GAAP that affect the Companys consolidated net income (loss) and shareholders equity.



For reporting periods beginning January 1, 2005, the consolidated accounts must be prepared in accordance with International Financial Reporting Standards
(IFRS). See note 2 for a discussion of the principal differences between Norwegian GAAP and IFRS that affect the Company.



Solely for the convenience of the reader, the consolidated financial statements as of and for the year ended December 31, 2004, have been translated from
Norwegian kroner (NOK) into United States dollars (U.S.$) using the December 31, 2004 Noon Buying Rate of the Federal Reserve Bank of New York of U.S.$1.00 = NOK 6.0794. This information is unaudited.



Nature of Operation



Smedvig is an offshore drilling contractor that, since 1965, has provided
drilling and related services to the oil and gas industry.



In
addition to owning and operating mobile drilling rigs, a drillship and tender rigs, Smedvig has contracts for production drilling and maintenance on fixed installations on the Norwegian and the UK continental shelves.



Use of Estimates



The preparation of financial statements in conformity with generally
accepted accounting principles in Norway and the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of
the financial statements, and the reported amounts of revenues and expenses during the reported period. Significant estimates include those required in the valuation of fixed assets, income taxes, assessment of other contingent liabilities and
pension liabilitites, and the capitalization of costs relating to the upgrade of a mobile unit or tender rig and income taxes. Actual results could differ from those estimates.



Basis of Consolidation



Subsidiaries in which the Companys holding exceeds 50 percent are consolidated in the financial statements.



The Company also consolidates certain limited partnerships and equity
investments, in which the Companys holding is 50 percent or less, in accordance with the proportionate consolidation method. Proportionate consolidation is utilized for joint ventures in which the Company is actively involved in the
operations.



The equity method of accounting is used for
investments in associated companies in which the investment provides the Company with the ability to exercise significant influence over operating and financial policies of the



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



investee company. Such influence is presumed to exist for investments in companies in which the Companys direct
or indirect ownership is between 20 and 50 percent. Under the equity method, the Companys share of profits and losses of associated companies is included in the consolidated income statement under Other financial items. The excess of the
investment in those affiliates over the Companys share of their net assets at the acquisition date was recognized as goodwill.



The cost method of accounting is used for investments in companies in which the Companys ownership is less than 20 percent.



All material intercompany transactions and internal sales have been
eliminated in consolidation.



Reclassification



Certain 2003 and 2002 amounts have been reclassified to
conform to the 2004 presentation. Previously, capitalized long-term maintenance costs were recorded as a separate asset. In 2004, the Company combined these balances with the related drilling units.



Capitalized finance costs have previously been recorded as Financial fixed
assets. After the reclassification in 2004, such items reduced Long-term interest-bearing debt.



Revenue Recognition



The substantial majority of the Companys revenues is derived from dayrate-based drilling contracts or other service contracts. Revenues are
recognized in the period during which the services are rendered, and at the rates established in the contracts.



Under some contracts, Smedvig is entitled to additional payments for exceeding performance targets. As there is uncertainty as to such bonus payments
until the drilling program is completed, such additional payments are recognized after completion of such drilling program, or at such time as the uncertainty is resolved.



Drilling contracts occasionally include mobilization fees and/or other fees payable at the start of the contract. In cases
where the fee covers a general upgrade of a drilling unit or equipment and it is considered that the upgrade represents a value increase to Smedvig beyond the contract period, the fee is amortized over the contract period whereas the investment is
depreciated over the remaining lifetime of the asset. In cases where the payment covers specific upgrades or equipment only of value to the customer, the up-front fees are recognized as revenue on a straight-line basis over the estimated contract
period. Related equipment in such cases is depreciated over the contract period.



Occasionally drilling contracts are terminated by the customer against payment of a financial compensation. The compensation is recognized as revenue over the termination period or upon termination if a termination
period is not applicable. The termination period is the period where the Company is contractually obligated to refund a portion of the termination fee if the related asset commences on a new contract with another customer.



Repairs and maintenance



Costs for normal repair and maintenance are expensed as Other operating
expenses when the repairs and maintenance take place. Information on periodic overhauls is described in the section Long-term Maintenance.



Functional Currency



The functional currency of an entity is the currency of the primary economic environment in which the entity operates. Normally, that is the currency of
the environment in which an entity primarily generates and



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



expends cash. The Company uses Norwegian kroner as functional currency on the Group level. However, Smedvig Asia and
Smedvig Rig use the U.S. dollar as the functional currency:



Foreign Currencies



Due to the international
nature of the Companys operations, exchange rate movements give rise to foreign currency transaction risk and translation risk when revenues, costs and net assets of foreign subsidiaries are converted into Norwegian kroner. While the Company
engages in certain foreign exchange transactions with respect to its foreign currency exposure, there can be no assurance that these transactions will protect the Company from the effects of future exchange rate fluctuations, see note 19.



The balance sheets of subsidiaries with functional currencies
other than the Norwegian kroner are translated into Norwegian kroner at the foreign exchange rate at year-end, and the income statements are translated at the average exchange rate prevailing during the year. Differences arising from foreign
exchange translation are recorded as a separate component of shareholders equity. For subsidiaries using Norwegian kroner as the functional currency, bank deposits, short-term receivables and short- and long-term liabilities denominated in
foreign currencies are translated at year-end exchange rates. Any gains or losses resulting from such translation are recognized as financial income or expense.



Newbuilding Projects



Newbuildings are included in fixed assets at their cumulative costs.



Capitalized Interest



Interest expenses on borrowings utilized to upgrade and construct newbuildings are capitalized based on accumulated expenditures for the applicable
project at the Companys current rate of borrowing.



Mobile Units, Tender Rigs and Other Tangible Assets



Mobile units, tender rigs and other tangible assets are recorded at historical cost less accumulated depreciation. These assets are depreciated on a straight-line basis over the economic life of the assets. The Companys mobile rigs,
drillship and tender rigs are depreciated over 25 years. Drilling equipment and fixtures are depreciated over a period of three to ten years, depending upon their useful life.



Towards the end of a units operating life, the Company may in certain situations decide to upgrade a unit in order to
extend the life of the unit or modify it for alternative employment. In such instances, the associated cost is capitalized and depreciated over the new remaining life of the unit.



Impairment of Long-Lived Assets



Long-lived assets, such as mobile units and tender rigs, other tangible assets and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying
amount of an asset to estimated discounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated discounted future cash flows, an impairment charge is recognized by the amount the carrying
amount of the asset exceeds its fair value.



In subsequent
periods, market conditions may improve resulting in the recovery of the fair value of an asset to levels that could exceed those that were the basis of impairment charges. In such cases, the impairment charge is reversed in periods reflecting these
increases in amounts up to the original cost basis less depreciation that would have been recorded from the date of the charge through the date of recovery.



F-8



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Repairs, maintenance and periodic overhauls



Costs related to periodic overhauls of mobile units and tender rigs are
capitalized under mobile units and tender rigs and amortized over the anticipated period between overhauls, which is generally five years, as required by various rules and regulations. Related costs are primarily shipyard costs and the cost of
employees directly involved in the periodic overhauls.



Accounts Receivable



Accounts receivable are
recorded net of an allowance for doubtful accounts, if any.



Cash and Bank Deposits



Cash and cash
equivalents include highly liquid investments with an original maturity of 90 days or less.



Pensions



The Company
has several defined benefit plans which provide retirement, death and termination benefits.



The retirement benefits are generally a function of years of employment and amount of compensation. The plans are primarily funded through payments to insurance companies. The Company records its pension costs in the
period during which the services are rendered by employees and amounts are based on actuarial calculations.



Derivative Financial Instruments



The Companys interest-rate swap agreements, currency options and forward exchange contracts do not qualify as hedges for accounting purposes, as
they are not designated as hedges of specific assets, liabilities or firm commitments. Consequently, interest-rate swap agreements, forward exchange and currency options contracts are marked to market, with the resulting gain or loss recorded as
Other Financial Items.



Income Taxes



Income tax expense consists of taxes currently payable and changes in
deferred tax assets and liabilities. Deferred tax assets and liabilities are based on temporary differences that arise between the book basis and tax basis of assets and liabilities and the future tax benefits of tax loss carry forwards.



Deferred tax assets can only be recognized if it is probable that the
future benefit will be realized.



The majority of the
Companys mobile units and tender rigs as well as the drillship are taxed according to the Norwegian tax scheme for shipowning and offshore companies. According to the principles of the scheme, no income tax is assessed on the operating results
of those companies that qualify and decide to participate in the scheme. Under the scheme, taxation will occur when dividends are paid by companies within the scheme or when a company decides to withdraw from the scheme. A portion of net financial
items are subject to ordinary Norwegian taxation. Since Smedvig deems it preferable to stay within the scheme indefinitely, no provision for deferred taxes has been accrued on applicable income. However, see note 28 for an updated version of the
Company ́s position related to the tonnage tax system. The Company recognizes provisions for deferred taxes related to temporary differences on taxable net financial items.



The Company aims to distribute a dividend each year. The dividend will primarily be taken from earnings which have been
subject to ordinary taxation, from distributable reserves and, if necessary, from earnings under the Norwegian scheme for shipowning and offshore companies. Available funds for distribution that have been subject to taxation are sufficient to cover
dividend payments for the immediate future.



F-9



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Earnings per Share



Earnings per share is computed by dividing net income by the weighted average number of Class A and Class B shares
outstanding during the year. Shares issued during the year are weighted for the portion of the year that they were outstanding.



Diluted earnings per share is computed in a manner consistent with that of earnings per share, while giving effect to the potentially dilutive effect of
outstanding stock options during the period. Diluted earnings per share does not include the potential effects of outstanding share options in loss years as the effects are anti-dilutive. Note 9 discloses outstanding shares for the years 2004, 2003
and 2002.



Incentive programs



The Company has established incentive plans for senior management. In the
case when the exercise price of the share options granted is lower than the market price of the Companys shares on the date of grant, the difference is recognized as salary expense over the vesting period. National insurance contributions
arising from such incentive programs are accrued over the period of the options.



The notes refer to the Group. The numbers are in NOK million unless otherwise stated.



Note 2  Transition to International Financial Reporting Standards (IFRS) - Unaudited



Impact of conversion on consolidated group financial statements



Smedvig will, with effect from January 1, 2005, prepare its consolidated
accounts in accordance with the International Financial Reporting Standards (IFRS). In order to have comparative figures, the transition date for IFRS has been set to January 1, 2004. The implementation of the new standards will result in
differences compared to the accounts, which are currently reported in accordance with Norwegian Generally Accepted Accounting Principles (NGAAP). The transition to IFRS is not expected to have any significant impact on the Companys equity as
of January 1, 2004. However, a summary of the preliminary effects is as follows.



Dividends



Under IFRS
the proposed dividend will not be recorded as a liability in the balance sheet before approved by the General Meeting. As of January 1, 2004 this represents NOK 101 million.



Financial instruments



The Company applies fair value accounting of all its financial instruments, in line with IFRS.



Income Taxes



Smedvig uses the U.S. dollar as its functional currency for a significant
part of its business, although the consolidated accounts are prepared in Norwegian kroner. The impact of translating U.S. dollar-denominated debt into Norwegian kroner is included in shareholders equity. Related income tax effects due to the
fact that these translation differences impact taxable income have also been adjusted as a component of shareholders equity. However, under IFRS such taxes will be recognized in the income statement. For 2004, such taxes amounted to NOK 67
million.



F-10



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Pensions



Smedvig will recognize plan amendments and cumulative actuarial gains and losses for defined benefit plans at the date of
transition as an implementation effect. This will lead to a decrease of approximately NOK 20 million in recorded pension liabilities in the consolidated balance sheet for 2004.



Share Based Option Schemes



In accordance with IFRS, the Company will amortize the fair value of the options granted to employees over the vesting period. The estimated
amortization expense for 2004 is NOK 14 million related to options granted subsequent to November 7, 2002.



Tangible Fixed Assets



Tangible fixed assets will continue to be recorded at historical cost adjusted for accumulated depreciation. However, under IFRS the Company has
introduced component accounting, which implies that drilling units are divided into essential components. The application of component accounting will not have any significant effects on the Companys accounts.



Liabilities



Under Norwegian GAAP, the current portion of long-term debt is classified as
long-term liability. Under IFRS, debt should be classified as current or non-current based on whether it is due within one year from the balance sheet.



The fact that certain IFRS rules were recently introduced means that clarifications from standard-setting bodies as well as the development of best
practice may lead to further clarifications that could have an effect on the information provided above. The IFRS rules are in addition subject to continuous review and approval by the EU.



Note 3  Segment Information



The Company provides drilling and related services to the offshore oil and
gas industry. There have not been any intersegment sales. The accounting principles for the segments are the same as for the consolidated accounts.



Geographic segment data



The following presents the Companys revenues, income (loss) before taxes and assets by geographic area:



|                                     |  |                         |  |       |   |  |      
|------------------------------------ |  | ----------------------- |  | ----- | - |  | -----
|                                     |  | Year ended December 31,
|                                     |  | 2004                    |  | 2003  |   |  | 2002 
|                                     |  | (NOK in millions)      
|Revenues from unaffiliated customers |  |                         |  |       |   |  |      
|Norway                               |  | 1,843                   |  | 2,045 |   |  | 1,866
|Congo                                |  | 253                     |  |      |   |  |     
|Thailand                             |  | 207                     |  | 278   |   |  | 328  
|Brunei                               |  | 170                     |  | 338   |   |  | 318  
|UK                                   |  | 151                     |  | 54    |   |  | 189  
|Indonesia                            |  | 149                     |  | 135   |   |  |     
|Malaysia                             |  | 144                     |  | 159   |   |  | 399  
|Mauritania                           |  | 110                     |  | 28    |   |  |     
|Other                                |  | 54                      |  |      |   |  | 254  
|                                     |  |                         |  |       |   |  |      
|Total                                |  | 3,081                   |  | 3,037 |   |  | 3,354
|                                     |  |                         |  |       |   |  |      
|                                     |  |                         | 
|Income (loss) before income taxes    |  |                         |  |       |   |  |      
|Norway(1)                            |  | 170                     |  | (398  | ) |  | 408  



F-11



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                          |  |                         |   |  |       |   |  |        |  
|--------------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ------ | -
|                                                          |  | Year ended December 31, |  
|                                                          |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                                                          |  | (NOK in millions)       |  
|Congo                                                     |  | 45                      |   |  |      |   |  |       |  
|Thailand                                                  |  | 50                      |   |  | 55    |   |  | 93     |  
|Brunei                                                    |  | 37                      |   |  | 173   |   |  | 142    |  
|UK                                                        |  | 24                      |   |  | (7    | ) |  | (10    | )
|Indonesia                                                 |  | 54                      |   |  | 36    |   |  |       |  
|Malaysia(2)                                               |  | 55                      |   |  | 63    |   |  | 192    |  
|Mauritania                                                |  | 14                      |   |  | (14   | ) |  |       |  
|Other(3)                                                  |  | 189                     |   |  | (46   | ) |  | (1,374 | )
|                                                          |  |                         |   |  |       |   |  |        |  
|Income (loss) before income taxes and net financial items |  | 638                     |   |  | (138  | ) |  | (549   | )
|Net financial items                                       |  | (90                     | ) |  | (38   | ) |  | (169   | )
|                                                          |  |                         |   |  |       |   |  |        |  
|Total                                                     |  | 548                     |   |  | (176  | ) |  | (718   | )
|                                                          |  |                         |   |  |       |   |  |        |  
|                                                          | 
|                                                          |  | As of December 31,      |  
|                                                          |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                                                          |  | (NOK in millions)       |  
|Identifiable assets (4)                                   |  |                         |   |  |       |   |  |        |  
|Norway                                                    |  | 3,289                   |   |  | 3,968 |   |  | 4,490  |  
|Congo                                                     |  | 750                     |   |  |      |   |  |       |  
|Thailand                                                  |  | 290                     |   |  | 542   |   |  | 490    |  
|Brunei                                                    |  | 406                     |   |  | 873   |   |  | 447    |  
|UK                                                        |  | 88                      |   |  |      |   |  | 186    |  
|Indonesia                                                 |  | 576                     |   |  | 638   |   |  |       |  
|Malaysia                                                  |  | 402                     |   |  | 152   |   |  | 529    |  
|Mauritania                                                |  | 2,146                   |   |  | 15    |   |  |       |  
|Other (5)                                                 |  | 151                     |   |  | 1,387 |   |  | 1,398  |  
|                                                          |  |                         |   |  |       |   |  |        |  
|Total                                                     |  | 8,098                   |   |  | 7,575 |   |  | 7,540  |  
|                                                          |  |                         |   |  |       |   |  |        |  

---

|(1) | Including a loss on the Balder dispute of NOK 668 million for the year ended December 31, 2003 and a gain on sales of assets of NOK 351 million for the year ended December 31, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Including gains on sale of T-2 and part of T-9 amounting to NOK 15 million for the year ended December 31, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------

|(3) | Including a partial reversal of a previous write-down of West Navigator amounting to NOK 209 million for the year ended December 31, 2004 and a write-down of West Navigator
amounting to NOK 1,313 million for the year ended December 31, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | A substantial portion of the Company ́s assets are mobile drilling units. Asset locations at the end of a period are not necessarily indicative of the geographic distribution
of the revenues or operating profits generated by such assets during such period.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Including West Navigator at NOK 943 million and NOK 982 million for the years ended December 31, 2003 and 2002, repectively. At December 31, 2004 West Navigator was operating in
Mauritania.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Industry segment data



As of December 31, 2004, the Company operates in the
following three segments:



|  |  |                |  |                                                                                                                                                                                                                                                                     
|- |  | -------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Mobile Units:  |  | The Company offers services encompassing drilling, completion and maintenance of offshore wells in deep waters and harsh environments. The drilling contracts relate to three semi-submersible
rigs, one ultra-large jack-up and one deepwater drillship.           
|  |  |               
| |  | Tender Rigs:   |  | The Company operates a fleet of seven self-erecting tender rigs and three semi-submersible tender rigs, which are used for production drilling and well maintenance in Southeast Asia and West
Africa.                                                              
|  |  |               
| |  | Well Services: |  | The Company performs production drilling and maintenance activities on several fixed installations in the Norwegian sector and the UK sector of the North Sea. The Company also provides
wireline services including well maintenance, modification and abandonment.



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For accounting purposes only, there is a fourth division, Discontinued Activities.



|                                                          |  |                         |   |  |       |   |  |        |  
|--------------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ------ | -
|                                                          |  | Year ended December 31, |  
|                                                          |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                                                          |  | (NOK in millions)       |  
|Revenues from unaffiliated customers                      |  |                         |   |  |       |   |  |        |  
|Mobile Units                                              |  | 1,168                   |   |  | 1,287 |   |  | 1,423  |  
|Tender Rigs                                               |  | 955                     |   |  | 911   |   |  | 1,076  |  
|Well Services                                             |  | 958                     |   |  | 838   |   |  | 855    |  
|Discontinued Activities                                   |  |                        |   |  | 1     |   |  |       |  
|                                                          |  |                         |   |  |       |   |  |        |  
|Total                                                     |  | 3,081                   |   |  | 3,037 |   |  | 3,354  |  
|                                                          |  |                         |   |  |       |   |  |        |  
|Depreciation and amortization                             |  |                         |   |  |       |   |  |        |  
|Mobile Units                                              |  | 247                     |   |  | 258   |   |  | 367    |  
|Tender Rigs                                               |  | 168                     |   |  | 147   |   |  | 143    |  
|Well Services                                             |  | 20                      |   |  | 18    |   |  | 18     |  
|                                                          |  |                         |   |  |       |   |  |        |  
|Total                                                     |  | 435                     |   |  | 423   |   |  | 528    |  
|                                                          |  |                         |   |  |       |   |  |        |  
|                                                          | 
|                                                          |  | Year ended December 31, |  
|                                                          |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                                                          |  | (NOK in millions)       |  
|Income (loss) before income taxes                         |  |                         |   |  |       |   |  |        |  
|Mobile Units (1)                                          |  | 298                     |   |  | 129   |   |  | (1,049 | )
|Tender Rigs (2)                                           |  | 248                     |   |  | 326   |   |  | 443    |  
|Well Services                                             |  | 92                      |   |  | 88    |   |  | 63     |  
|Discontinued Activities (3)                               |  |                        |   |  | (681  | ) |  | (6     | )
|                                                          |  |                         |   |  |       |   |  |        |  
|Income (loss) before income taxes and net financial items |  | 638                     |   |  | (138  | ) |  | (549   | )
|Net financial items                                       |  | (90                     | ) |  | (38   | ) |  | (169   | )
|                                                          |  |                         |   |  |       |   |  |        |  
|Total                                                     |  | 548                     |   |  | (176  | ) |  | (718   | )
|                                                          |  |                         |   |  |       |   |  |        |  
|                                                          | 
|                                                          |  | Year ended December 31, |  
|                                                          |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                                                          |  | (NOK in millions)       |  
|Identifiable assets                                       |  |                         |   |  |       |   |  |        |  
|Mobile Units                                              |  | 5,417                   |   |  | 4,558 |   |  | 4,655  |  
|Tender Rigs                                               |  | 2,226                   |   |  | 2,759 |   |  | 2,497  |  
|Well Services                                             |  | 455                     |   |  | 258   |   |  | 220    |  
|Discontinued Activities                                   |  |                        |   |  |      |   |  | 168    |  
|                                                          |  |                         |   |  |       |   |  |        |  
|Total                                                     |  | 8,098                   |   |  | 7,575 |   |  | 7,540  |  
|                                                          |  |                         |   |  |       |   |  |        |  
|                                                          | 
|                                                          |  | As of December 31,      |  
|                                                          |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                                                          |  | (NOK in millions)       |  
|Capital expenditures                                      |  |                         |   |  |       |   |  |        |  
|Mobile Units                                              |  | 1,075                   |   |  | 21    |   |  | 273    |  
|Tender Rigs                                               |  | 383                     |   |  | 451   |   |  | 72     |  
|Well Services                                             |  | 23                      |   |  | 40    |   |  | 9      |  
|                                                          |  |                         |   |  |       |   |  |        |  
|Total                                                     |  | 1,481                   |   |  | 512   |   |  | 354    |  
|                                                          |  |                         |   |  |       |   |  |        |  

---

|(1) | Including a partial reversal of a previous write-down of West Navigator amounting to NOK 209 million for the year ended December 31, 2004 and a write-down of West Navigator
amounting to NOK 1,313 million offset by gains on sales of assets of NOK 351 million related to the sale of West Vanguard for the year ended Decemebr 31, 2002.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Including gains on sale of T-2 and part of T-9 amounting to NOK 15 million for the year ended December 31, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------

|(3) | Including a loss on the Balder dispute of NOK 668 million for the year ended December 31, 2003.
|--- | -----------------------------------------------------------------------------------------------



F-13



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 4  Personnel Expenses and Remuneration to the Board of Directors and Chief Executive Officer



|                                    |  |                         |  |       |  |      
|----------------------------------- |  | ----------------------- |  | ----- |  | -----
|                                    |  | Year ended December 31,
|                                    |  | 2004                    |  | 2003  |  | 2002 
|                                    |  | (NOK in millions)      
|Specification of personnel expenses |  |                         |  |       |  |      
|Salaries                            |  | 1,134                   |  | 1,038 |  | 1,126
|National insurance contribution     |  | 133                     |  | 129   |  | 142  
|Pension costs                       |  | 83                      |  | 85    |  | 109  
|Other remuneration                  |  | 100                     |  | 95    |  | 88   
|                                    |  |                         |  |       |  |      
|Total                               |  | 1,450                   |  | 1,347 |  | 1,465
|                                    |  |                         |  |       |  |      
|Average number of employees         |  | 3,751                   |  | 2,805 |  | 3,100



Remuneration to the
Board of Directors and Chief Executive Officer



|                               |  |                 
|------------------------------ |  | ----------------
|                               |  | 2004            
|                               |  | (Numbers in NOK)
|Remuneration expensed in 2004: |  |                 
|Board of Directors             |  | 800,000         
|Chief Executive Officer(1)     |  | 3,185,069       

---

|(1) | In addition to the remuneration detailed above, the Chief Executive Officer exercised options in Smedvig with net value of NOK 896,760. The Chief Executive Officer has been granted
70,000 options in 2004, which are described in note 18. The Chief Executive Officer has a bonus arrangement based on achieving specific targets with a maximum limit of 50 percent of annual salary. The Chief Executive Officer has an early pension
agreement whereby he can retire at the age of 65. Pursuant to his employment contract he will receive compensation corresponding to 24 months salary if he, at the request of the Board of Directors, resigns.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Chairman of the Board, Peter T. Smedvig, who is a Non-Executive Chairman,
has not received any remuneration in 2004.



Note 5  Other Financial
Items



In 2004, Other financial items amounted to a net
income of NOK 28 million. Approximately NOK 75 million was related to gains on the Companys forward exchange contracts, while the gains on the Companys interest rate swap agreements amounted to approximately NOK 5 million. Income from
associated companies amounted to approximately NOK 10 million and the currency losses on balance sheet items amounted to approximately NOK 60 million.



In 2003, Other financial items amounted to a net income of NOK 75 million of which approximately NOK 80 million was related to gains on the Companys
forward exchange contracts. In addition, NOK 12 million was reported as income from the associated companies. These gains were partly offset by currency losses on receivables and bank deposits of approximately NOK 15 million.



In 2002, Other financial items amounted to a net income of NOK 27 million of
which approximately NOK 120 million was related to gains on the Companys forward exchange contracts, partly offset by a loss of NOK 56 million related to a currency loss on a debt denominated in U.S. dollars as well as a currency loss on
receivables and bank deposits of approximately NOK 40 million.



F-14



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 6  Other Items



In 2004, Other items reflected a partial reversal of the previous write-down of West Navigator. The reversal amounted to NOK
209 million. The reversal was done as the market conditions have improved, resulting in a partial recovery of the fair value of the drillship.



Gains on sale of assets amounting to NOK 13 million reflected the partial sale of T-9, when the rig was sold to the Varia Perdana Group, a joint venture
controlled by Sapura-Crest Petroleum 51 percent and Smedvig 49 percent. In addition, T-2 was retired, resulting in a gain of NOK 2 million.



On July 30, 2003, Stavanger District Court came to a decision in the dispute between Esso and Smedvig regarding the completion of the Balder production
vessel that Smedvig sold to Esso. The Court concluded that Smedvig had to pay a net amount of NOK 485 million plus U.S.$ 3.5 million. In addition to these amounts, Smedvig had to pay interest to Esso of approximately NOK 160 million.



Early 2004, Esso and Smedvig agreed to waive all outstanding claims
concerning the litigation process. All remaining issues between Esso and Smedvig have been settled without any further payments. At the same time, Smedvig reached a final settlement with Keppel FELS in relation to the building contract for Balder
FPU. Under this agreement Smedvig received U.S.$ 25 million and maintained the right to seek indemnity from the underwriters of the warranty insurance.



As a consequence of the Courts decision, the Company had to write-off a receivable of NOK 175 million, which was included in Other items in 2003.
The net effect of the Balder dispute was a loss of NOK 668 million.



In 2002, the Company recorded a write-down of West Navigator amounting to NOK 1,313 million as a result of its impairment evaluation to reflect the asset at fair value. Fair value was determined based on the average fair value estimates
obtained from three independent offshore brokers.



In 2002, the
Company sold the mobile unit West Vanguard for approximately U.S.$ 69 million, resulting in a net gain of NOK 351 million.



F-15



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 7  Income Taxes



Allocation of income (loss) before income taxes:



|                   |  |                         |  |      |   |  |      |  
|------------------ |  | ----------------------- |  | ---- | - |  | ---- | -
|                   |  | Year ended December 31, | 
|                   |  | 2004                    |  | 2003 |   |  | 2002 |  
|                   |  | (NOK in millions)       | 
|Norway             |  | 495                     |  | (246 | ) |  | (769 | )
|Outside Norway (1) |  | 53                      |  | 70   |   |  | 51   |  
|                   |  |                         |  |      |   |  |      |  
|Total              |  | 548                     |  | (176 | ) |  | (718 | )
|                   |  |                         |  |      |   |  |      |  



Income tax expense
(benefit):



|                                                   |  |                         |   |  |      |   |  |     
|-------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ----
|                                                   |  | Year ended December 31,
|                                                   |  | 2004                    |   |  | 2003 |   |  | 2002
|                                                   |  | (NOK in millions)      
|Payable tax:                                       |  |                         |   |  |      |   |  |     
|Norway                                             |  | 46                      |   |  | 21   |   |  | 12  
|Outside Norway                                     |  | 45                      |   |  | 37   |   |  | 41  
|                                                   |  |                         |   |  |      |   |  |     
|Total payable tax (2)                              |  | 91                      |   |  | 58   |   |  | 53  
|Total deferred income tax expense (benefit) Norway |  | 22                      |   |  | (145 | ) |  | 31  
|Total deferred income tax benefit outside Norway   |  | (16                     | ) |  | (1   | ) |  |    
|                                                   |  |                         |   |  |      |   |  |     
|Total                                              |  | 97                      |   |  | (88  | ) |  | 84  
|                                                   |  |                         |   |  |      |   |  |     

---

|(1) | Allocation of income before taxes refers to income not taxable in Norway.
|--- | -------------------------------------------------------------------------

|(2) | In 2004, total payable taxes amounted to NOK 91 million of which NOK 38 million was a result of an assessment paid related to a disputed tax claim involving the rig West Alpha. The
Company is actively trying to recover this amount and is of the opinion that this will be refunded at a later stage.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The principal differences between the expected tax expense computed by applying the Norwegian statutory tax rate of 28 percent to income (loss) before
income taxes and the actual tax expense are as follows:



|                                           |  |                         |   |  |      |   |  |      |  
|------------------------------------------ |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                           |  | Year ended December 31, |  
|                                           |  | 2004                    |   |  | 2003 |   |  | 2002 |  
|                                           |  | (NOK in millions)       |  
|Expected income taxes                    |  | 153                     |   |  | (49  | ) |  | (201 | )
|Foreign tax rate differential              |  | 17                      |   |  | 21   |   |  | 27   |  
|Shipowners taxation in Norway             |  | (88                     | ) |  | (51  | ) |  | 250  |  
|Income tax provision (reversed provisions) |  | (4                      | ) |  | 13   |   |  |     |  
|Other                                      |  | 19                      |   |  | (22  | ) |  | 8    |  
|                                           |  |                         |   |  |      |   |  |      |  
|Income taxes                               |  | 97                      |   |  | (88  | ) |  | 84   |  
|                                           |  |                         |   |  |      |   |  |      |  



Deferred income taxes
reflect the impact of temporary differences between the amount of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. The net deferred tax assets (liabilities) consists of the following:



|                          |  |                         |  |      |  |     
|------------------------- |  | ----------------------- |  | ---- |  | ----
|                          |  | Year ended December 31,
|                          |  | 2004                    |  | 2003 |  | 2002
|                          |  | (NOK in millions)      
|Deferred tax assets:      |  |                         |  |      |  |     
|Tax loss carry forward    |  | 179                     |  | 235  |  | 276 
|Pension liabilities       |  | 55                      |  | 45   |  | 46  
|Provisions                |  | 19                      |  | 15   |  | 25  
|                          |  |                         |  |      |  |     
|Gross deferred tax assets |  | 253                     |  | 295  |  | 347 
|                          |  |                         |  |      |  |     



F-16



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                       |  |                         |   |  |      |  |      |  
|------------------------------------------------------ |  | ----------------------- | - |  | ---- |  | ---- | -
|                                                       |  | Year ended December 31, |  
|                                                       |  | 2004                    |   |  | 2003 |  | 2002 |  
|                                                       |  | (NOK in millions)       |  
|Deferred tax liabilities:                              |  |                         |   |  |      |  |      |  
|Fixed assets                                           |  | 4                       |   |  | 15   |  | 14   |  
|Currency exchange fluctuations (restated, see note 30) |  | 272                     |   |  | 213  |  | 353  |  
|Other                                                  |  | 3                       |   |  | 41   |  | 59   |  
|                                                       |  |                         |   |  |      |  |      |  
|Gross deferred tax liabilities                         |  | 279                     |   |  | 269  |  | 426  |  
|                                                       |  |                         |   |  |      |  |      |  
|Net deferred tax assets                                |  | (26                     | ) |  | 26   |  | (79  | )
|                                                       |  |                         |   |  |      |  |      |  



At December 31, 2004,
the Companys deferred tax asset of NOK 179 million was derived from a tax loss carry forward of NOK 638 million, that expires in varying amounts primarily between 2008 and 2013. The Company is of the opinion that it is probable that the
deferred tax assets will be realized through future profits.



Note 8 
Mobile Units and Tender Rigs and Other Tangible Assets



|                                                                            |  |                                     |       |  |                                         |   |  |                      |  
|--------------------------------------------------------------------------- |  | ----------------------------------- | ----- |  | --------------------------------------- | - |  | -------------------- | -
|                                                                            |  | Mobile unitsand tenderrigs          |       |  | Drillingequipment,inventory andfixtures |   |  | Total tangibleassets |  
|                                                                            |  | (NOK in million except percentages) |      
|Original cost January 1, 2004                                               |  | 9,678                               |       |  | 398                                     |   |  | 10,076               |  
|Additions                                                                   |  | 1,687                               |       |  | 36                                      |   |  | 1,723                |  
|Disposals                                                                   |  | (372                                | )     |  | (16                                     | ) |  | (388                 | )
|                                                                            |  |                                     |       |  |                                         |   |  |                      |  
|Cost at December 31, 2004                                                   |  | 10,993                              |       |  | 418                                     |   |  | 11,411               |  
|Currency exchange fluctuations                                              |  | (552                                | )     |  |                                        |   |  | (552                 | )
|Accumulated depreciation, amortization and write-downs at December 31, 2004 |  | (4,360                              | )     |  | (290                                    | ) |  | (4,650               | )
|                                                                            |  |                                     |       |  |                                         |   |  |                      |  
|Book value at December 31, 2004                                             |  | 6,081                               |       |  | 128                                     |   |  | 6,209                |  
|                                                                            |  |                                     |       |  |                                         |   |  |                      |  
|Depreciation for the year                                                   |  | 314                                 |       |  | 38                                      |   |  | 352                  |  
|Reversal of write-down                                                      |  | (209                                | )     |  |                                        |   |  | (209                 | )
|Amortization for the year                                                   |  | 83                                  |       |  |                                        |   |  | 83                   |  
|Percentage depreciation and amortization                                    |  | 4-20                                | % (1) |  | 10-33                                   | % |  |                     |  

---

|(1) | The percentage of 20 is related to long-term maintenance that is included in the asset value and amortized over five years.
|--- | ---------------------------------------------------------------------------------------------------------------------------



Note 9  Earnings Per Share



|                                  |  |                                                |   |  |                                    |  |                    |  
|--------------------------------- |  | ---------------------------------------------- | - |  | ---------------------------------- |  | ------------------ | -
|                                  |  | Net income (loss)adjusted forminority interest |   |  | Weighted averageshares outstanding |  | Earnings per share |  
|                                  |  | (NOK in million except per share data)         |  
|2002                              |  |                                                |   |  |                                    |  |                    |  
|Earnings (loss) per share         |  | (801                                           | ) |  | 82,253,720                         |  | (9.74              | )
|Effect of dilution:               |  |                                                |   |  |                                    |  |                    |  
|Options                           |  |                                                |   |  |                                   |  |                    |  
|                                  |  |                                                |   |  |                                    |  |                    |  
|Diluted earnings (loss) per share |  | (801                                           | ) |  | 82,253,720                         |  | (9.74              | )
|2003                              |  |                                                |   |  |                                    |  |                    |  
|Earnings (loss) per share         |  | (58                                            | ) |  | 81,346,850                         |  | (0.71              | )
|Effect of dilution:               |  |                                                |   |  |                                    |  |                    |  
|Options                           |  |                                                |   |  |                                   |  |                    |  
|                                  |  |                                                |   |  |                                    |  |                    |  
|Diluted earnings (loss) per share |  | (58                                            | ) |  | 81,346,850                         |  | (0.71              | )
|2004                              |  |                                                |   |  |                                    |  |                    |  
|Earnings per share                |  | 451                                            |   |  | 80,562,850                         |  | 5.60               |  
|Effect of dilution:               |  |                                                |   |  |                                    |  |                    |  
|Options                           |  |                                                |   |  | 725,587                            |  |                    |  
|                                  |  |                                                |   |  |                                    |  |                    |  
|Diluted earnings per share        |  | 451                                            |   |  | 81,288,437                         |  | 5.55               |  



F-17



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



For the years 2003 and 2002, 1,465,000 and 1,210,000 options were excluded from the computation of
diluted earnings per share due to their antidilutive effect.



Note 10 
Financial Fixed Assets



|                                       |  |                    |  |      |  |     
|-------------------------------------- |  | ------------------ |  | ---- |  | ----
|                                       |  | As of December 31,
|                                       |  | 2004               |  | 2003 |  | 2002
|                                       |  | (NOK in millions) 
|Long-term receivables:                 |  |                    |  |      |  |     
|KS West Alpha                          |  |                   |  |     |  | 84  
|Other long-term receivables            |  | 9                  |  | 35   |  | 38  
|Shares in associated companies:        |  |                    |  |      |  |     
|Lisme AS                               |  | 134                |  | 119  |  | 98  
|Shares in limited partnerships:        |  |                    |  |      |  |     
|KS Difko XLIV                          |  | 14                 |  | 8    |  | 10  
|Shares:                                |  |                    |  |      |  |     
|Shares in North Norway Drilling Co. AS |  | 1                  |  | 1    |  | 1   
|                                       |  |                    |  |      |  |     
|Total                                  |  | 158                |  | 163  |  | 231 
|                                       |  |                    |  |      |  |     



Note 11  Receivables



|                                                                                |  |                    |  |      |  |      
|------------------------------------------------------------------------------- |  | ------------------ |  | ---- |  | -----
|                                                                                |  | As of December 31,
|                                                                                |  | 2004               |  | 2003 |  | 2002 
|                                                                                |  | (NOK in millions) 
|Trade receivables                                                               |  | 531                |  | 445  |  | 580  
|Other receivables, including unbilled receivables and other current receivables |  | 454                |  | 438  |  | 525  
|                                                                                |  |                    |  |      |  |      
|Total                                                                           |  | 985                |  | 883  |  | 1,105
|                                                                                |  |                    |  |      |  |      



The trade receivables
are primarily from major international oil and gas companies. The Company continually evaluates the credit risk associated with each customer and, when considered necessary, requires certain guarantees. At December 31, 2004, 2003 and 2002 no
provision for doubtful accounts was considered necessary.



Note 12 
Cash and Cash Equivalents



|                        |  |                    |  |      |  |     
|----------------------- |  | ------------------ |  | ---- |  | ----
|                        |  | As of December 31,
|                        |  | 2004               |  | 2003 |  | 2002
|                        |  | (NOK in millions) 
|Cash                    |  | 608                |  | 851  |  | 469 
|Certificates of deposit |  | 138                |  | 142  |  | 129 
|                        |  |                    |  |      |  |     
|Total                   |  | 746                |  | 993  |  | 598 
|                        |  |                    |  |      |  |     



Of the total cash and
cash equivalents of NOK 746 million, NOK 87 million represents cash and cash equivalents in proportionately consolidated entities.



Note 13  Shareholders Equity



The Companys share capital is divided in two share classes, Class A and Class B. The class B shares are in general non-voting, but otherwise carry
the same rights and privileges as the holders of Class A shares. Each share has a par value of NOK 10.00.



F-18



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Total paid-in capital:



|                         |  |                  |   |  |               |   |  |               |  
|------------------------ |  | ---------------- | - |  | ------------- | - |  | ------------- | -
|                         |  | 2004             |   |  | 2003          |   |  | 2002          |  
|                         |  | (Numbers in NOK) |  
|Registered share capital |  | 822,840,040      |   |  | 829,840,040   |   |  | 829,840,040   |  
|Treasury shares          |  | (22,030,000      | ) |  | (17,910,000   | ) |  | (7,909,999    | )
|Share premium reserve    |  | 1,740,284,947    |   |  | 1,733,284,947 |   |  | 1,733,284,947 |  
|                         |  |                  |   |  |               |   |  |               |  
|Balance at December 31   |  | 2,541,094,987    |   |  | 2,545,214,987 |   |  | 2,555,214,988 |  
|                         |  |                  |   |  |               |   |  |               |  



Changes in the number
of Class A shares, Class B shares and share capital are as follows:



|                                   |  |                         |     |  |                         |     |  |               |  
|---------------------------------- |  | ----------------------- | --- |  | ----------------------- | --- |  | ------------- | -
|                                   |  | Number ofClass A Shares |     |  | Number ofClass B Shares |     |  | Share Capital |  
|Balance at January 1, 2004         |  | 55,014,004              |     |  | 27,970,000              |     |  | 830           |  
|Cancellation of shares in 2004     |  | (700,000                | )   |  |                        |     |  | (7            | )
|                                   |  |                         |     |  |                         |     |  |               |  
|Issued shares at December 31, 2004 |  | 54,314,004              | (1) |  | 27,970,000              | (1) |  | 823           |  
|                                   |  |                         |     |  |                         |     |  |               |  



Treasury shares:



|                                        |  |                         |   |  |                         |   |  |               |  
|--------------------------------------- |  | ----------------------- | - |  | ----------------------- | - |  | ------------- | -
|                                        |  | Number ofClass A Shares |   |  | Number ofClass B Shares |   |  | Share Capital |  
|Balance at January 1, 2002              |  |                        |   |  | 693,250                 |   |  | (7            | )
|Treasury shares bought 2002             |  |                        |   |  | 100,000                 |   |  | (1            | )
|Treasury shares sold 2002               |  |                        |   |  | (2,250                  | ) |  |              |  
|                                        |  |                         |   |  |                         |   |  |               |  
|Balance at December 31, 2002            |  |                        |   |  | 791,000                 |   |  | (8            | )
|Treasury shares bought 2003             |  | 700,000                 |   |  | 300,000                 |   |  | (10           | )
|                                        |  |                         |   |  |                         |   |  |               |  
|Balance at December 31, 2003            |  | 700,000                 |   |  | 1,091,000               |   |  | (18           | )
|Treasury shares bought 2004             |  | 550,000                 |   |  | 902,000                 |   |  | (15           | )
|Treasury shares sold 2004               |  |                        |   |  | (340,000                | ) |  | 3             |  
|Treasury shares cancelled 2004          |  | (700,000                | ) |  |                        |   |  | 7             |  
|                                        |  |                         |   |  |                         |   |  |               |  
|Balance at December 31, 2004            |  | 550,000                 |   |  | 1,653,000               |   |  | (22           | )
|Outstanding shares at December 31, 2004 |  | 53,764,004              |   |  | 26,317,000              |   |  | 801           |  

---

|(1) | Includes 550,000 Class A Shares and 1,653,000 Class B Shares held as treasury shares at December 31, 2004.
|--- | ----------------------------------------------------------------------------------------------------------



A share repurchase program authorizes the Company to purchase up to 8.2
million shares from time to time on the open market or pursuant to negotiated transactions at price levels the Company deems attractive. In 2004, the Company purchased 0.6 million Class A Shares and 0.9 million Class B Shares at an aggregate cost of
NOK 84 million, in addition the Company issued 0.3 million Class B Shares at a total price of NOK 16 million in connection with exercises of share options. In 2003, the Company purchased 0.7 million Class A Shares and 0.3 million Class B Shares at
an aggregate cost of NOK 30 million. The Company purchased 0.1 million Class B shares in 2002 at an aggregate cost of NOK 4 million. The purpose of the share repurchase program is to assist the Company achieve its long-term objective of enhancing
shareholder value. The treasury shares should also be viewed as part of the Companys obligations related to the share incentive programs.



Changes in share capital, share premium reserve, minority interests, retained earnings and foreign currency adjustments:



|                           |  |                   |  |                     |  |                   |   |  |                  |   |  |                            |  |                          |  
|-------------------------- |  | ----------------- |  | ------------------- |  | ----------------- | - |  | ---------------- | - |  | -------------------------- |  | ------------------------ | -
|                           |  | ShareCapital      |  | Sharepremiumreserve |  | Minorityinterests |   |  | Retainedearnings |   |  | Foreigncurrencyadjustments |  | Totalshareholdersequity |  
|                           |  | (NOK in millions) | 
|Balance at January 1, 2002 |  | 823               |  | 1,733               |  | 20                |   |  | 2,391            |   |  | 101                        |  | 5,068                    |  
|Net loss                   |  |                  |  |                    |  | (1                | ) |  | (801             | ) |  |                           |  | (802                     | )



F-19



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                     |  |                   |   |  |                     |  |                   |   |  |                  |   |  |                            |   |  |                          |  
|---------------------------------------------------- |  | ----------------- | - |  | ------------------- |  | ----------------- | - |  | ---------------- | - |  | -------------------------- | - |  | ------------------------ | -
|                                                     |  | ShareCapital      |   |  | Sharepremiumreserve |  | Minorityinterests |   |  | Retainedearnings |   |  | Foreigncurrencyadjustments |   |  | Totalshareholdersequity |  
|                                                     |  | (NOK in millions) |  
|Dividend                                             |  |                  |   |  |                    |  |                  |   |  | (81              | ) |  |                           |   |  | (81                      | )
|Foreign exchange translation                         |  |                  |   |  |                    |  |                  |   |  |                 |   |  | (802                       | ) |  | (802                     | )
|Treasury shares                                      |  | (1                | ) |  |                    |  |                  |   |  | (3               | ) |  |                           |   |  | (4                       | )
|                                                     |  |                   |   |  |                     |  |                   |   |  |                  |   |  |                            |   |  |                          |  
|Balance at December 31, 2002                         |  | 822               |   |  | 1,733               |  | 19                |   |  | 1,506            |   |  | (701                       | ) |  | 3,379                    |  
|                                                     |  |                   |   |  |                     |  |                   |   |  |                  |   |  |                            |   |  |                          |  
|Net loss                                             |  |                  |   |  |                    |  | (30               | ) |  | (58              | ) |  |                           |   |  | (88                      | )
|Dividend                                             |  |                  |   |  |                    |  |                  |   |  | (101             | ) |  |                           |   |  | (101                     | )
|Foreign exchange translation                         |  |                  |   |  |                    |  |                  |   |  |                 |   |  | (109                       | ) |  | (109                     | )
|Treasury shares                                      |  | (10               | ) |  |                    |  |                  |   |  | (20              | ) |  |                           |   |  | (30                      | )
|Other changes in minority interests                  |  |                  |   |  |                    |  | 11                |   |  |                 |   |  |                           |   |  | 11                       |  
|                                                     |  |                   |   |  |                     |  |                   |   |  |                  |   |  |                            |   |  |                          |  
|Balance at December 31, 2003                         |  | 812               |   |  | 1,733               |  |                  |   |  | 1,327            |   |  | (810                       | ) |  | 3,062                    |  
|                                                     |  |                   |   |  |                     | 
|Net income                                           |  |                  |   |  |                    |  |                  |   |  | 451              |   |  |                           |   |  | 451                      |  
|Dividend                                             |  |                  |   |  |                    |  |                  |   |  | (120             | ) |  |                           |   |  | (120                     | )
|Foreign exchange translation (restated, see note 30) |  |                  |   |  |                    |  |                  |   |  |                 |   |  | (355                       | ) |  | (355                     | )
|Cancellation of shares                               |  |                  |   |  | 7                   |  |                  |   |  | (7               | ) |  |                           |   |  |                         |  
|Treasury shares                                      |  | (11               | ) |  |                    |  |                  |   |  | (58              | ) |  |                           |   |  | (69                      | )
|                                                     |  |                   |   |  |                     |  |                   |   |  |                  |   |  |                            |   |  |                          |  
|Balance at December 31, 2004                         |  | 801               |   |  | 1,740               |  |                  |   |  | 1,593            |   |  | (1,165                     | ) |  | 2,969                    |  
|                                                     |  |                   |   |  |                     |  |                   |   |  |                  |   |  |                            |   |  |                          |  



The Companys 20
largest shareholders at December 31, 2004:



|                                  |  |                      |  |                      |  |                           
|--------------------------------- |  | -------------------- |  | -------------------- |  | --------------------------
|Name                              |  | No. of Class Ashares |  | No. of Class Bshares |  | % of total numberof shares
|Peder Smedvig Capital I as        |  | 18,856,098           |  | 2,501,374            |  | 25.96                     
|Folketrygdfondet                  |  | 4,118,500            |  | 4,046,300            |  | 9.92                      
|Odin Norge                        |  |                     |  | 2,961,405            |  | 3.60                      
|Odin Norden                       |  |                     |  | 2,833,000            |  | 3.44                      
|Smedvig asa                       |  | 550,000              |  | 1,653,000            |  | 2.68                      
|State Street Bank & Trust Co.     |  | 1,363,202            |  | 674,295              |  | 2.48                      
|Mellon Bank AS Agent for Clients  |  | 1,577,828            |  | 84,816               |  | 2.02                      
|UBS (Luxembourg) S.A.             |  | 1,089,768            |  | 272,442              |  | 1.67                      
|Investors Bank & Trust            |  | 1,133,660            |  |                     |  | 1.38                      
|A/S Veni                          |  | 832,460              |  | 208,114              |  | 1.28                      
|Nora Smedvig                      |  | 826,528              |  | 206,632              |  | 1.26                      
|JP Morgan Chase Bank              |  | 1,002,849            |  | 7,316                |  | 1.23                      
|Morgan Stanley & Co. Inc.         |  | 458,347              |  | 517,500              |  | 1.19                      
|Credit Suisse First Boston        |  |                     |  | 939,000              |  | 1.14                      
|Citibank NA                       |  | 443,347              |  | 477,365              |  | 1.12                      
|Stiching Shell Pensioensfond      |  | 74                   |  | 866,900              |  | 1.05                      
|Third Avenue Intl.                |  | 760,400              |  |                     |  | 0.92                      
|JP Morgan Chase Bank              |  | 336,080              |  | 384,492              |  | 0.88                      
|Deutsche Bank AG                  |  | 651,200              |  |                     |  | 0.79                      
|Skagen Vekst                      |  |                     |  | 600,000              |  | 0.73                      
|                                  |  |                      |  |                      |  |                           
|Percent of total number of shares |  | 41.32                |  | 23.40                |  | 64.70                     
|                                  |  |                      |  |                      |  |                           



F-20



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Shares and options owned by the Board, CEO and senior management at December 31, 2004:



|                                     |  |                |  |                |  |        
|------------------------------------ |  | -------------- |  | -------------- |  | -------
|                                     |  | Class A shares |  | Class B shares |  | Options
|Peter T. Smedvig, Chairman           |  | 21,708,854     |  | 3,214,564      |  |       
|Raymond De Smedt, Director           |  | 34,000         |  | 11,300         |  |       
|Siri B. Hatlen, Director             |  |               |  |               |  |       
|J. Larry Nichols, Director           |  | 20,000         |  |               |  |       
|Andrew C. Salvesen, Director         |  |               |  |               |  |       
|Kjell E. Jacobsen, CEO               |  | 8,000          |  | 5,000          |  | 220,000
|Alf C. Thorkildsen, CFO              |  |               |  | 7,700          |  | 140,000
|Stein Diesen, Managing Director      |  |               |  |               |  | 70,000 
|Alf Ragnar Løvdal, Managing Director |  |               |  | 1,000          |  | 70,000 
|Ståle Rød, Managing Director         |  | 8,000          |  | 82,000         |  | 140,000



Note 14  Pension Plans



The Company has a defined benefit pension plan that
covers approximately 1,984 employees as of December 31, 2004. A significant part of this plan is covered by a life insurance company, based on a 30 years earning period for the employees.



The main conditions for the onshore employees in Norway are a retirement pension of about 66 percent of salary at retirement
age of 67 years of age, together with long-term disability pension. The retirement pension per employee is however capped at an annual payment of approximately NOK 465.000. Most employees in this group may choose to retire at 62 years of age on a
pre-retirement pension.



Offshore employees in Norway have
retirement and longterm disability pension of about 60 percent of salary at retirement age of 67. Offshore employees on mobile units may choose to retire at 60 years of age on a pre-retirement pension. Offshore employees on fixed installations have
the same pre-retirement pension, but the employees may not retire until they are 62 years of age.



In addition, the Company has a defined contribution plan for some senior employees in Asia. At December 31, 2004, the obligation related to the
contribution plan was NOK 13 million and related expenses were NOK 1 million for each of 2004, 2003 and 2002.



The funded status of the defined benefit plan is as follows:



|                                                  |  |                    |   |  |      |   |  |      |  
|------------------------------------------------- |  | ------------------ | - |  | ---- | - |  | ---- | -
|                                                  |  | As of December 31, |  
|Change in Projected Benefit Obligation (PBO)      |  | 2004               |   |  | 2003 |   |  | 2002 |  
|                                                  |  | (NOK in millions)  |  
|PBO at the start of the year                      |  | 448                |   |  | 443  |   |  | 344  |  
|Service cost                                      |  | 64                 |   |  | 64   |   |  | 67   |  
|Interest cost                                     |  | 24                 |   |  | 22   |   |  | 21   |  
|Plan amendments                                   |  |                   |   |  |     |   |  |     |  
|Actuarial loss/(gain)                             |  | (8                 | ) |  | (78  | ) |  | 13   |  
|Benefits paid                                     |  | (4                 | ) |  | (3   | ) |  | (2   | )
|                                                  |  |                    |   |  |      |   |  |      |  
|PBO at the end of the year                        |  | 524                |   |  | 448  |   |  | 443  |  
|                                                  |  |                    |   |  |      |   |  |      |  
|                                                  | 
|                                                  |  | As of December 31, |  
|Change in plan assets                             |  | 2004               |   |  | 2003 |   |  | 2002 |  
|                                                  |  | (NOK in millions)  |  
|Fair value of the assets at the start of the year |  | 306                |   |  | 236  |   |  | 174  |  
|Actual return on plan assets                      |  | 19                 |   |  | 13   |   |  | 11   |  
|Benefits paid                                     |  | (4                 | ) |  | (3   | ) |  | (2   | )
|Employer contributions                            |  | 38                 |   |  | 60   |   |  | 50   |  
|Unrecognized gain/(loss)                          |  | (26                | ) |  |     |   |  |     |  
|                                                  |  |                    |   |  |      |   |  |      |  
|Fair value of the assets at the end of the year   |  | 333                |   |  | 306  |   |  | 236  |  
|                                                  |  |                    |   |  |      |   |  |      |  



F-21



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                      |  |                         |   |  |       |   |  |        |  
|--------------------------------------------------------------------- |  | ----------------------- | - |  | ----- | - |  | ------ | -
|                                                                      |  | As of December 31,      |  
|                                                                      |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                                                                      |  | (NOK in millions)       |  
|Funded status (underfunded)                                           |  | (191                    | ) |  | (142  | ) |  | (207   | )
|Unrecognized net (loss)/gain                                          |  | (6                      | ) |  | (26   | ) |  | 39     |  
|Unrecognized prior service cost                                       |  | 26                      |   |  | 28    |   |  | 30     |  
|                                                                      |  |                         |   |  |       |   |  |        |  
|Net amount recognized as a pension liability                          |  | (171                    | ) |  | (140  | ) |  | (138   | )
|                                                                      |  |                         |   |  |       |   |  |        |  
|Amounts recognized in the statement of financial position Consist of: |  |                         |   |  |       |   |  |        |  
|Accrued benefit liability                                             |  | (171                    | ) |  | (140  | ) |  | (138   | )
|Accrued social security cost and other costs                          |  | (27                     | ) |  | (20   | ) |  | (27    | )
|                                                                      |  |                         |   |  |       |   |  |        |  
|Net amount recognized as provisions                                   |  | (198                    | ) |  | (160  | ) |  | (165   | )
|                                                                      |  |                         |   |  |       |   |  |        |  
|Assumptions used in calculation of pension obligations:               |  |                         |   |  |       |   |  |        |  
|                                                                      |  |                         |  
|                                                                      |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|Rate of compensation increase at end of the year                      |  | 3.50                    | % |  | 3.50  | % |  | 4.00   | %
|Discount rate at end of the year                                      |  | 5.50                    | % |  | 6.00  | % |  | 6.00   | %
|Prescribed pension index factor                                       |  | 3.00                    | % |  | 3.00  | % |  | 3.00   | %
|Expected return on plan assets for the year                           |  | 6.50                    | % |  | 7.00  | % |  | 7.00   | %
|                                                                      |  |                         |  
|Expected annual early retirement from age 60/62:                      |  |                         |   |  |       |   |  |        |  
|Offshore personnel fixed installations                                |  | 30.00                   | % |  | 30.00 | % |  | 100.00 | %
|Offshore personnel Mobile units and onshore employees                 |  | 60.00                   | % |  | 60.00 | % |  | 100.00 | %
|                                                                      | 
|                                                                      |  | Year ended December 31, |  
|Components of net periodic benefit cost                               |  | 2004                    |   |  | 2003  |   |  | 2002   |  
|                                                                      |  | (NOK in millions)       |  
|Service cost                                                          |  | 65                      |   |  | 64    |   |  | 67     |  
|Interest cost                                                         |  | 24                      |   |  | 22    |   |  | 21     |  
|Expected return on plan assets                                        |  | (19                     | ) |  | (18   | ) |  | (14    | )
|Amortization of transition obligation (asset)                         |  | 2                       |   |  | 2     |   |  | 2      |  
|Amortization of prior service cost                                    |  | (2                      | ) |  | (2    | ) |  | 1      |  
|                                                                      |  |                         |   |  |       |   |  |        |  
|Total net periodic benefit cost                                       |  | 70                      |   |  | 68    |   |  | 78     |  
|                                                                      |  |                         |   |  |       |   |  |        |  



The weighted-average
asset allocation of funds related to the Companys defined benefit plan at December 31, 2004, 2003 and 2002 were as follows:



Pension benefit plan assets:



|                  |  |       |   |  |       |   |  |       |  
|----------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                  |  | 2004  |   |  | 2003  |   |  | 2002  |  
|Equity securities |  | 15.6  | % |  | 12.7  | % |  | 11.5  | %
|Debt securities   |  | 68.4  | % |  | 74.6  | % |  | 76.1  | %
|Real estate       |  | 10.9  | % |  | 12.6  | % |  | 12.1  | %
|Other             |  | 5.1   | % |  | 0.1   | % |  | 0.3   | %
|                  |  |       |   |  |       |   |  |       |  
|Total             |  | 100.0 | % |  | 100.0 | % |  | 100.0 | %
|                  |  |       |   |  |       |   |  |       |  



F-22



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The investment policies and strategies for the pension benefit plan funds do not use target
allocations for the individual asset categories. The investment objectives are to maximize returns subject to specific risk management policies. The Company addresses diversification by the use of domestic and international fixed income securities
and domestic and international equity securities. These investments are readily marketable and can be sold to fund benefit payment obligations as they become payable.



Cash Flows



The Company expects the annual pension plan contributions under defined benefit plans for the years 2005-2009, to be approximately NOK 30 million. The
aggregate expected payments in the five years from 2010-2014 are NOK 175 million. The expected payments are based on the assumptions used to measure the Companys obligations at December 31, 2004 and include estimated future employee services.



Note 15  Long-Term Interest-Bearing Debt and Interest Expense



In 2001, the Company entered into a new secured Reducing
and Revolving Credit Loan Facility Agreement which was amended in 2003 and 2004 (U.S.$ 500 million RRCF).



The main changes of the amended facility relate to price and profile:



| |  | The term was extended by 33 months, maturing in 2011 with a 20-year repayment profile.
|- |  | --------------------------------------------------------------------------------------



| |  | The margin was reduced to LIBOR plus 95 basis points until the end of the second quarter 2006. Thereafter the margin will be set at LIBOR plus a level between 75 and 120 basis
points dependent on the financial leverage of the Company.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In November 2004, the Company entered into a new secured seven-year U.S.$ 250 million Reducing and Revolving Credit Loan Facility Agreement (U.S.$ 250 million RRCF) with a 20-year repayment profile. The price and
condition under the U.S.$ 250 million RRCF were in line with the conditions reported under the U.S.$ 500 million RRCF described above.



The ammended loan and the new loan (The Facilities) have a total limit of U.S.$ 750 million (NOK 4,540 million) at December 31, 2004. U.S.$ 519 million
(NOK 3,142 million) and U.S.$ 419 million (NOK 2,802 million) were drawn at December 31, 2004 and 2003, respectively. Actual interest rates ranged from 2.6 percent to 3.5 percent in 2004 and from 2.6 percent to 2.8 percent in 2003.



The Companys share of a five-year long-term interest-bearing loan in
the proportionately consolidated company Varia Perdana Group amounted to NOK 161 million (U.S.$ 27 million) and NOK 21 million (U.S.$ 3 million) for the years ended December 31, 2004 and 2003 respectively. In 2004, the interest rate was LIBOR plus
140 basis points and at December 31, 2004 the interest rate was 3.94 percent.



The Company raised NOK 75 million through bonds issued in the Norwegian market in 2004, with a four-year maturity. The bonds were issued at a premium, which gives an effective interest rate at NIBOR plus 1.25 percent.
The effective interest rate at December 31, 2004 was 3.00 percent.



At December 31, 2004, the Company had the following bonds outstanding:



|              |  |                   |  |                     
|------------- |  | ----------------- |  | --------------------
|(NOK in mill) |  | Maturity          |  | Interest            
|230           |  | February 23, 2006 |  | NIBOR + 2.00 percent
|225           |  | November 19, 2008 |  | NIBOR + 2.75 percent
|100           |  | November 19, 2008 |  | Fixed 7.50 percent  



F-23



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Weighted average interest rates on Norwegian bonds at December 31, 2004 and 2003 were approximately
5.0 percent and 5.7 percent, respectively.



Long-term
interest-bearing debt totaled NOK 3,828 million and NOK 3,323 million at December 31, 2004 and 2003, respectively, and was used to finance the rig fleet. Except for the NOK 555 million bond issue, all the remaining long-term debt is denominated in
U.S. dollars.



Long-term interest-bearing debt at December 31,
2004 is payable as follows:



|      |  |                  
|----- |  | -----------------
|Year  |  | (NOK in millions)
|2005  |  |                 
|2006  |  | 397              
|2007  |  | 249              
|2008  |  | 473              
|2009  |  | 297              
|2010  |  | 227              
|2011  |  | 2,185            
|      |  |                  
|Total |  | 3,828            
|      |  |                  



The Company has
covenants in its loan agreements. The Facilities contain the following main covenants:



| |  | To maintain a minimum value adjusted assets of total liabilities: 1.5:1;
|- |  | ------------------------------------------------------------------------



| |  | To maintain a minimum liquidity balance (cash and cash equivalents) of U.S.$ 50 million;
|- |  | ----------------------------------------------------------------------------------------



| |  | To maintain the ratio of funded debt to earnings before interests, taxes, depreciation and amortization (EBITDA) of 6.5:1 until May 15, 2005 and for the rest of the loan period:
5.5:1;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Not to enter into any merger unless the Company will be the surviving entity, remain bound by the terms of the original Facilities and such merger would not reasonably be expected
to adversely affect the ability to comply with the financial covenants under the Facilities.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys bonds contain the following main covenants, based on financial statements, which require:



| |  | To maintain an adjusted shareholders equity equal to or greater than U.S.$ 300 million
|- |  | ---------------------------------------------------------------------------------------



| |  | To maintain an adjusted shareholders equity equivalent to a minimum of 40% of our total liabilities. For these purposes, the term adjusted shareholders
equity means the adjusted value of our total consolidated assets less total consolidated liabilities with the addition or subtraction of the difference between market value and book value of our rigs and offshore vessels.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For the years ended December 31, 2004, 2003 and
2002, interest costs incurred were NOK 132 million, NOK 131 million and NOK 224 million, respectively. Interest cost of NOK 3 million, NOK 3 million and NOK 0 million were capitalized as part of the financing cost for assets under construction and
upgrading of drilling rigs for the years December 31, 2004, 2003 and 2002, respectively.



F-24



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The accounting effects of the Companys interest swap agreements are included in Other financial
items and amounted to a gains of NOK 5 million and NOK 3 million for the year ended December 31, 2004 and 2003, respectively and losses of NOK 37 million for the year ended December 31, 2002.



Note 16  Short-Term Interest-Bearing Debt



The Company has issued two three-month commercial paper notes which have
been renewed at the end of each three month period. Each of the two commercial paper notes has a principal amount of NOK 100 million. The weighted interest rate on these commercial paper notes was 2.7 percent, 5.4 percent and 7.6 percent as of
December 31, 2004, 2003 and 2002, respectively.



As at December
31, 2004, the Company also has an overdraft facility of NOK 200 million of which NOK 183 million was undrawn.



Note 17  Other Short-Term Liabilities



|                                                 |  |                    |  |      |  |     
|------------------------------------------------ |  | ------------------ |  | ---- |  | ----
|                                                 |  | As of December 31,
|                                                 |  | 2004               |  | 2003 |  | 2002
|                                                 |  | (NOK in millions) 
|Accounts payable                                 |  | 135                |  | 108  |  | 117 
|Taxes payable                                    |  | 49                 |  | 9    |  | 21  
|Withheld taxes, social security and vacation pay |  | 170                |  | 160  |  | 215 
|Dividends payable                                |  | 120                |  | 101  |  | 81  
|Accrued interest expense                         |  | 18                 |  | 18   |  | 80  
|Other current liabilities                        |  | 372                |  | 422  |  | 409 
|                                                 |  |                    |  |      |  |     
|Total                                            |  | 864                |  | 818  |  | 923 
|                                                 |  |                    |  |      |  |     



Note 18  Share-Based
Incentive Programs



The Company has granted options to
senior management which provide the employee with the right to subscribe to Class B shares. The options are not transferable and may be withdrawn upon termination of employment. The subscription price under the options is fixed at the date of grant.
In all instances the subscription price was not less than the fair value of the Companys shares on the date of grant. Accordingly, no compensation expense has been recognized.



Options issued under the 2002 Program may be exercised up to December 31, 2005. The exercise price is NOK 34.90 per share.



Options issued under the 2003 Program may be exercised in the
period January 1, 2005 to December 31, 2007. The exercise price is NOK 29.00 per share.



Options issued under the 2004 Program may be exercised in the period May 1, 2006 to December 31, 2009. The exercise price is NOK 54.00 per share.



The following table summarizes the transactions under the Companys option plans for each of the years in the
three-year period ended December 31, 2004:



|                                 |  |                                          |  |                   |  |                  
|-------------------------------- |  | ---------------------------------------- |  | ----------------- |  | -----------------
|                                 |  | Weightedaverage exerciseprice per option |  | Number of AShares |  | Number of BShares
|Outstanding at January 1, 2002   |  | 69.87                                    |  | 0                 |  | 966,250          
|Options granted                  |  | 39.50                                    |  | 0                 |  | 530,000          
|Options exercised                |  | 35.25                                    |  | 0                 |  | 2,250            
|Forfeited                        |  | 53.37                                    |  | 0                 |  | 284,000          
|                                 |  |                                          |  |                   |  |                  
|Outstanding at December 31, 2002 |  | 61.22                                    |  | 0                 |  | 1,210,000        
|                                 |  |                                          | 
|Options granted                  |  | 29.00                                    |  | 0                 |  | 565,000          
|Forfeited                        |  | 75.00                                    |  | 0                 |  | 310,000          
|                                 |  |                                          |  |                   |  |                  
|Outstanding at December 31, 2003 |  | 45.88                                    |  | 0                 |  | 1,465,000        
|                                 |  |                                          |  |                   |  |                  
|Options granted                  |  | 54.00                                    |  | 0                 |  | 595,000          
|Options exercised                |  | 45.86                                    |  | 0                 |  | 340,000          
|Forfeited                        |  | 89.00                                    |  | 0                 |  | 290,000          
|                                 |  |                                          |  |                   |  |                  
|Outstanding at December 31, 2004 |  | 40.52                                    |  | 0                 |  | 1,430,000        
|                                 |  |                                          |  |                   |  |                  



F-25



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



The following table summarizes the information about share options outstanding as of December 31,
2004:



|                                    |  |         |  |         |  |        
|----------------------------------- |  | ------- |  | ------- |  | -------
|Options Program                     |  | 2004    |  | 2003    |  | 2002   
|Number of Class B Shares            |  | 595,000 |  | 565,000 |  | 270,000
|Subscription price (NOK)            |  | 54.00   |  | 29.00   |  | 34.90  
|Remaining contractual life (months) |  | 60      |  | 36      |  | 12     



As at December 31,
2004, 270,000 options issued under the 2002 Program were exercisable.



As of December 31, 2004, the Board could grant further 435,000 options under the 2003 authorization and 405,000 options under the 2004 authorization.



Accounting for Stock-Based Compensation (SFAS No. 123)



The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, to account for its fixed-plan
stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. FASB Statement No. 123, Accounting for Stock-Based Compensation
and FASB Statement No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure, an amendment of FASB Statement No. 123, established accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As permitted by existing accounting standards, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure
requirements of Statement 123, as amended. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.



|                                  |  |             |  |            |              |  |            |   |  |            |  |            |   |  |            |  
|--------------------------------- |  | ----------- |  | ---------- | ------------ |  | ---------- | - |  | ---------- |  | ---------- | - |  | ---------- | -
|                                  |  | As Reported |  |            | Pro Forma(1) | 
|                                  |  | 2004        |  | 2003       |              |  | 2002       |   |  | 2004       |  | 2003       |   |  | 2002       |  
|                                  |  | (NOK)       |  |            | (NOK)        | 
|Norwegian GAAP:                   |  |             |  |            |              | 
|Net income (loss) (in millions)   |  | 451         |  | (88        | )            |  | (802       | ) |  | 437        |  | (96        | ) |  | (805       | )
|Basic earnings (loss) per share   |  | 5.60        |  | (0.71      | )            |  | (9.74      | ) |  | 5.42       |  | (0.81      | ) |  | (9.79      | )
|Diluted earnings (loss) per share |  | 5.55        |  | (0.71      | )            |  | (9.74      | ) |  | 5.38       |  | (0.81      | ) |  | (9.79      | )
|U.S. GAAP:                        |  |             |  |            |              |  |            |   |  |            |  |            |   |  |            |  
|Net income (loss) (in millions)   |  | 137         |  | 64         |              |  | (949       | ) |  | 123        |  | 56         |   |  | (952       | )
|Basic earnings (loss) per share   |  | 1.70        |  | 0.79       |              |  | (11.54     | ) |  | 1.53       |  | 0.69       |   |  | (11.57     | )
|Diluted earnings (loss) per share |  | 1.69        |  | 0.79       |              |  | (11.54     | ) |  | 1.52       |  | 0.69       |   |  | (11.57     | )
|Average shares outstanding        |  | 80,562,850  |  | 81,346,850 |              |  | 82,253,720 |   |  | 80,562,850 |  | 81,346,850 |   |  | 82,253,720 |  



F-26



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                |  |             |  |              |  |      |  |      |     |   |      |     |     |      |  |     |     |  
|----------------------------------------------- |  | ----------- |  | ------------ |  | ---- |  | ---- | --- | - | ---- | --- | --- | ---- |  | --- | --- | -
|                                                |  | As Reported |  | Pro Forma(1) | 
|                                                |  | 2004        |  | 2003         |  | 2002 |  | 2004 |     |   | 2003 |     |     | 2002 | 
|                                                |  | (NOK)       |  | (NOK)        | 
|Norwegian GAAP:                                 |  |             |  |              |  |     
|Average fair value of grants during the year    |  |            |  |             |  |     |  | NOK  | 17  |   |      | NOK | 28  |      |  | NOK | 5   |  
|Black Scholes option pricing model assumptions: |  |             |  |              |  |      |  |      |     |   |      |     |     |      |  |     |     |  
|Risk free interest rate                         |  |             |  |              |  |      |  |      | 4.1 |   |      |     | 2.2 |      |  |     | 5.5 |  
|Expected life (years)                           |  |             |  |              |  |      |  |      | 4   |   |      |     | 4   |      |  |     | 3   |  
|Volatility                                      |  |             |  |              |  |      |  |      | 35  | % |      |     | 35  | %    |  |     | 50  | %

---

|(1) | Pro Forma amounts under U.S. GAAP have been adjusted by NOK 0 million, NOK 0 million and NOK 3 million for the years ended December 31, 2004, 2003 and 2002, respectively, for share
compensation expense recognized in determining reported net income (loss), as shown in the table. No share compensation expense was recognised in reported net income (loss) under Norwegian GAAP.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                                                                            |  |                         |   |  |      |   |  |      |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                                                                                                                                            |  | Year Ended December 31, |  
|                                                                                                                                            |  | 2004                    |   |  | 2003 |   |  | 2002 |  
|                                                                                                                                            |  | (NOK)                   |  
|U.S. GAAP:                                                                                                                                  |  |                         |  
|Net income (loss), as reported                                                                                                              |  | 137                     |   |  | 64   |   |  | (949 | )
|Add: Stock-based employee compensation expense included in reported net income (loss), net of related tax effects                           |  |                        |   |  |     |   |  | 3    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  | (14                     | ) |  | (8   | ) |  | (3   | )
|                                                                                                                                            |  |                         |   |  |      |   |  |      |  
|Pro forma net income (loss)                                                                                                                 |  | 123                     |   |  | 56   |   |  | (949 | )



Note 19  Financial
Instruments and Risk Management



The Company has
operations and assets in a number of countries worldwide. Consequently, the Companys results from operations are affected, when measured in NOK, by fluctuations in currency exchange rates, primarily relative to the U.S. dollar. When the NOK
appreciates against other currencies, the Companys profit from operations in foreign currencies reported in NOK may decrease. Likewise, when the NOK depreciates against other currencies, the Companys profit from operations in foreign
currencies reported in NOK may increase. The Company is also exposed to changes in interest rates on debt with variable interest rates (see note 15 and 16) and to the impact of changes in currency exchange rates on U.S. dollar-denominated debt.
Different financial instruments are used by the Company to manage these foreign currency and interest rate risks as summarized below.



Notional amounts and credit exposure



The notional amounts of derivative financial instruments presented in this note represent the face or contractual amounts and thus are not a measure of
the exposure of the Company through its use of such financial instruments. The actual amounts exchanged are calculated on the basis of the notional amounts and the other terms of the derivative financial instruments, which relate to interest rates
and exchange rates.



The Company is exposed to credit-related
losses in the event that counterparties to the derivative financial instrument contracts do not perform according to the terms of the contract. In the opinion of the management, the counterparties to the derivative financial instrument contracts are
creditworthy financial institutions, and the Company does not expect any significant loss to result from non-performance by such counterparties. The Company, in the normal course of business, does not demand collateral. The credit exposure of
interest rate swap agreements, currency option contracts and foreign currency contracts is represented by the fair value of contracts with a positive fair value at the end of each period, reduced by the effects of master netting agreements. It is
the Companys policy to enter into master netting agreements with the counterparties to derivative financial instrument contracts. These master netting agreements give the Company the legal right to discharge all or a portion of the amounts
owed to a counterparty by offsetting it against amounts that the counterparty owes to the Company.



F-27



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Foreign currency risk management



The Company uses foreign currency forward contracts and foreign currency
option contracts to manage its exposure to foreign currency risk on certain assets, liabilities and future anticipated transactions. Such derivative contracts do not qualify for hedge accounting treatment and are recorded in the balance sheet under
receivables if the forward contracts have a net positive fair value, and under other short-term liabilities if the forward contracts have a net negative fair value. As of December 31, 2004, the Company had forward contracts to receive approximately
NOK 805 million at exchange rates ranging from NOK/U.S.$ 6.06 to NOK/U.S.$ 7.11 between January 4, 2005 and December 20, 2005. Further, the Company had forward contracts to receive approximately THB 236 million and SGD 25 million. The exchange rates
ranging from THB/U.S.$ 39.24 to THB/U.S.$ 39.32 and SGD/U.S.$ 1.60 to SGD/U.S.$ 1.64 in the period January 18, 2005 to May 15, 2006.



Furthermore, as of December 31, 2004, the Company has one option contract, the contract expires May 19, 2005 to exchange NOK 90 million against U.S.$ 15
million.



The Companys foreign currency risk arises from:



| |  | The translation of U.S. dollar denominated debt and other monetary assets and liabilities to Norwegian kroner with the resulting gain or loss recorded as shareholders equity.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Foreign currency forward contracts and foreign currency options which are recorded as Other financial items.
|- |  | ------------------------------------------------------------------------------------------------------------



| |  | The impact of fluctuations in exchange rates on the reported amounts of the Companys revenues and expenses which are contracted in foreign currencies (primarily the U.S.
dollar).
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The net investment in certain foreign subsidiaries which is recorded as a cumulative translation adjustment in share holders equity.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------



|                           |  |                    |  |           |  |                |  |          
|-------------------------- |  | ------------------ |  | --------- |  | -------------- |  | ---------
|                           |  | As of December 31,
|                           |  | 2004               |  | 2003     
|                           |  | Notionalamount     |  | Fairvalue |  | Notionalamount |  | Fairvalue
|                           |  | (NOK in millions) 
|Currency forward contracts |  |                    |  |           |  |                |  |          
|Receivables                |  | 934                |  | 74        |  | 702            |  | 64       
|                           |  |                    |  |          
|Currency option contracts  |  |                    |  |           |  |                |  |          
|Receivables                |  | 90                 |  | 2         |  | 132            |  | 2        



Interest rate risk
management



The following is a summary of interest rate
swap agreements of the Company. Swap agreements that have a positive fair value are recorded as receivables while swap agreements with a negative fair value are recorded as other short-term liabilities.



F-28



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                              |  |                    |  |           |  |                |  |           |  
|----------------------------- |  | ------------------ |  | --------- |  | -------------- |  | --------- | -
|                              |  | As of December 31, | 
|                              |  | 2004               |  | 2003      | 
|                              |  | Notionalamount     |  | Fairvalue |  | Notionalamount |  | Fairvalue |  
|                              |  | (NOK in millions)  | 
|Interest rate swap agreements |  |                    |  |           |  |                |  |           |  
|Other short-term liabilities  |  | 706                |  | 8         |  | 888            |  | (11       | )



The extent of the
utilization of financial instruments is determined by reference to the Companys net debt exposure and the Companys views regarding future interest rates. At December 31, 2004, the Company had outstanding interest rate swap agreements
representing approximately 18 percent of the Companys U.S. dollar interest-bearing debt. This implies that the Company has a fixed interest rate for this portion of the debt. However, as described in the Accounting Policies, these agreements
do not qualify for hedge accounting, and accordingly the changes in the fair values of the swap agreements are recorded as Other financial items.



The Company had the following interest rate swap agreements as of December 31, 2004:



|                       |  |               |  |               |   |  |                                      
|---------------------- |  | ------------- |  | ------------- | - |  | -------------------------------------
|Notional amount        |  | Receive rate  |  | Pay rate      |   |  | Length of contract                   
|(NOK in millions)      |  |               |  |               |   |  |                                      
|303 (U.S.$ 50 million) |  | 3 month LIBOR |  | 3.34          | % |  | November 15, 2002  November 15, 2007
|303 (U.S.$ 50 million) |  | 3 month LIBOR |  | 3.31          | % |  | November 15, 2002  November 15, 2007
|100                    |  | 7.50% fixed   |  | 3 month NIBOR |   |  | November 19, 2003  November 19, 2008



The primary loan is
held by the rig owning company, Smedvig Rig AS. The interest rate swap agreements are not linked to individual drilling rigs or the drillship.



Concentration of credit risk



The market for the Companys services is the offshore oil and gas industry, and the customers consist primarily of major integrated oil companies,
independent oil and gas producers and government-owned oil companies. The Company performs ongoing credit evaluations of the customers and generally do not require material collateral. Reserves for potential credit losses are maintained when
necessary. The results of operations and financial condition should be considered in light of the fluctuations in demand experienced by drilling contractors as changes in oil and gas producers expenditures and budgets occur. These fluctuations
can impact the results of operations and financial condition as supply and demand factors directly affect utilization and dayrates, which are the primary determinants of net cash provided by operating activities.



The following table summarizes revenues from major customers as a percentage
of total revenues (revenues in excess of 10 percent for the period):



|            |  |      |   |  |      |   |  |      |  
|----------- |  | ---- | - |  | ---- | - |  | ---- | -
|Customer    |  | 2004 |   |  | 2003 |   |  | 2002 |  
|BP          |  | 13   | % |  | 20   | % |  | 14   | %
|Norsk Hydro |  | 17   | % |  | 22   | % |  | 28   | %
|Statoil     |  | 28   | % |  | 23   | % |  | 14   | %



Note 20  Fair Value of
Financial Instruments



The Company has used a variety of
methods and assumptions, which are based on market conditions and risks existing at the time, to estimate the fair value of the Companys financial instruments as at December 31, 2004 and December 31, 2003. For certain instruments, including
cash and cash equivalents, receivables and accounts payable, it is assumed that the carrying amount approximated fair value due to the short-term maturity of those instruments.



F-29



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Quoted market prices or dealer quotes for the same or similar financial instruments were used to
estimate the fair value of the marketable securities, short-term interest-bearing debt, and long-term interest-bearing debt. The estimated values of the Companys derivative financial instruments are primarily based on settlement values. These
values represent the estimated amount that would be received or paid in the event of termination of the contract, taking into consideration current interest rates, the creditworthiness of the counterparties and current foreign currency exchange
rates.



|                                  |  |                    |  |           |  |               |   |  |           |  
|--------------------------------- |  | ------------------ |  | --------- |  | ------------- | - |  | --------- | -
|                                  |  | As of December 31, | 
|                                  |  | 2004               |  | 2003      | 
|                                  |  | Carryingvalue      |  | Fairvalue |  | Carryingvalue |   |  | Fairvalue |  
|                                  |  | (NOK in millions)  | 
|Assets:                           |  |                    |  |           |  |               |   |  |           |  
|Cash and cash equivalents         |  | 746                |  | 746       |  | 993           |   |  | 993       |  
|Receivables                       |  | 985                |  | 985       |  | 883           |   |  | 883       |  
|Liabilities:                      |  |                    |  |           |  |               |   |  |           |  
|Accounts payable                  |  | 135                |  | 135       |  | 108           |   |  | 108       |  
|Short-term interest-bearing debt  |  | 200                |  | 200       |  | 200           |   |  | 200       |  
|Long-term interest-bearing debt   |  | 3,828              |  | 3,833     |  | 3,323         |   |  | 3,326     |  
|Derivative financial instruments: |  |                    |  |           |  |               |   |  |           |  
|Interest rate swap agreements     |  | 8                  |  | 8         |  | (11           | ) |  | (11       | )
|Currency forward contracts        |  | 74                 |  | 74        |  | 64            |   |  | 64        |  
|Currency option contracts         |  | 2                  |  | 2         |  | 2             |   |  | 2         |  



See Note 19 for
further details regarding fair value of derivative financial instruments.



Note 21  Purchase of 50 percent of West Navigator



Effective November 15, 2004, the Company purchased the 50 percent share of PR West Navigator DA it did not previously own for a cash consideration of NOK 1,120 million. PR West Navigator DAs sole activity was
ownership of the drillship West Navigator. The purchase price was assigned as follows:



|                          |  |      
|------------------------- |  | -----
|Fixed assets              |  | 1,088
|Other assets              |  | 9    
|Liabilities to the selles |  | 23   
|                          |  |      
|Total                     |  | 1,120
|                          |  |      



Note 22  Leases



The Company has signed operating leases for certain
premises. Some of the premises are leased from the Smedvig familys real estate company, A/S Veni. See note 25 Related party transactions. Smedvig Offshore AS has a lease with A/S Veni lasting until 2007 for the offices at Dusavik, Stavanger.



Rental expenses amount to NOK 18 million for 2004, which is an
increase of NOK 3 million from 2003, and a decrease of NOK 4 million from 2002. Estimated future minimum rental payments for the period 2005 to 2009 are as follows:



|     |  |                  
|---- |  | -----------------
|Year |  | (NOK in millions)
|2005 |  | 18               
|2006 |  | 19               
|2007 |  | 19               
|2008 |  | 20               
|2009 |  | 20               



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 23  Proportionate Consolidation



The Company consolidates certain joint-stock companies and limited partnerships in accordance with proportionate
consolidation principles. The Companys ownership interest in such companies and partnerships is approximately 50 percent. The table below presents condensed financial information for the Companys pro rata share of the assets, liabilities
and results of operations of the companies that have been proportionally consolidated.



|                                  |  |                         |   |  |      |   |  |        |  
|--------------------------------- |  | ----------------------- | - |  | ---- | - |  | ------ | -
|                                  |  | As of December 31,      |  
|                                  |  | 2004                    |   |  | 2003 |   |  | 2002   |  
|                                  |  | (NOK in millions)       |  
|Balance sheet                     |  |                         |   |  |      |   |  |        |  
|Non-current assets                |  | 497                     |   |  | 949  |   |  | 1,147  |  
|Current assets                    |  | 168                     |   |  | 262  |   |  | 141    |  
|Non-current liabilities           |  | 176                     |   |  | (17  | ) |  | (3     | )
|Current liabilities               |  | 93                      |   |  | 21   |   |  | 47     |  
|                                  | 
|                                  |  | Year ended December 31, |  
|                                  |  | 2004                    |   |  | 2003 |   |  | 2002   |  
|                                  |  | (NOK in millions)       |  
|Income statement                  |  |                         |   |  |      |   |  |        |  
|Revenues                          |  | 413                     |   |  | 446  |   |  | 533    |  
|Operating profit (loss)           |  | (18                     | ) |  | (4   | ) |  | (69    | )
|Income (loss) before income taxes |  | (11                     | ) |  | 6    |   |  | (1,221 | )



Note 24  Auditors
Remuneration



|                                                           |  |           |  |           |  |          
|---------------------------------------------------------- |  | --------- |  | --------- |  | ---------
|                                                           |  | 2004      |  | 2003      |  | 2002     
|                                                           |  | (NOK)     |  | (NOK)     |  | (NOK)    
|Audit of parent company                                    |  | 350,000   |  | 350,000   |  | 400,000  
|Audit services in connection with U.S. financial reporting |  | 642,875   |  | 750,000   |  | 635,245  
|Audit of subsidiaries                                      |  | 1,148,820 |  | 1,280,220 |  | 1,145,465
|Other advisory services                                    |  | 545,684   |  | 1,005,767 |  | 4,630,727



Note 25  Related Party
Transactions



The Company has signed miscellaneous lease
agreements with A/S Veni and Peder Smedvig Capital Ltd. Both companies are wholly owned by the Smedvig family, which is the largest shareholder in Smedvig asa. The lease agreements primarily relate to office premises and expire at various dates
through 2007. The lease payments to those companies for the years ended December 31, 2004, 2003 and 2002 were NOK 7 million per year.



F-31



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 26  Supplemental Cash Flow Information



Cash paid for interest and taxes are as follows:



|              |  |                         |  |      |  |     
|------------- |  | ----------------------- |  | ---- |  | ----
|              |  | Year ended December 31,
|              |  | 2004                    |  | 2003 |  | 2002
|              |  | (NOK in millions)      
|Interest paid |  | 143                     |  | 179  |  | 271 
|Taxes paid    |  | 82                      |  | 73   |  | 46  



Note 27  Mortgages,
Guarantees and Purchase Commitments for Capital Expenditures



Mortgages



|                             |  |                        
|---------------------------- |  | -----------------------
|                             |  | As of December 31, 2002
|                             |  | (NOK in millions)      
|Mortgages                    |  | 3,303                  
|                             | 
|Pledged Assets               |  |                        
|                             | 
|Mobile units and tender rigs |  | 6,081                  
|Accounts receivable          |  | 531                    
|                             | 
|Book value pledged assets    |  | 6,612                  



Guarantees



The Company has issued guarantees in favor of third
parties as follows which is the maximum potential future payment for each type of guarantee:



|                                                                                |  |                         |  |     
|------------------------------------------------------------------------------- |  | ----------------------- |  | ----
|                                                                                |  | Year ended December 31,
|                                                                                |  | 2004                    |  | 2003
|                                                                                |  | (NOK in millions)      
|Guarantees to customers of the Companys own performance                        |  | 395                     |  | 388 
|Guarantee of the Companys share of debt of proportionately consolidated entity |  | 161                     |  | 21  
|Other guarantees                                                                |  | 30                      |  | 24  
|                                                                                |  |                         |  |     
|Total                                                                           |  | 586                     |  | 433 
|                                                                                |  |                         |  |     



The guarantees have
the following maturities:



|                    |  |                  
|------------------- |  | -----------------
|Year                |  | (NOK in millions)
|2005                |  | 198              
|2006                |  | 182              
|2007 and thereafter |  | 206              



F-32



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SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Purchase commitments for capital expenditures



The Company had contractual obligations in respect of capital expenditure
amounting to approximately NOK 600 million at December 31, 2004, payments of which are all due by December 31, 2005.



Purchase commitments West Alpha



Included in the contractual obligation is the commitment for the future acquisition of the remaining 50 percent ownership interest in West Alpha,
increasing Smedvigs ownership share in the rig to 100 percent. The purchase price is U.S.$ 75 million combined with an additional payment of maximum U.S.$ 5 million dependent on the price development of the Companys Class A share in the
period until December 31, 2005. The share price range that forms the basis for the additional payment is between NOK 90 and NOK 140. Accordingly, no additional payment will be paid if the Company ́s Class A share has a price below NOK 90, and
correspondingly additional payment will be capped at U.S.$ 5 million if the price of the Company ́s Class A share exceeds NOK 140. Based on the Companys Class A share price at December 31, 2004, the obligation would be U.S.$ 76 million.



Purchase commitments West Setia



The Company has also entered into an agreement with Keppel FELS in Singapore
to build a new semi-tender, West Setia. Total capital expenditure for the new semi-tender is estimated at U.S.$ 94 million, of which Smedvigs share is approximately U.S.$ 29 million. As of December 31, 2004, the Company has spent U.S.$ 6.5
million. The agreement includes an option for Smedvig to purchase the hull and machinery at a pre-agreed price. The new rig is scheduled for delivery in the third quarter 2005.



Note 28  Commitments and Contingencies



Tonnage tax system



Since 1996, the majority of Smedvigs drilling units have been part of the Norwegian tax scheme for ship and rig owning companies, where the tax on
profits is deferred until the point in time when the profits are distributed as dividends or the company decides to exit the special tax system.



Through the EEA agreement, most rules and regulations in EU bind Norway. For state subsidies the EU has set up certain guidelines known as the State Aid
Guidelines. These guidelines have recently been revised with a deadline for implementing the amendments in the national legislation set at June 30, 2005. One element in the revised guidelines is the definition of activities known as maritime
transport. In this connection, some uncertainty has been introduced as to whether mobile units in the offshore oil and gas industry will qualify as maritime transport in the future.



On March 11, 2005 the Norwegian Ministry of Finance issued a discussion paper
with proposed changes to the Norwegian tax scheme for ship and rig owning companies. The paper states that mobile drilling units will no longer qualify as maritime transport. Furthermore, it is suggested that companies that do not
qualify to stay in the tax scheme will be given a transitional period to the end of 2005 to facilitate adjustments to the proposed changes. The Company is of the opinion that this change is of such significance that transitional rules to mitigate
the tax burden of being excluded from the tax scheme must be evaluated carefully by the Ministry of Finance. Smedvig will take an active part in a process to establish such transitional rules. If no transitional rules are provided for, the Company
will recognize income tax expenses of approximately NOK 850 million, which will be payable based on the declining balance method at 20 percent per annum. At December 31, 2004, the Company had a tax asset derived from tax loss carry forwards
amounting to NOK 179 million. This tax asset may be utilized to reduce the effect of the increase in payable taxes. On June 17, 2005, the Norwegian Parliament requested that the Government propose transitional rules that do not result in an
unreasonably high impact on the annual income tax expense or the financial position of rig owning companies during the transition years. It is unclear how this will impact the Company at this time. The proposal must be presented as part of the
Norwegian Government budget for 2006.



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Note 29  Principal Differences between Norwegian (Norwegian GAAP) and U.S. Accounting Principles (U.S. GAAP)



Norwegian GAAP differs in certain respects from U.S.
GAAP. Differences which have a significant effect on the Companys consolidated net income and shareholders equity are summarized and described below:



The effect on net income (loss) of significant differences between Norwegian GAAP and U.S. GAAP is as follows:



|                                                                                       |  |                                               |  |      |   |  |      |   |  |        |  
|-------------------------------------------------------------------------------------- |  | --------------------------------------------- |  | ---- | - |  | ---- | - |  | ------ | -
|                                                                                       |  | Referenceto Notebelow                         |  | 2004 |   |  | 2003 |   |  | 2002   |  
|                                                                                       |  | (NOK in millions except per shareinformation) | 
|Consolidated net income (loss) in accordance with Norwegian GAAP                       |  |                                               |  | 451  |   |  | (88  | ) |  | (802   | )
|Minority interests                                                                     |  |                                               |  |     |   |  | 30   |   |  | 1      |  
|Adjustment for U.S. GAAP:                                                              |  |                                               |  |      |   |  |      |   |  |        |  
|Amortization of goodwill of associated company                                         |  | (a)                                           |  | 2    |   |  | 1    |   |  |       |  
|Stock compensation expense and social security costs                                   |  | (b)                                           |  | 10   |   |  |     |   |  | 3      |  
|Disposal of mobile unit                                                                |  | (c)                                           |  |     |   |  | 301  |   |  | (301   | )
|Reversal of impairment charge                                                          |  | (d)                                           |  | (209 | ) |  |     |   |  |       |  
|Other                                                                                  |  |                                               |  |     |   |  |     |   |  | (4     | )
|Deferred taxes  shipowning companies                                                  |  | (e)                                           |  | (88  | ) |  | (51  | ) |  | 250    |  
|Deferred taxes  foreign exchange (restated, see note 30)                              |  | (e)                                           |  | (67  | ) |  | (45  | ) |  | (181   | )
|Deferred taxes  change in tax law                                                     |  | (e)                                           |  | (18  | ) |  |     |   |  |       |  
|The tax effect of U.S. GAAP adjustments                                                |  | (e)                                           |  | 56   |   |  | (84  | ) |  | 85     |  
|                                                                                       |  |                                               |  |      |   |  |      |   |  |        |  
|Net income (loss) in accordance with U.S. GAAP (restated, see note 30)                 |  |                                               |  | 137  |   |  | 64   |   |  | (949   | )
|                                                                                       |  |                                               |  |      |   |  |      |   |  |        |  
|Basic earnings (loss) per share in accordance with U.S. GAAP (restated, see note 30)   |  |                                               |  | 1.70 |   |  | 0.79 |   |  | (11.54 | )
|                                                                                       |  |                                               |  |      |   |  |      |   |  |        |  
|Diluted earnings (loss) per share in accordance with U.S. GAAP (restated, see note 30) |  |                                               |  | 1.69 |   |  | 0.79 |   |  | (11.54 | )
|                                                                                       |  |                                               |  |      |   |  |      |   |  |        |  



The effect on
consolidated shareholders equity of significant differences between Norwegian GAAP and U.S. GAAP is as follows:



|                                                                                            |  |                       |  |       |  |       |  |       |  
|------------------------------------------------------------------------------------------- |  | --------------------- |  | ----- |  | ----- |  | ----- | -
|                                                                                            |  | Referenceto Notebelow |  | 2004  |  | 2003  |  | 2002  |  
|                                                                                            |  | (NOK in millions)     | 
|Consolidated shareholders equity in accordance with Norwegian GAAP (restated, see note 30) |  |                       |  | 2,969 |  | 3,062 |  | 3,379 |  
|Minority interests                                                                          |  |                       |  |      |  |      |  | (19   | )
|Adjustment for U.S. GAAP:                                                                   |  |                       |  |       |  |       |  |       |  
|Subsidiary merger and associated company:                                                   |  |                       |  |       |  |       |  |       |  
|Lismes issuance of shares                                                                  |  | (a)                   |  | 1     |  | 1     |  |      |  
|Goodwill, net                                                                               |  | (a)                   |  | 5     |  | 3     |  | 3     |  
|Stock compensation expense and social security costs                                        |  | (b)                   |  | 10    |  |      |  |      |  
|Short-term liabilitiesDividends                                                            |  | (f)                   |  | 120   |  | 101   |  | 81    |  



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



|                                                                          |  |                       |  |       |   |  |       |   |  |       |  
|------------------------------------------------------------------------- |  | --------------------- |  | ----- | - |  | ----- | - |  | ----- | -
|                                                                          |  | Referenceto Notebelow |  | 2004  |   |  | 2003  |   |  | 2002  |  
|                                                                          |  | (NOK in millions)     | 
|Disposal of mobile unit                                                   |  | (c)                   |  |      |   |  |      |   |  | (301  | )
|Reversal of impairment charge                                             |  | (d)                   |  | (209  | ) |  |      |   |  |      |  
|Deferred tax liabilities                                                  |  | (e)                   |  | (788  | ) |  | (738  | ) |  | (603  | )
|                                                                          |  |                       |  |       |   |  |       |   |  |       |  
|Shareholders equity in accordance with U.S. GAAP (restated, see note 30) |  |                       |  | 2,108 |   |  | 2,429 |   |  | 2,540 |  
|                                                                          |  |                       |  |       |   |  |       |   |  |       |  



Principal
differences between Norwegian GAAP and U.S. GAAP



a)
Subsidiary merger



Under Norwegian GAAP, the exchange of
ownership interests in a former subsidiary for an ownership interest in Roxar was accounted for as a merger at book value with no gain or loss recognition. In accordance with U.S. GAAP, the transaction was recorded at fair value and a gain was
recognized to the extent that ownership interests were deemed to have been economically acquired and sold. The gain recognized under U.S. GAAP resulted in goodwill computed on differences between the Companys investment in Roxar over its
proportionate share of Roxars net assets.



In 2003, Lisme
AS was established as the holding company of Roxar. Smedvig contributed its ownership interests in Roxar to Lisme in an exchange for Lisme shares that did not change its proportionate ownership interest in Roxar. Subsequently, Lisme acquired all of
the remaining ownership interests of Roxar, increasing Smedvigs indirect ownership in Roxar to 44 percent, resulting in goodwill which, under U.S. GAAP, is no longer amortized but tested annually for impairment. Under Norwegian GAAP, goodwill
related to Lismes increase in ownership of Roxar is amortized over five years.



Certain interests in Roxar were acquired through the issuance of new Lisme common shares. To the extent the Companys proportionate ownership changed, a gain was recorded under U.S. GAAP and is reflected as an
increase to shareholders equity. No gain was recognized under Norwegian GAAP.



b) Stock compensation expense and social security costs



The Company has a number of share incentive plans. Under Norwegian GAAP, no compensation is recorded if the exercise price is equal to or greater than the
fair value of the shares at the grant date. All of the Companys share incentive plans comply with this principle. In 2002, however, some of the plans involved indexed options whereby the exercise price increased by one percent per
month from the date when the option was granted to its exercise date. Under U.S. GAAP, such plans are accounted for as variable plans because the exercise price is not known at the date of grant. For those plans, compensation was measured each year
as the difference between the market value of the Companys shares and the exercise price at the balance sheet date, and recognized as expense over the remaining vesting period.



Under U.S. GAAP, social security tax related to stock options is recorded when the option is exercised and the social
security tax is due and payable. However, under Norwegian GAAP, social security tax is calculated for options in money at year end and is recognized as compensation expense over the vesting period.



c) Disposal of mobile unit



In December 2002, the Company sold the rig Ocean Vanguard to Diamond
Offshore Drilling Ltd. for approximately NOK 500 million. At the time the rig was sold, it was under contract to a customer. The Company leased the unit back from Diamond Offshore Drilling Ltd. in order to fulfill its obligations under the contract.
Under Norwegian GAAP, the entire amount of the gain was recognized at the time of the sale. Under U.S. GAAP, only a portion of the gain was recognized at the time of the sale and the remainder was recognized into income ratably over the remaining
period of the lease.



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



d) Reversal of impairment charges



Under Norwegian GAAP, impairment charges recognized in previous financial
reporting periods can be reversed when the fair value of a related asset increases above its adjusted carrying value. Under U.S. GAAP, for assets held and used, an impairment charge results in a new carrying value of the asset and cannot be reversed
when market conditions improve.



e) Deferred taxes



The income tax effects of the U.S. GAAP adjustments are
recorded as deferred tax expense (benefit), where appropriate.



The Norwegian taxation scheme for shipping and offshore companies provides that taxation will be based upon funds distributed to shareholders. In addition, parts of net financial items are subject to ordinary Norwegian taxation. As no
distribution is proposed from this income in 2004, the Company has not recorded any deferred taxes under Norwegian GAAP. However, under U.S. GAAP, deferred taxes are provided on such income.



Under U.S. GAAP, the income tax benefits of the deferred tax assets may be
recognized if it is more likely than not that the asset will be realized, whereas Norwegian GAAP only allows the recognition of deferred tax assets if it is probable that the asset will be realized. No difference is reported in the reconciliation to
U.S. GAAP in the financial statements, as the Company is of the opinion that the tax assets will be realized both under Norwegian GAAP and U.S. GAAP.



A translation gain adjusted for deferred tax of NOK 172 million and 117 million in 2004 and 2003 respectively, was recorded as component of
shareholders equity under Norwegian GAAP. If income tax expenses occurs that is related to transactions recorded as component to shareholders equity, under Norwegian GAAP such income tax expense would normally be recorded as a component
of shareholders equity. For taxation purposes, Smedvig Rig must report in Norwegian kroner resulting in differences between the financial statement and tax basis of U.S. dollar-denominated debt. Under U.S. GAAP, related deferred taxes on such
differences are recognised in the income statement.



The tax
basis for calculation of foreign exchange differences within the Norwegian tax scheme for shipowning and offshore companies, was modified effective from January 1, 2005.



Under U.S. GAAP, a deferred tax asset was recorded for the difference between the book and tax basis in an equity method
investment. Deferred taxes were not required to be recorded under Norwegian GAAP for this matter. During 2004, Norwegian tax law changed so that gains and losses on disposition of the investment are not subject to taxation. Accordingly, a deferred
tax asset was reversed under U.S. GAAP in 2004.



f)
Dividends



Under Norwegian law, dividends are payable out
of annual earnings. The dividend is subject to approval by the Annual General Meeting following the fiscal year to which the dividend relates. Under Norwegian GAAP, dividends are recorded when proposed. Under U.S. GAAP, dividends are recorded when
legally declared.



Other differences between Norwegian GAAP
and U.S. GAAP



First years installment on
long-term debt



Under Norwegian GAAP, the first
years installment on long-term debt is included in long-term debt.



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



Proportionate consolidation method



Under Norwegian GAAP the Company consolidates certain joint stock companies
and limited partnerships, in which the Companys holdings are 50 percent or less, in accordance with the proportionate consolidation method. Condensed financial information for the companies and partnerships that have been proportionally
consolidated is included in note 23. Under U.S. GAAP the Companys ownership interest in these companies and partnerships would be accounted for under the equity method.



Operating profit U.S. GAAP



In accordance with U.S. GAAP, gains and losses on disposals of operating assets and impairment charges should be included in operating profit. In 2004,
such items included a reversal of a previous write-down amounting to NOK 209 million and a gain on sale of assets amounting to 15 million. In 2003, such items included an expense from the Balder dispute of NOK 688 million. In 2002, such items
included a write-down of West Navigator of NOK 1,313 million and a gain from the sale of West Vanguard of NOK 351 million.



Guarantees



Under U.S. GAAP, a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation taken. Norwegian
GAAP does not have a similar requirement. Substantially all of the Companys guarantees relate to its own performance and do not fall within the scope of FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45).



However, the Company has guaranteed its share of bank debt at an entity that is proportionately consolidated under Norwegian GAAP. Under U.S. GAAP, this entity would be accounted for as an equity method investment
and, accordingly, FIN 45 is applicable to such a guarantee. Under FIN 45, the Company records the fair value of the guarantee as an increase in its investment with a corresponding guarantee liability at inception. Both the increase in the investment
and guarantee liability are recognized ratably in earnings over the guarantee period. The Company believes the fair value of the guarantee was immaterial and would not impact net income in 2004 or shareholders equity as of December 31, 2004.



New U.S. GAAP accounting standards implemented in the
current year



During 2004, the Company adopted FASB
Interpretation No. 46 (Revised) (FIN 46R), Consolidation of Variable Interest Entities (VIE), which addresses how a business enterprise should evaluate whether it has a controlling financial interest in an entity through means other than voting
rights and accordingly should consolidate the entity. The Company did not identify any VIEs based upon its review and analysis of potential VIEs.



Accounting standards issued but not yet fully adopted



In December 2004, the FASB Issued Statement No. 123 (Revised 2004), Share-Based Payment: an amendment of FASB Statements 123 and 95, December 2004 (SFAS
123R). SFAS 123R requires an entity to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees in the income statement. SFAS 123R eliminates an entitys ability to account for share-based
compensation transactions using the intrinsic value method of accounting in APB Opinion No. 25, Accounting for Stock Issues to Employees, which was permitted under FASB Statement No. 123. SFAS 123R also addresses the classification of awards between
liabilities and shareholders equity.



Upon adoption of
SFAS 123R, an entity must choose between two transition methods, the modified prospective method or the modified retrospective method. Under the modified prospective method, awards that are granted, modified or settled after
the date of adoption should be measured and accounted for in accordance with SFAS 123R. Unvested equity classified awards that were granted prior to the effective date should continue to be



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##### Table of Contents

SMEDVIG asa AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



accounted for in accordance with SFAS 123, except that amounts must be recognized in the income statement. Under the
modified retrospective approach, the previously-reported amounts are restated (either to the beginning of the year of adoption or for all periods presented) to reflect the SFAS 123 amounts in the income statement. In April 2005, the U.S. Securities
and Exchange Commision issued a rule delaying the effective date of Statement No. 123R until the beginning of the fiscal year that follows June 15, 2005. The Company is now required to adopt Statement No. 123R as of January 1, 2006. Beginning from
January 1, 2005, the Company will recognize expense over the service period for the fair value of all grants issued as well as expense attributable to the remaining service period for all prior grants that have not fully vested by that date. The
Company has not yet determined which transition method it will utilize, and accordingly has not yet calculated the impact of adopting SFAS 123R in 2005.



Note 30  Restatement of Deferred Taxes



In the Norwegian government budget for 2005, there was a decision to eliminate the taxation of unrealized foreign exchange differences within the tonnage
tax system. The Company believed that the change in the regulation impacted the accumulated unrealized foreign exchange gains at December 31, 2004 and reduced related deferred taxes by NOK 196 million which resulted in a corresponding increase in
shareholders equity as of December 31, 2004. After the 2004 consolidated financial statements were issued, the Company determined that the new regulation applied only to foreign exchange gains arising after January 1, 2005. Accordingly, under
Norwegian GAAP the consolidated balance sheet included herein and consolidated shareholders equity have been adjusted to appropriately reflect a deferred tax liability of NOK 196 million on unrealized foreign currency gains as of December 31,
2004 resulting in a corresponding reduction of shareholders equity.



The following summarizes the restatement under Norwegian GAAP:



|                                                         |  |                         |  |                
|-------------------------------------------------------- |  | ----------------------- |  | ---------------
|                                                         |  | As of December 31, 2004
|                                                         |  | Previouslyreported      |  | Restatednumbers
|                                                         |  | (NOK in millions)      
|Deferred tax assets                                      |  | 170                     |  | 0              
|Total retained earnings and foreign currency adjustments |  | 624                     |  | 428            
|Deferred tax liabilities                                 |  | 0                       |  | 26             



Under U.S. GAAP,
deferred taxes were also restated resulting in an increase in the deferred tax liability of NOK 196 million as of December 31, 2004 with a corresponding increase in deferred income tax expense for 2004 and a related reduction of shareholders
equity as of December 31, 2004. Corresponding earnings per share data has also been restated.



The following summarizes the restatement under U.S. GAAP as of and for the year-ended December 31, 2004:



|                                   |  |             |  |         
|---------------------------------- |  | ----------- |  | --------
|                                   |  | As Reported |  | Restated
|                                   |  | (NOK)      
|Shareholders equity (in millions) |  | 2,304       |  | 2,108   
|Net income (in millions)           |  | 333         |  | 137     
|Basic earnings per share           |  | 4.13        |  | 1.70    
|Diluted earnings per share         |  | 4.10        |  | 1.69    



F-38