**EXHIBIT        13.1**

 

**2007        ANNUAL REPORT TO SHAREHOLDERS**

**THE        COMPANY**

This Annual Report is for Atwood Oceanics, Inc. and its subsidiaries, which        are collectively referred to as “we”, “our”, or the        “Company” except where stated otherwise. We are engaged in the domestic and        international offshore drilling and completion of exploratory and developmental oil and gas        wells and related services. Presently, we own and operate a premium, modern fleet of eight        mobile offshore drilling units. Since fiscal year 1997, we have invested approximately $510        million in upgrading seven mobile offshore drilling units and constructing an ultra-premium        jack-up unit, the ATWOOD BEACON. Upon its expected delivery in October/November 2008, the        ATWOOD AURORA will be our ninth owned active mobile offshore drilling unit. We support our        operations from our Houston headquarters and offices currently located in Australia,        Malaysia, Malta, Egypt, Indonesia, Singapore and the United Kingdom.

**FINANCIAL        HIGHLIGHTS**

|                                                                                              |                                                                                                                                                       | **2007**                         |                                                                           | **2006**      |
|---------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------|--------------------------------------------------------------------------------|---------------|
|                                                                                              |                                                                                                                                                       | (In Thousands)                   |
|                                                                                              |                                                                                                                                                       |                             |                                                                           |          |
| **FOR THE YEAR ENDED SEPTEMBER                    30:       ** |                                         |                             |               |          |
| REVENUES                                                                                          |                                                                                                                                                       | **$                    403,037** |                                                                           | **$ 276,625** |
| NET                    INCOME                                                                     |                                                                                                                                                       | **139,024**                      |                                                                           | **86,122**    |
| CAPITAL EXPENDITURES                                                                              |                                                                                                                                                       | **91,306**                       |                                                                           | **78,464**    |
| **AT SEPTEMBER 30:**                                                                              |                                                                                                                                                       |                             |                                                                           |          |
| NET PROPERTY AND EQUIPMENT                                                                        |                                                                                                                                                       | **$                    493,851** |                                                                           | **$ 436,166** |
| TOTAL ASSETS                                                                                      |                                                                                                                                                       | **717,724**                      |                                                                           | **593,829**   |
| TOTAL SHAREHOLDERS' EQUITY                                                                        |                                                                                                                                                       | **615,855**                      |                                                                           | **458,894**   |

 

1

 

TO OUR        SHAREHOLDERS AND EMPLOYEES:

We are pleased to report that 2007 was        another record fiscal year for the Company with notable achievements in many areas.        Revenues, operating cash flows and net income for fiscal year 2007 were the highest in our        history. Our netincome of $139        million, or $4.37per diluted share,        improved on our previous record net income of $86 million,or $2.74 per diluted share,for fiscal year 2006. Based upon our strong        current financial position and market outlook, we believe that continuing to pursue our        current strategy will further enhance shareholder value in the future.

Our strategy focuses on safe, quality        operations; premium equipment; meeting the needs of our clients and being leveraged to        attractive international markets. This strategy has served us wellbyenhancing shareholder value and        continuingto guide ourpath forward.The Company iswell-positioned for the future with a        distinct strategy and position in the industry, particularly given our size.

Our existing fleet of eightownedoperating units is working with key clients        in some of the world’s most attractive offshore markets. During the past fiscal year,        we achieved fleet utilization of 100%. Our current estimated contract backlog in terms of        available rig days for our eight units isapproximately87% for fiscal year 2008 and 33% for fiscal        2009. This backlog provides a combination of earnings visibility and future earnings upside        potential, particularly with our deepwater and international leverage. Our new        ultra-premium jack-up, the ATWOOD AURORA, now under construction in Brownsville, Texas,        with expected delivery in October/November 2008, will offer growth potential when it        commences operation as our ninth offshore drilling unit.

Wecontinue to strengthenour balance sheet and the Companycurrentlyhasno outstanding term debt. In October        2007,we replacedour then existing credit agreement with a        five-year $300 million revolving loan facility. This new facility, which is on more        favorable terms than our previous facility,willprovide funding for future growth        opportunities and for general corporate needs.

With our strong balance sheet and the        likelihood of record cash flows and financial results, we expect to be in a position to        consider opportunities when the times are right. Based on longer-term expectations for        energy demand, the outlook for the markets we serve is positive, particularly our        international deep water markets. Accordingly, we are working to identify and pursue        value-enhancing growth opportunities as well as evaluating the best use of future cash        flow. In considering growth opportunities, we want to remain leveraged to our international        deepwater markets, particularly for conventionally moored semisubmersibles in the range of        6,000 to 8,000 feet of water supported by acceptable term contract opportunities. We        estimate current project costs (including capitalized interest) of $550,000,000 to        $600,000,000 to construct a new semisubmersible with the specifications to meet our        clients’ future deepwater needs. Time for rig construction will put new rig delivery        approximately four years after commitment.

Our international scope of activities means        much to us, as does our involvement in many different communities where we operate or        maintain offices. Atwood Oceanics is proud of its long operating history and reputation        – and it’s long-standing relationships with clients. We owe much to the talent        and contributions of both our U.S. and international employees for our performance        during 2007. Each day, our agenda emphasizes safe, high standards of performance, the value        of our committed workforce and continued development of our organization for the future. We        aspire to continue building our longer-term position as a leader in our        industry.

We are grateful for our shareholders trust        and the successes delivered by our talented and dedicated multi-national employees during        fiscal year 2007.

         

|   | /s/ John R. Irwin |
|--------|-------------------|

John R. Irwin

 

2

 

**Atwood        Oceanics, Inc. and Subsidiaries**

**FIVE        YEAR FINANCIAL REVIEW**

| (In thousands, except per share amounts,                fleet data and                ratios)       | At                 orForthe                 Years September 30, |
|----------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------|
| **2007**                                                                                                 |                                                                      |   | 2006 |   |   | 2005 |   |   | 2004 |   |   | 2003 |   |
| **STATEMENTS OF                OPERATIONS   DATA:**                                            |                                                                      |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|      Revenues                                                                   |                                                                      |   | **$** | **403,037** |   | $ | 276,625 |   | $ | 176,156 |   | $ | 163,454 |   | $ | 144,765 |   |
|      Contract                drilling costs                                     |                                                                      |   |   | ** (186,949** | **)         ** |   | (144,366 | )       |   | (102,849 | )      |   | (98,936 | )      |   | (98,500 | ) |
|      Depreciation                                                               |                                                                      |   |   | **(33,366** | **)** |   | (26,401 | ) |   | (26,735 | ) |   | (31,582 | ) |   | (25,758 | ) |
|      General and                administrative expenses                         |                                                                      |   |   | **(23,929** | **)** |   | (20,630 | ) |   | (14,245 | ) |   | (11,389 | ) |   | (14,015 | ) |
|      Gain on sale of                equipment                                   |                                                                      |   |   | **414** |   |   | 10,548 |   |   | -- |   |   | -- |   |   | -- |   |
|      OPERATING                INCOME                                            |                                                                      |   |   | **159,207** |   |   | 95,776 |   |   | 32,327 |   |   | 21,547 |   |   | 6,492 |   |
|      Other (expense)                income                                      |                                                                      |   |   | **752** |   |   | (3,940 | ) |   | (6,719 | ) |   | (9,145 | ) |   | (4,856 | ) |
|      Tax (provision)                benefit                                     |                                                                      |   |   | **(20,935** | **)** |   | (5,714 | ) |   | 403 |   |   | (4,815 | ) |   | (14,438 | ) |
|           NET                INCOME (LOSS)             |                                                                      |   | **$** | **139,024** |   | $ | 86,122 |   | $ | 26,011 |   | $ | 7,587 |   | $ | (12,802 | ) |
|                                                                                                          |                                                                           |  |  |  |  |
| **PER SHARE                DATA:**                                                                       |                                                                      |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|      Earnings (loss)                per common share:                           |                                                                      |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|           Basic                                        |                                                                      |   | **$** | **4.44** |   | $ | 2.78 |   | $ | 0.86 |   | $ | 0.27 |   | $ | (0.46 | ) |
|           Diluted                                      |                                                                      |   | **$** | **4.37** | ** ** | $ | 2.74 |   | $ | 0.83 |   | $ | 0.27 |   | $ | (0.46 | ) |
|      Average common                shares outstanding:                          |                                                                      |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|           Basic                                        |                                                                      |   |   | **31,343** |   |   | 30,936 |   |   | 30,412 |   |   | 27,718 |   |   | 27,692 |   |
|           Diluted                                      |                                                                      |   |   | **31,814** |   |   | 31,442 |   |   | 31,220 |   |   | 28,064 |   |   | 27,692 |   |
|                                                                                                          |                                                                           |  |  |  |  |
| **FLEET                DATA:**                                                                           |                                                                      |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|      Number of rigs                owned or managed, at end                     |                                                                      |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|           of                period                     |                                                                      |   |   | **8** |   |   | 10 |   |   | 11 |   |   | 11 |   |   | 11 |   |
|      Utilization                rate for in-service rigs (1)                    |                                                                      |   |   | **100** | **%** |   | 100 | % |   | 98 | % |   | 93 | % |   | 92 | % |
|                                                                                                          |                                                                           |  |  |  |  |
| **BALANCE SHEET                DATA:**                                                                   |                                                                      |   |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|      Cash and cash                equivalents                                   |                                                                      |   | **$** | **100,361** |   | $ | 32,276 |   | $ | 18,982 |   | $ | 16,416 |   | $ | 21,551 |   |
|      Working                capital                                             |                                                                      |   |   | **158,549** |   |   | 86,308 |   |   | 35,894 |   |   | 32,913 |   |   | 26,063 |   |
|      Net property                and equipment                                  |                                                                      |   |   | **493,851** |   |   | 436,166 |   |   | 390,778 |   |   | 401,141 |   |   | 443,102 |   |
|      Total                assets                                                |                                                                      |   |   | **717,724** |   |   | 593,829 |   |   | 495,694 |   |   | 498,936 |   |   | 522,674 |   |
|      Total long-term                debt (including current  portion) |                                                                      |   |   | **18,000** |   |   | 64,000 |   |   | 90,000 |   |   | 181,000 |   |   | 205,000 |   |
|      Shareholders'                equity (2) (3)                                |                                                                      |   |   | **615,855** |   |   | 458,894 |   |   | 362,137 |   |   | 271,589 |   |   | 263,467 |   |
|      Ratio of                current assets to current liabilities              |                                                                      |   |   | **3.75** |   |   | 2.41 |   |   | 1.64 |   |   | 1.55 |   |   | 1.52 |   |
|                                                                                                          |                                                                           |  |  |  |  |

| Notes - |     |                                                                                                                                   |
|---------|-----|-----------------------------------------------------------------------------------------------------------------------------------|
|    | (1) | Excludes managed rigs, the SEASCOUT (sold in fiscal year                        2006), and contractual downtime on rigs upgraded. |

|   | (2) | We have never paid any cash dividends on our common                        stock. |
|--------|-----|-----------------------------------------------------------------------------------|

|   | (3) | In October 2004, we sold 2,350,000 shares of common stock in                        a public offering. |
|--------|-----|--------------------------------------------------------------------------------------------------------|

 

 

3

**OFFSHORE DRILLING OPERATIONS**

| **RIG                        NAME**                    | **YEAR****UPGRADED** | **MAXIMUM WATER****DEPTH** | **PERCENTAGE OF FY                        2007****REVENUES****(1)** | **LOCATION AT****NOVEMBER 27****,****200****7**     | **CUSTOMER**                                                                                                      | **CONTRACT STATUS                        AT****NOVEMBER                        27****,                        200****7**                                                                                                                                                                                                                                                                                                                                                                                                              |  |  |
|--------------------------------------------------------|----------------------|----------------------------|---------------------------------------------------------------------|-----------------------------------------------------|-------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--|--|
| **SEMISUBMERSIBLES                        -**          |                 |                            |                                                                     |
| ATWOOD EAGLE                                           | 2000/2002            | 5,000 Ft.                  | 14%                                                                 | Offshore Australia                                  | BHP BILLITON PETROLEUM PTY (“BHPB”)                                                                   | The rig is currently working under a drilling program for BHPB which is                        expected to extend to May 2008. Upon completion of this drilling                        commitment, the rig has a one (1) well contract commitment with ENI                        Australia BV, followed by a two (2) year contract commitment with Woodside                        Energy, Ltd (“Woodside”). It should take until June/July 2010                        before these drilling commitments are completed. |  |  |
| ATWOOD HUNTER                                          | 1997/2001            | 5,000 Ft.                  | 21%                                                                 | Offshore Egypt                                      | BURULLUS GAS CO.                        (“BURULLUS”)                                                  | The rig is currently working under a drilling                        program for Burullus which should take untilmidDecember 2007 to complete.Following the completion of the Burullus                        contract, the rig will be moved to a shipyard in Malta to undergo an                        estimated 20 day equipment upgrade and will then move to Mauritania to                        complete the previously suspended Woodside contract which should extend to                        July 2008.                  |  |  |
| ATWOOD FALCON                                          | 1998/2006            | 5,000 Ft.                  | 13%                                                                 | Offshore Malaysia                                   | SARAWAK SHELL BERHAD (“SHELL”)                                                                        | The rig is currently working under a long-term drilling commitment with                        Shell which extends to July 2009.                                                                                                                                                                                                                                                                                                                                                                                                      |  |  |
| ATWOOD SOUTHERN CROSS                                  | 1997/2006            | 2,000 Ft.                  | 15%                                                                 | Offshore                        Bulgaria and Turkey | MELROSE RESOURCES (“MELROSE”) AND                        TURKIYE PETROLLERI A.O. (“TPAO”) | The rig is currently working under drilling commitments with Melrose and                        TPAO which should take until February 2008 to complete. Upon completion of                        this commitment, the rig has a contract commitment with ENI Spa AGIP                        Exploration & Production Division to drill two (2) firm wells plus two                        (2) option wells which should take approximately six months to complete if                        both option wells are drilled.      |  |  |
| **CANTILEVER JACK-UPS                        –** |                      |
| ATWOOD BEACON                                          | Constructed in 2003  | 400 Ft.                    | 10%                                                                 | Offshore India                                      | GUJARAT STATE PETROLEUM CORPORATION LTD.                        (“GSPC”)                              | The rig is currently working under a drilling                        commitment for GSPC which extends to January 2009.                                                                                                                                                                                                                                                                                                                                                                                                               |  |
| VICKSBURG                                              | 1998                 | 300 Ft.                    | 10%                                                                 | Offshore Thailand                                   | CHEVRON OVERSEAS PETROLEUM                        (“CHEVRON”)                                         | The rig is currently working under a drilling                        commitment for Chevron which extends to June 2009.                                                                                                                                                                                                                                                                                                                                                                                                               |  |
| ATWOOD AURORA                                          | Under Construction   | 350 Ft.                    | 0%                                                                  | N/A                                                 | N/A                                                                                                               | The rig is under construction in Brownsville,                        Texas with expected delivery in October/November 2008.                                                                                                                                                                                                                                                                                                                                                                                                           |  |
| **SUBMERSIBLE**–                                 |
| RICHMOND                                               | 2000/2002/2007       | 70 Ft.                     | 7%                                                                  | Shipyard                                            | HELIS OIL & GAS                        (“HELIS”)                                                  | The rig is currently in a shipyard in Mississippi undergoing a life                        enhancement upgrade, which is expected to be completed in December 2007.                        The rig has one (1)remaining well to drill for Helis.                                                                                                                                                                                                                                                                                      |
| **SEM****ISUBMERSIBLE TENDER ASSIST UNIT****-**        |
| SEAHAWK                                                | 1992/1999/2006       | 600 Ft.                    | 8%                                                                  | Offshore Equatorial Guinea                          | AMERADA HESS EQUATORIAL GUINEA, INC. (“HESS”)                                                         | The rig is currently working under a contractual commitment with Hess which                        extends to September 2008. Hess also has four (4) six-month options.                                                                                                                                                                                                                                                                                                                                                               |
|                                                   |                 |                       |                                                                |                                                |                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

(1) Percentages do not add to 100% as the table does not include 2% of        fiscal year 2007 revenues earned pursuant to our Australia Management Contracts prior to        their termination during fiscal year 2007.

 

6

 

**SECURITIES LITIGATION SAFE HARBOR STATEMENT**

Statements included in this report which are not historical facts (including        any statements concerning plans and objectives of management for future operations or        economic performance, or assumptions related thereto) are “forward-looking        statements” within the meaning of the Private Securities Litigation Reform Act of        1995. In addition, we and our representatives may from to time to time make other oral or        written statements which are also forward-looking statements.

These forward-looking statements are made based upon management’s        current plans, expectations, estimates, assumptions and beliefs concerning future events        impacting us and therefore involve a number of risks and uncertainties. We caution that        forward-looking statements are not guarantees and that actual results could differ        materially from those expressed or implied in the forward-looking statements.

Important factors that could cause our actual results of operations or our        actual financial conditions to differ include, but are not necessarily limited        to:

|   | § | our dependence on the oil and gas industry; |
|--------|--------|---------------------------------------------|

|   | § | the operational risks involved in drilling for oil and                        gas; |
|--------|--------|------------------------------------------------------------------------------------|

|   | § | changes in rig utilization and dayrates in response to the                        level of activity in the oil and gas industry, which is significantly                        affected by indications and expectations regarding the level and volatility                        of oil and gas prices, which in turn are affected by such things as                        political, economic and weather conditions affecting or potentially                        affecting regional or worldwide demand for oil and gas, actions or                        anticipated actions by OPEC, inventory levels, deliverability constraints,                        and future market activity; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | the extent to which customers and potential customers                        continue to pursue deepwater drilling; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|

|   | § | exploration success or lack of exploration success by our                        customers and potential customers; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------|

|   | § | the highly competitive and cyclical nature of our business,                        with periods of low demand and excess rig availability; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | the impact of the war with Iraq or other military                        operations, terrorist acts or embargoes elsewhere; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------|

|   | § | our ability to enter into and the terms of future drilling                        contracts; |
|--------|--------|----------------------------------------------------------------------------------------------|

|   | § | the availability of qualified personnel; |
|--------|--------|------------------------------------------|

|   | § | our failure to retain the business of one or more                        significant customers; |
|--------|--------|-------------------------------------------------------------------------------------------------|

|   | § | the termination or renegotiation of contracts by                        customers; |
|--------|--------|------------------------------------------------------------------------------------|

|   | § | the availability of adequate insurance at a reasonable                        cost; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | § | the occurrence of an uninsured loss; |
|--------|--------|--------------------------------------|

|   | § | the risks of international operations, including possible                        economic, political, social or monetary instability, and compliance with                        foreign laws; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | the effect public health concerns could have on our                        international operations and financial results; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|

|   | § | compliance with or breach of environmental laws; |
|--------|--------|--------------------------------------------------|

|   | § | the incurrence of secured debt or additional unsecured                        indebtedness or other obligations by us or our subsidiaries; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------|

 

7

 

|   | § | the adequacy of sources of liquidity; |
|--------|--------|---------------------------------------|

|   | § | currently unknown rig repair needs and/or additional                        opportunities to accelerate planned maintenance expenditures due to                        presently unanticipated rig downtime; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | higher than anticipated accruals for performance-based                        compensation due to better than anticipated performance by us, higher than                        anticipated severance expenses due to unanticipated employee terminations,                        higher than anticipated legal and accounting fees due to unanticipated                        financing or other corporate transactions, and other factors that could                        increase general and administrative expenses; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | the actions of our competitors in the offshore drilling                        industry, which could significantly influence rig dayrates and                        utilization; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | changes in the geographic areas in which our customers plan                        to operate, which in turn could change our expected effective tax                        rate; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | changes in oil and gas drilling technology or in our                        competitors’ drilling rig fleets that could make our drilling rigs                        less competitive or require major capital investments to keep them                        competitive; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | rig availability; |
|--------|--------|-------------------|

|   | § | the effects and uncertainties of legal and administrative                        proceedings and other contingencies; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|

|   | § | the impact of governmental laws and regulations and the                        uncertainties involved in their administration, particularly in some                        foreign jurisdictions; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | § | changes in accepted interpretations of accounting guidelines                        and other accounting pronouncements and tax laws; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------|

|   | § | the risks involved in the construction, upgrade, and repair                        of our drilling units; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------|

|   | § | such other factors as may be discussed in our reports filed                        with the Securities and Exchange Commission, or SEC. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|

These factors are not necessarily all of the important factors that could        cause actual results to differ materially from those expressed in any of our        forward-looking statements. Other unknown or unpredictable factors could also have material        adverse effects on future results. The words “believe,” “impact,”        “intend,” “estimate,” “anticipate,” “plan”        and similar expressions identify forward-looking statements. These forward-looking        statements are found at various places throughout this report. When considering any        forward-looking statement, you should also keep in mind the risk factors described in our        Form 10-K for the year ended September 30, 2007, particularly in Item 1A Risk Factors, to        which this Annual Report is an exhibit, and in other reports or filings we make with the        SEC from time to time. Undue reliance should not be placed on these forward-looking        statements, which are applicable only on the date hereof. Neither we nor our        representatives have a general obligation to revise or update these forward-looking        statements to reflect events or circumstances that arise after the date hereof or to        reflect the occurrence of unanticipated events.

 

8

 

**MANAGEMENT’S DISCUSSION AND ANALYSIS**

**OF        FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**MARKET        OUTLOOK**

 

Revenues, operating cash flows and net income for fiscal year 2007 were the        highest in our history. Currently, we have approximately 87% of our available rig days        contracted for fiscal year 2008. A comparison of the average per day revenues for fiscal        year 2007 and 2006 for each of our eight active drilling units to their highest currently        contracted dayrate commitment is as follows:

         

|                                                                                                                                                                                                                                                                                                                                               | Average Per Day Revenues                                   | (1)    |                                                             |   |                                                     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------|--------|------------------------------------------------------------------|--------|----------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                               |  

                         

Fiscal

Year

2006 |   |  

                         

Fiscal

Year

 2007 |   |  

Current Highest Contracted Dayrate Commitment(1) |   | Percentage Change from Fiscal Year 2007 to Highest Currently                        Contracted Dayrate Commitment |
|                                                                                                                                                                                                                                                                                                                                               |                                                       |   |                                                             |   |                                                     |   |   |
| ATWOOD EAGLE                                                                                                                                                                                                                                                                                                                                       | $129,000                                                   |   | $160,000                                                         |   | $405,000                                                 |   | 153% |
| ATWOOD HUNTER                                                                                                                                                                                                                                                                                                                                      | 172,000                                                    |   | 234,000                                                          |   | 240,000                                                  |   | 3% |
| ATWOOD FALCON                                                                                                                                                                                                                                                                                                                                      | 83,000                                                     |   | 138,000                                                          |   | 187,000                                                  | (2) | 36% |
| ATWOOD SOUTHERN CROSS                                                                                                                                                                                                                                                                                                                              |  

82,000                                             |   |  

171,000                                                  |   |  

380,000                                          |   |  

122% |
| ATWOOD BEACON                                                                                                                                                                                                                                                                                                                                      | 88,000                                                     |   | 109,000                                                          |   | 133,500                                                  |   | 22% |
| VICKSBURG                                                                                                                                                                                                                                                                                                                                          | 82,000                                                     |   | 110,000                                                          |   | 154,000                                                  |   | 40% |
| SEAHAWK                                                                                                                                                                                                                                                                                                                                            | 32,000                                                     |   | 84,000                                                           |   | 93,000                                                   | (3) | 11% |
| RICHMOND                                                                                                                                                                                                                                                                                                                                           | 55,000                                                     |   | 81,000                                                           |   | 80,000                                                   |   | --- |
|                                                                                                                                                                                                                                                                                                                                               |
| (1)  Average per day revenues include dayrate and                        service revenues and amortized deferred fees while the highest currently                        contracted dayrate commitment includes estimated amortized deferred fees                        where noted.                                                    |
| (2) At a certain water depth, the dayrate would increase to                        $200,000; however we currently expect most, if not all, work will be at the                        $160,000 dayrate level which, with estimated amortized deferred fees of                        $27,000 per day results in the commitment amount of $187,000. |
| (3) Includes estimated amortized deferred fees of $17,000                        per day.                                                                                                                                                                                                                                                          |

 

With our backlog of contracted days at increasing rates on a fleetwide        basis, we anticipate that revenues, operating cash flows and earnings for fiscal year 2008        will reflect a significant improvement over fiscal year 2007 operating results and thus,        would be the highest in our history. In addition, our balance sheet continues to strengthen        with no outstanding term debt as of November 27, 2007.

         

In October 2007, we entered into a new 5-year $300,000,000 non-amortizing        revolving credit facility. This new facility will provide funding for future growth        opportunities and for general corporate cash needs. We believe we are in a position to be        opportunistic when the time is right, and accordingly, we continue to pursue and explore        various growth opportunities. In addition to our ultra premium jack-up, ATWOOD AURORA,        currently under construction in Brownsville, Texas, with an expected delivery date in        October/November 2008 at a total cost (including capitalized interest) of approximately        $160 million, we are interested in expanding our semisubmersible fleet if we can identify        acceptable term contract opportunities. We estimate total costs (including capitalized        interest) to construct a conventionally moored semisubmersible drilling unit with a maximum        water depth capability of 6,000 to 8,000 feet would range from $550 million to $600 million        and take approximately four years to construct.

 

Besides focusing on new growth, we also remain focused on increasing the        backlog of our existing drilling units at dayrates that provide good returns on our        investments. The ATWOOD EAGLE is currently working under a contractual commitment offshore        Australia at dayrates ranging from $160,000 to $170,000 which could extend to May 2008.        Following completion of this contract commitment, the rig will drill one well at a dayrate        of $360,000 (estimated to take 45 days to complete) and then commence a two-year contract        commitment (estimated June/July 2008) at a dayrate of $405,000. Immediately following the        current contract commitment offshore Egypt that should extend until mid December 2007, the        ATWOOD HUNTER will be moved to a shipyard in Malta to undergo an estimated 20        day

 

9

 

equipment        upgrade and will then move to Mauritania to complete the previously suspended Woodside        contract at a dayrate of $240,000, which should extend to July 2008; however, the contract        term can be extended up to one additional year subject to agreement on dayrate. The ATWOOD        FALCON has a contractual commitment, which extends to July 2009, offshore Malaysia at a        current dayrate of $160,000 (over a certain water depth the dayrate will be $200,000;        however, we believe that most, if not all, wells drilled will be at the $160,000 dayrate        level). The ATWOOD SOUTHERN CROSS is currently working in the Black Sea under contract        commitments which should extend to December 2007 or January 2008 at dayrate levels ranging        from $145,000 to $380,000. Following completion of the Black Sea commitments, the rig will        drill one well at a dayrate of $320,000 in the Mediterranean Sea. Upon completion of the        Mediterranean Sea well, the rig has a commitment to work offshore Italy for two firm wells        plus two option wells at a dayrate of $406,000 which should take approximately six months        to complete if both option wells are drilled. The ATWOOD BEACON is currently working        offshore India under contract commitments that extend to January 2009 at dayrates ranging        from $113,000 to $133,500. The VICKSBURG has a contract commitment offshore Thailand at a        dayrate of $154,000 that extends to June 2009. The SEAHAWK is working offshore West Africa        under a drilling contract that extends to September 2008; however, this contract provides        for four six-month options at the current contracted dayrate plus certain cost escalations.        The rig’s current dayrate is approximately $76,000, which with amortized deferred        fees of $17,000 per day results in the total daily revenues of $93,000. Our only rig in the        U.S. Gulf of Mexico, the RICHMOND, is currently in a shipyard undergoing an approximate $14        million life enhancing upgrade, which is expected to be completed in mid December 2007.        Following the shipyard work, the RICHMOND has one well to drill at a dayrate of $80,000.        The RICHMOND has been 100% utilized in the Gulf of Mexico for many years and we expect high        utilization of this rig during fiscal year 2008; however, we currently expect the        rig’s dayrate to decline from $80,000 to the mid to high $60,000’s.

 

The continuing strong market environment is not only supporting high        equipment utilization with historically high dayrates, but also continues to reflect        increasing operating costs. Total drilling costs for fiscal year 2007 ($187 million)        compared to fiscal year 2006 ($144 million) increased 29%; however, a significant portion        of this increase is attributable to higher than anticipated operating costs for the SEAHAWK        while working in West Africa during the current fiscal year compared to the prior fiscal        year when the SEAHAWK incurred lower operating costs as the rig was idle approximately five        months while undergoing an upgrade and relocating to West Africa. Despite our operating        results for fiscal year 2007 being the highest in our history, operating costs on the        SEAHAWK during the current fiscal year exceeded revenues on that rig by approximately $4        million. We expect to incur operating costs for this rig in excess of revenue in the range        of $1 to $2 million in fiscal year 2008. We currently expect a 10% to 12% fleetwide        increase in total drilling costs for fiscal year 2008 compared to fiscal year        2007.

 

In addition to the estimated 70 days and 20 days of zero rate time to be        incurred by the RICHMOND and the ATWOOD HUNTER, respectively, during the first quarter of        fiscal year 2008 while undergoing their upgrades, we expect the following drilling units to        incur planned zero rate time during fiscal year 2008:

 

 

| ATWOOD EAGLE          | 15 days of zero rate time during the first quarter for                        required regulatory inspections and maintenance

                                                                                                                                                                     |
|-----------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ATWOOD FALCON         | 5 to 10 zero rate days during the fourth quarter for                        required regulatory inspections and maintenance; however, this zero rate                        period could be incurred during the first quarter of fiscal year                        2009

                          |
| ATWOOD SOUTHERN CROSS | 4 to 10 zero rate days during the second quarter for some                        maintenance work

                                                                                                                                                                                                 |
| ATWOOD BEACON         | 3 zero rate days during the second quarter for required                        inspections                                                                                                                                                                                                               |

 

 

10

 

In addition to the above planned zero rate days that could be incurred        during fiscal year 2008, unplanned zero rate days can occur at any time. In recent fiscal        years, we have incurred approximately 1% to 2% of unplanned zero rate days per year,        however, we have already incurred 16 zero rate days and 3 zero rate days on the        SEAHAWK and ATWOOD HUNTER, respectively, due to unplanned equipment downtime during the        first quarter of fiscal year 2008 through November 27, 2007.

 

Despite increasing drilling costs, planned zero rate time and the continuing        risk of unplanned zero rate time, we expect operating results for fiscal year 2008 will        reflect significant improvement over fiscal year 2007 results and assuming no new growth,        we could end fiscal year 2008 with increased cash and no outstanding term debt. With our        strong balance sheet and continuing trend for improvement in cash flows and financial        results at historic levels, we remain focused on identifying value enhancing growth        opportunities, as well as evaluating the best use of future cash flows. We remain        optimistic that we will identify one or more growth opportunities during fiscal year 2008,        with required funding to be supported by our new $300 million credit facility and        internally generated funds.

 

**RESULTS        OF OPERATIONS**

*Fiscal        Year 2007 Versus Fiscal Year 2006*

Revenues for fiscal year 2007 increased 46% compared to the prior fiscal        year. A comparative analysis of revenues by rig for fiscal years 2007 and 2006 is as        follows:

         

|                           | **REVENUES**

(In millions)                   |
|--------------------------------|-----------------------------------------------|
|                           |
|                           | **Fiscal**                                    | **Fiscal** |   |
|                           | **Year 2007**                                 | **   Year 2006** | **   Variance** |
| ATWOOD SOUTHERN CROSS          | **$                    62.3**                 | **$ 29.9** | **$ 32.4 ** |
| ATWOOD HUNTER                  | **                      85.4**      | **  62.8** | **22.6 ** |
| ATWOOD FALCON                  | **                      50.5**      | **  30.1** | **20.4 ** |
| SEAHAWK                        | **                      30.6**      | **  11.6** | **19.0 ** |
| ATWOOD EAGLE                   | **                      58.4**      | **  47.0** | **11.4 ** |
| VICKSBURG                      | **                      40.0**      | **  30.0** | **10.0 ** |
| RICHMOND                       | **                      29.5**      | **  20.2** | **9.3 ** |
| ATWOOD BEACON                  | **                      39.8**      | **  32.1** | **7.7 ** |
| AUSTRALIA MANAGEMENT CONTRACTS | **                       6.5** | **  12.9** | **(6.4)** |
|                           | **      $ 403.0**    | **  $ 276.6** | **      $ 126.4 ** |

 

         The increase in        fleetwide revenues during fiscal year 2007 when compared to fiscal year 2006 is primarily        attributable to the increase in average dayrates due to improving market conditions and        strong demand for offshore drilling equipment as noted in Market Outlook. Increases in        revenues for the ATWOOD SOUTHERN CROSS, ATWOOD HUNTER, ATWOOD FALCON, SEAHAWK, ATWOOD        EAGLE, VICKSBURG, RICHMOND, and the ATWOOD BEACON were related to each of these drilling        units working under higher dayrate contracts during the current fiscal year compared to the        prior fiscal year. In addition, for approximately five months of fiscal year 2006, the        SEAHAWK earned virtually no revenue as the rig was in a shipyard undergoing a        life-enhancing upgrade and then relocated to West Africa. Revenue for the AUSTRALIA        MANAGEMENT CONTRACTS was lower for the current fiscal year when compared to the prior        fiscal year due to decreased activity as the most recent drilling program was completed at        the end of the first quarter of fiscal year 2007 with the management contracts terminating        during the third quarter of fiscal year 2007.

         

         

11

 

Contract drilling costs for fiscal year 2007 increased 29% compared to the        prior fiscal year. A comparative analysis of contract drilling costs by rig for fiscal        years 2007 and 2006 is as follows:

         

|                      | **CONTRACT DRILLING COSTS**

                    (In Millions) |                            |
|--------------------------------|----------------------------------------------------------------|----------------------------|
|                                |
|                           | **Fiscal**                                                     | **Fiscal**                 |   |  |
|                           | **  Year 2007 **                                     | ** Year 2006  ** | **Variance** |  |
| SEAHAWK                        | **$                    28.2**                                  | **$ 8.4**                  | **$ 19.8 ** |  |
| ATWOOD EAGLE                   | **35.0**                                                       | **26.8**                   | **8.2 ** |   |
| ATWOOD FALCON                  | **23.6**                                                       | **16.5**                   | **7.1 ** |  |
| ATWOOD HUNTER                  | **25.2**                                                       | **18.8**                   | **6.4 ** |  |
| ATWOOD BEACON                  | **15.5**                                                       | **10.4**                   | **5.1 ** |   |
| RICHMOND                       | **13.1**                                                       | **10.4**                   | **2.7 ** |   |
| VICKSBURG                      | **14.0**                                                       | **11.9**                   | **2.1 ** |  |
| ATWOOD SOUTHERN CROSS          | **20.7**                                                       | 24.2                       | **(3.5)** |  |
| AUSTRALIA MANAGEMENT CONTRACTS | **5.1**                                                        | **10.8**                   | **(5.7)** |  |
| OTHER                          | **6.5**                                                        | **6.2**                    | **0.3 ** |  |
|                           | **$ 186.9**                                                    | **$ 144.4**                | **$ 42.5 ** |  |
|                           |                                                           |                       |   |  |

         

On a fleetwide basis, wage increases and extra personnel for training and        development have resulted in higher personnel costs during fiscal year 2007 for virtually        every rig when compared to the prior fiscal year. With the SEAHAWK and ATWOOD HUNTER        currently working offshore West and North Africa, respectively, both rigs have experienced        increased travel, freight and shorebase costs due to higher transportation and living        expenses in West and North Africa. Contract drilling costs for the SEAHAWK also reflect        amortization of approximately $5.1 million of deferred expenses during fiscal year 2007        compared to $0.9 million during fiscal year 2006. In addition, as previously noted, the        SEAHAWK incurred significantly less operating costs for approximately five months of the        prior fiscal year as the rig was in a shipyard undergoing a life enhancing upgrade and then        relocated to West Africa. The ATWOOD HUNTER incurred additional maintenance costs during a        planned regulatory inspection period in December 2006. In addition to the rising personnel        costs mentioned above, the ATWOOD EAGLE and RICHMOND incurred higher maintenance costs        during fiscal year 2007 due to the amount and timing of certain maintenance projects when        compared to the prior fiscal year. The increase in drilling costs for the ATWOOD FALCON is        primarily attributable to planned maintenance during its water depth upgrade which was        completed during the first quarter of the current fiscal year. The ATWOOD BEACON has        experienced higher maintenance costs in the current fiscal year as it was in a Singapore        shipyard having its last leg sections reattached during the first quarter of fiscal year        2007. Drilling costs for the VICKSBURG have remained relatively consistent other than        higher personnel costs. Current fiscal year contract drilling costs for the ATWOOD SOUTHERN        CROSS have decreased primarily due to $8.6 million of mobilization expense amortization        during the prior fiscal year compared to none during the current fiscal year. AUSTRALIA        MANAGEMENT CONTRACTS costs have decreased due to the decreased activity resulting from the        completion of the current drilling program at the end of the first quarter of the current        fiscal year and termination of the contracts during the third quarter of fiscal year 2007.        Other drilling costs were relatively consistent with the prior fiscal year.

 

12

 

Depreciation expense for fiscal year 2007 increased 27% as compared to the        prior fiscal year. A comparative analysis of depreciation expense by rig for fiscal years        2007 and 2006 is as follows:

         

|                  |                                    |                         |                  |
|-----------------------|-----------------------------------------|------------------------------|-----------------------|
|                  | **DEPRECIATION EXPENSE**

(In millions) |
|                  |
|                  | **Fiscal**                              | **Fiscal**                   |                  |
|                  | **  Year 2007  **        |   Year 2006   |    Variance |
| SEAHAWK               | **$                    6.1**            | **$ 1.6**                    | **$ 4.5 **       |
| ATWOOD FALCON         | **4.4**                                 | **2.8**                      | **1.6 **         |
| ATWOOD SOUTHERN CROSS | **3.4**                                 | **2.9**                      | **0.5 **         |
| ATWOOD HUNTER         | **5.7**                                 | **5.4**                      | **0.3 **         |
| VICKSBURG             | **2.9**                                 | **2.8**                      | **0.1 **         |
| RICHMOND              | **1.0**                                 | **0.9**                      | **0.1 **         |
| ATWOOD EAGLE          | **4.5**                                 | **4.6**                      | **(0.1)**             |
| ATWOOD BEACON         | **5.1**                                 | **5.3**                      | **(0.2)**             |
| OTHER                 | **0.3**                                 | **0.1**                      | **0.2 **         |
|                       | **$ 33.4**                              | $ 26.4                       | $ 7.0            |
|                  |                                    |                         |                  |

Depreciation expense increased for the SEAHAWK, ATWOOD FALCON and ATWOOD        SOUTHERN CROSS as these rigs have recently undergone upgrades during the current and prior        fiscal years, while depreciation expense for all other rigs has remained relatively        consistent with the prior fiscal year. The SEAHAWK was almost fully depreciated prior to        its upgrade; accordingly, ongoing depreciation expense will approximate fiscal year 2007        levels.

         

General and administrative expenses for the current fiscal year increased        compared to the prior fiscal year primarily due to rising personnel costs and additions to        the corporate staff. The fiscal year 2007 increase also includes an approximate $0.7        million increase in annual bonus compensation over the prior fiscal year. The decrease in        the gain on sale of equipment reflects the sale of our semisubmersible hull, SEASCOUT, for        $10 million (net after certain expenses) and our spare 15,000 P.S.I. BOP Stack for        approximately $15 million for a gain of approximately $10.1 million in the prior fiscal        year compared to a gain on sale of equipment of $0.4 million during the current fiscal        year. Interest expense has decreased during the current year primarily due to the reduction        of our outstanding debt and due to $2.6 million of capitalized interest charges related to        the construction of the ATWOOD AURORA during fiscal year 2007 compared to only $1.1 million        during fiscal year 2006. Interest income has increased when compared to the prior fiscal        year due to interest earned on higher cash balances.

         

Virtually all of our tax provision for fiscal year 2007 relates to taxes in        foreign jurisdictions. Accordingly, due to the high level of operating income earned in        certain nontaxable and deemed profit tax jurisdictions during both the current and prior        fiscal years, our effective tax rate for these periods was significantly less than the        United States federal statutory rate. In addition, during the prior fiscal year, we        reversed a $1.8 million tax contingent liability due to the expiration of the statute of        limitations in a foreign jurisdiction and recognized a $4.6 million tax benefit due to the        acceptance of certain amended prior year tax returns by a foreign tax authority, both of        which contributed to the low effective tax rates in the prior fiscal year.

         

During July 2007, we were notified by the Malaysian tax authorities        regarding a potential proposed adjustment relating to fiscal years 2000 to 2003. Although        we believe we are in compliance with applicable rules and regulations, we are currently        evaluating the merit of the assertions by the Malaysian tax authorities and currently plan        to vigorously contest these assertions. While we cannot predict or provide assurance as to        the final outcome of these allegations, we do not expect them to have a material adverse        effect on our consolidated financial position, results of operations or cash        flows.

         

13

 

*Fiscal        Year 2006 Versus Fiscal Year 2005*

Revenues for fiscal year 2006 increased 57% compared to the prior fiscal        year. A comparative analysis of revenues by rig for fiscal years 2006 and 2005 is as        follows:

         

|                           | **REVENUES**

(In millions)   |
|--------------------------------|-------------------------------|
|                           |
|                           | **Fiscal**                    | **Fiscal** |   |
|                      | **  Year 2006**          | **  Year 2005 ** | **Variance** |
| ATWOOD HUNTER                  | **$                    62.8** | **$ 22.1** | **$ 40.7 ** |
| ATWOOD SOUTHERN CROSS          | **29.9**                      | **10.8** | **19.1 ** |
| ATWOOD EAGLE                   | **47.0**                      | **34.6** | **12.4 ** |
| RICHMOND                       | **20.2**                      | **11.9** | **8.3 ** |
| ATWOOD BEACON                  | **32.1**                      | **24.2** | **7.9 ** |
| AUSTRALIA MANAGEMENT CONTRACTS | **12.9**                      | **5.2** | **7.7 ** |
| VICKSBURG                      | **30.0**                      | **23.6** | **6.4 ** |
| ATWOOD FALCON                  | **30.1**                      | **29.8** | **0.3 ** |
| SEAHAWK                        | **11.6**                      | **13.9** | **(2.3)** |
|                           | **   $ 276.6**      | **$ 176.1** | **$ 100.5 ** |
|                           |                          |   |   |

         

The increase in fleetwide revenues is primarily attributable to the increase        in average dayrates due to improving market conditions and strong demand for offshore        drilling equipment as noted in Market Outlook. Unless otherwise noted below, the increase        in revenues for each rig is due to the increases in contractual dayrates in fiscal year        2006 compared to fiscal year 2005.

During the last quarter of fiscal year 2005, the ATWOOD SOUTHERN CROSS was        relocated from Southeast Asia to the Mediterranean Sea with no revenues being realized        during this relocation period. This relocation resulted in earned mobilization fees for the        ATWOOD SOUTHERN CROSS increasing from $0.8 million in fiscal year 2005 to $8.1 million in        fiscal year 2006, which, along with increases in contracted dayrates accounts for its        increase in revenues. Increases in revenues for the ATWOOD HUNTER, ATWOOD EAGLE, VICKSBURG,        ATWOOD BEACON, ATWOOD FALCON and the RICHMOND were related to each of these drilling units        working under higher dayrate contracts in fiscal year 2006 compared to fiscal year 2005.        The increase in revenues from the AUSTRALIA MANAGEMENT CONTRACTS was due to one of these        managed rigs returning to active drilling. The decline in revenues for the SEAHAWK was due        to the unit being upgraded in fiscal year 2006, with no revenues being realized during this        upgrade period.

         

14

 

Contract drilling costs for fiscal year 2006 increased 40% compared to the        prior fiscal year. A comparative analysis of contract drilling costs by rig for fiscal        years 2006 and 2005 is as follows:

|                      | **CONTRACT DRILLING COSTS**

(In millions) |               |
|--------------------------------|--------------------------------------------|---------------|
|                                |
|                           |                                            |
|                           | **Fiscal**                                 | **Fiscal**    |   |  |
|                           | **Year 2006**                              | **Year 2005** | **Variance** |  |
| ATWOOD SOUTHERN CROSS          | **$                    24.2**              | **$ 9.1**     | **$ 15.1 ** |  |
| ATWOOD HUNTER                  | **18.8**                                   | **11.9**      | **6.9 ** |   |
| AUSTRALIA MANAGEMENT CONTRACTS | **10.8**                                   | **4.7**       | **6.1 ** |  |
| ATWOOD EAGLE                   | **26.8**                                   | **21.9**      | **4.9 ** |  |
| VICKSBURG                      | **11.9**                                   | **8.8**       | **3.1 ** |  |
| ATWOOD BEACON                  | **10.4**                                   | **8.5**       | **1.9 ** |  |
| ATWOOD FALCON                  | **16.5**                                   | **14.6**      | **1.9 ** |  |
| RICHMOND                       | **10.4**                                   | **8.9**       | **1.5 ** |  |
| SEAHAWK                        | **8.4**                                    | **9.9**       | **(1.5)** |  |
| OTHER                          | **6.2**                                    | **4.5**       | **1.7 ** |  |
|                           | **$ 144.4**                                | **$ 102.8**   | **$ 41.6 ** |  |
|                           |                                       |          |   |  |

         

The increase in fleetwide drilling costs was primarily attributable to the        following areas: rising personnel costs due to wage increases, increased repairs and        maintenance expenses and freight costs due to the amount and timing of various repairs and        maintenance projects and equipment enhancements, and rising insurance costs due to        increased premiums. Unless otherwise noted below, the increase in drilling costs for each        rig is primarily due to the areas mentioned above.

         

Besides the four areas discussed above, the increase in drilling costs for        the ATWOOD SOUTHERN CROSS is also due to $8.6 million of mobilization expense amortization        during the fiscal year 2006, compared to $0.8 million of deferred mobilization expense        during fiscal year 2005, as the rig relocated from Southeast Asia to the Mediterranean        during the fourth quarter of fiscal year 2005. The increase in drilling costs for the        ATWOOD HUNTER also includes higher agent commissions due to increased revenues when        compared to fiscal year 2005 and due to its relocation from Egypt to Mauritania where        operating costs are higher. As previously mentioned, one of our managed platform rigs in        Australia commenced a new drilling program during fiscal year 2006, and thus, service        activities for our AUSTRALIA MANAGEMENT CONTRACTS have increased accordingly when compared        to fiscal year 2005. The decrease in drilling costs for the SEAHAWK is due to $4.0 million        of deferred mobilization costs for fiscal year 2006 due to the relocation of the rig from        Southeast Asia to West Africa compared to no deferred mobilization costs in fiscal year        2005. Other drilling costs for fiscal year 2006 have increased primarily due to the        recording of stock option compensation expense (resulting from adoption of Statement of        Financial Accounting Standards No. 123(R), “Share-Based Payment”, or SFAS        123(R) on October 1, 2005) for field personnel.

         

15

 

Depreciation expense for fiscal year 2006 decreased 1% as compared to the        prior fiscal year. A comparative analysis of depreciation expense by rig for fiscal years        2006 and 2005 is as follows:

         

|                  | **DEPRECIATION EXPENSE**

                    (In millions) |                      |
|-----------------------|-------------------------------------------------------------|---------------------------|
|                  |                                                        |
|                  | **Fiscal**                                                  | **Fiscal**                |   |   |
|                  | **  Year 2006 **                             | **Year 2005  ** | ** Variance** |   |
| SEAHAWK               | **$                    1.6**                                | **$ 0.5**                 | **$ 1.1 ** |   |
| ATWOOD HUNTER         | **5.4**                                                     | **5.3**                   | **0.1 ** |     |
| VICKSBURG             | **2.8**                                                     | **2.7**                   | **0.1 ** |    |
| ATWOOD BEACON         | **5.3**                                                     | **5.2**                   | **0.1 ** |   |
| RICHMOND              | **0.9**                                                     | **0.9**                   | **- ** |   |
| ATWOOD FALCON         | **2.8**                                                     | **2.8**                   | **- ** |   |
| ATWOOD EAGLE          | **4.6**                                                     | **4.7**                   | **(0.1)** |   |
| ATWOOD SOUTHERN CROSS | **2.9**                                                     | **4.5**                   | **(1.6)** |   |
| OTHER                 | **0.1**                                                     | **0.1**                   | **- ** |   |
|                  | **$ 26.4**                                                  | **$ 26.7**                | **$ (0.3)** |   |

         

The increase in depreciation expense for the SEAHAWK was due to the        completion of a $16 million life enhancing upgrade during the fourth quarter of fiscal year        2006. During the first quarter of the fiscal year 2006, the ATWOOD SOUTHERN CROSS underwent        a life enhancing upgrade whereby the useful life of the rig was extended from approximately        two to five years. Depreciation expense for our other units was relatively unchanged in        fiscal year 2006 as compared to fiscal year 2005.

         

In October 2005, we sold our semisubmersible hull, SEASCOUT, for $10 million        (net after certain expenses) and our spare 15,000 P.S.I. BOP Stack for approximately $15        million. For the 2006 fiscal year period, gains on the sales of these two assets and other        excess equipment totaled approximately $10.5 million in the aggregate. We had no operations        or revenues associated with these assets prior to their sale.

         

General and administrative expenses for fiscal year 2006 increased 45%        compared to fiscal year 2005 due primarily to the following: $3.7 million of stock option        compensation expense (resulting from adoption of SFAS 123(R) on October 1, 2005), a $1.5        million increase in professional fees primarily related to higher Sarbanes-Oxley compliance        costs, and a $0.6 million increase in annual bonus compensation. Interest expense has        decreased primarily due to the reduction of our outstanding debt, while interest income has        increased when compared to fiscal year 2005 due to higher interest rates earned on higher        cash balances.

         

Virtually all of our tax provision for fiscal year 2006 relates to taxes in        foreign jurisdictions. As a result of working in foreign jurisdictions, we earned a high        level of operating income in certain nontaxable and deemed profit tax jurisdictions which        significantly reduced our effective tax rate for the current fiscal year when compared to        the United States statutory rate. In addition, we reversed a $1.8 million tax contingent        liability due to the expiration of the statute of limitations in a foreign jurisdiction.        Also, we were advised by a foreign tax authority that it had approved acceptance of certain        amended prior year tax returns. The acceptance of these amended tax returns, along with the        fiscal year 2005 tax return in this foreign jurisdiction, resulted in the recognition of a        $4.6 million tax benefit in the third quarter. Including the two previously mentioned        discrete items, which reduced our rate by 7%, our effective tax rate for fiscal year 2006        was approximately 6%.

         

16

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of September 30, 2007, we had $18 million outstanding under the term        portion of our senior secured credit facility and no funds borrowed under the $100 million        revolving portion of our senior secured credit facility. We were in compliance with all        financial covenants at September 30, 2007 and at all times during fiscal years 2007, 2006        and 2005. At September 30, 2007, the collateral for our credit facility consisted primarily        of preferred mortgages on all eight of our active drilling units (with an aggregate net        book value at September 30, 2007 totaling approximately $378 million). Under the facility,        we were not required to maintain compensating balances; however, we were required to pay a        fee of approximately 0.60% per annum on the unused revolving portion of our credit facility        and certain other administrative costs.

         

Subsequent to September 30, 2007, we entered into a new credit agreement        with several banks with Nordea Bank Finland PLC, New York Branch, as Administrative Agent        for the lenders, as well as Lead Arranger and Book Runner and terminated our prior senior        secured credit facility. The new credit agreement provides for a secured 5-year        $300,000,000 non-amortizing revolving loan facility with maturity in October 2012, subject        to acceleration upon certain specified events of defaults, including breaches of        representations or covenants. Loans under the new facility will bear interest at varying        rates ranging from 0.70% to 1.25% over the Eurodollar        Rate**,**depending upon the ratio of        outstanding debt to earnings before interest, taxes and depreciation. The collateral for        the new credit agreement consists primarily of preferred mortgages on three of our active        drilling units (ATWOOD EAGLE, ATWOOD HUNTER and ATWOOD BEACON). The new credit agreement        contains various financial covenants that, among other things, require the maintenance of        certain leverage and interest expense coverage ratios. This new credit facility will        provide funding for future growth opportunities and for general corporate needs. As of        November 27, 2007, no funds have been borrowed under the new credit facility. In        conjunction with the establishment of the new credit agreement, we terminated our prior        senior secured credit facility, and we repaid the $18 million then outstanding on our prior        senior secured credit facility at the time of termination. We will write off the remaining        unamortized loan costs of approximately $0.4 million related to the prior senior secured        credit facility in the first quarter of fiscal year 2008.

         

Since we operate in a very cyclical industry, maintaining high equipment        utilization in up, as well as down, cycles is a key factor in generating cash to satisfy        current and future obligations. For fiscal years 2001 through 2006, net cash provided by        operating activities ranged from a low of approximately $13.7 million in fiscal year 2003        to a high of approximately $85.5 million in fiscal year 2006. For fiscal year 2007, net        cash provided by operating activities totaled approximately $190.8 million. Our operating        cash flows are primarily driven by our operating income, which reflects dayrates and rig        utilization. During fiscal year 2007, we used internally generated cash to expend        approximately $63 million toward the construction of the ATWOOD AURORA, approximately $9        million on completing the water depth upgrade and equipment maintenance of the ATWOOD        FALCON and approximately $19 million in other capital expenditures. In fiscal year 2008, we        currently expect to expend approximately $70 million in completing the construction of the        ATWOOD AURORA, approximately $14 million for the life enhancing upgrade for the RICHMOND        and approximately $20 million for other capital expenditures.

         

With approximately 87% of our available operating rig days committed for        fiscal year 2008 and approximately 33% committed for fiscal year 2009 at historically high        dayrates, we anticipate significant increases in cash flows and earnings during fiscal        years 2008 and 2009 when compared to fiscal year 2007. As we repaid the $18 million        remaining term portion of our prior senior secured credit facility during October 2007 and        have not borrowed against our new senior secured credit facility to date, the only        additional firm cash commitment for fiscal year 2008, outside of funding current rig        operations, is our expected capital expenditures of approximately $104 million as noted        above. We expect to generate more than sufficient cash flows from operations to satisfy        these obligations.

 

Our portfolio of accounts receivable is comprised of major international        corporate entities with stable payment experience. Historically, we have not encountered        significant difficulty in collecting receivables and typically do not require collateral        for our receivables. As of September 30, 2007, we have an unbilled receivable balance of        $13.1 million with one customer. This balance relates to contract drilling services        performed in August and September 2007, for which billing was postponed awaiting receipt of        tax-exempt status from a foreign government. Such amounts were billed subsequent to the        current fiscal year end and are expected to be collected in the first quarter of fiscal        year 2008. The insurance receivable of $0.6 million at September 30, 2006 related to        repairs made to the ATWOOD BEACON during the first quarter of fiscal year 2007.

 

17

 

Accrued liabilities have increased by $14.7 million from September 30, 2006        primarily due to the increase of accrued, but unpaid, agent fees and current income tax        liabilities.

         

**COMMITMENTS**

 

The following table summarizes our obligations and commitments (in        thousands) at September 30, 2007:

         

         

|                                         | **Fiscal ** |         | **Fiscal ** |        | **Fiscal ** |        | **Fiscal ** |     |        |                                                                                          | **2012                    and ** |
|-----------------------------------------|------------------|---------|------------------|--------|------------------|--------|------------------|-----|--------|------------------------------------------------------------------------------------------|---------------------------------------|
|                                         | **2008**         |         | **2009**         |        | **2010**         |        | **2011**         |     |        |                                                                                          | **thereaft****er**                    |
|                                         |                  |         |                  |        |                  |        |                  |     |        |                                                                                          |                                       |  |  |  |  |
| Long-Term Debt                (1)       | $                | 18,000  |             | $      | -                |   | $                | -   |   | $                               - |                                  |   | $ | - |   |
| Purchase                Commitments (2) |             | 83,000  |             |   | -                |   |             | -   |   | -                                                                                        |                                  |   |   | - |   |
| Operating                Leases         |             | 1,644   |             |   | 1,029            |   |             | 854 |   | 842                                                                                      |                                  |   |   | 2,730 |   |
|                                    | $                | 102,644 |             | $      | 1,029            |   | $                | 854 |   | $       842                                           |                                  |   | $ | 2,730 |   |

         

|   | (1) | Remaining balance repaid during October 2007. |
|--------|-----|-----------------------------------------------|

|   | (2) | Rig construction and upgrade commitments for the ATWOOD                        AURORA and the RICHMOND, respectively. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------|

         

**CRITICAL        ACCOUNTING POLICIES**

 

Significant accounting policies are included in Note 2 to our consolidated        financial statements for the year ended September 30, 2007. These policies, along with the        underlying assumptions and judgments made by management in their application, have a        significant impact on our consolidated financial statements. We identify our most critical        accounting policies as those that are the most pervasive and important to the portrayal of        our financial position and results of operations, and that require the most difficult,        subjective and/or complex judgments by management regarding estimates about matters that        are inherently uncertain. Our most critical accounting policies are those related to        revenue recognition, property and equipment, impairment of assets, income taxes, and        employee stock-based compensation.

         

We account for contract drilling revenue in accordance with the terms of the        underlying drilling contract. These contracts generally provide that revenue is earned and        recognized on a daily rate (i.e. “dayrate”) basis and dayrates are typically        earned for a particular level of service over the life of a contract. Dayrate contracts can        be for a specified period of time or the time required to drill a specified well or number        of wells. Revenues from dayrate drilling operations, which are classified under contract        drilling services, are recognized on a per day basis as the work progresses. In addition,        lump-sum fees received at commencement of the drilling contract as compensation for the        cost of relocating drilling rigs from one major operating area to another, as well as        equipment and upgrade costs reimbursed by the customer are recognized as earned on a        straight-line method over the term of the related drilling contract, as are the dayrates        associated with such contract. However, lump-sum fees received upon termination of a        drilling contract are recognized as earned during the period termination occurs. In        addition, we defer the mobilization costs relating to moving a drilling rig to a new area        and customer requested equipment purchases that will revert to the customer at the end of        the applicable drilling contract. We amortize such costs on a straight-line basis over the        life of the applicable drilling contract.

         

18

 

We currently operate eight active offshore drilling units. These assets are        premium equipment and should provide many years of quality service. At September 30, 2007,        the carrying value of our property and equipment totaled $493.9 million, which represents        69% of our total assets. This carrying value reflects the application of our property and        equipment accounting policies, which incorporate estimates, assumptions and judgments by        management relative to the useful lives and salvage values of our units. Once a rig is        placed in service, it is depreciated on the straight-line method over its estimated useful        life, with depreciation discontinued only during the period when a drilling unit is out of        service while undergoing a significant upgrade that extends its useful life. The estimated        useful lives of our drilling units and related equipment range from 3 years to 25 years and        our salvage values are generally based on 5% of capitalized costs. Any future increases in        our estimates of useful lives or salvage values will have the effect of decreasing future        depreciation expense in future years and spreading the expense to later years. Any future        decreases in our useful lives or salvage values will have the effect of accelerating future        depreciation expense.

         

We evaluate the carrying value of our property and equipment when events or        changes in circumstances indicate that the carrying value of such assets may be impaired.        Asset impairment evaluations are, by nature, highly subjective. Operations of our drilling        equipment are subject to the offshore drilling requirements of oil and gas exploration and        production companies and agencies of foreign governments. These requirements are, in turn,        subject to fluctuations in government policies, world demand and price for petroleum        products, proved reserves in relation to such demand and the extent to which such demand        can be met from onshore sources. The critical estimates which result from these dynamics        include projected utilization, dayrates, and operating expenses, each of which impact our        estimated future cash flows. Over the last ten years, our equipment utilization rate has        averaged approximately 90%; however, if a drilling unit incurs significant idle time or        receives dayrates below operating costs, its carrying value could become impaired. The        estimates, assumptions and judgments used by management in the application of our property        and equipment and asset impairment policies reflect both historical experience and        expectations regarding future industry conditions and operations. The use of different        estimates, assumptions and judgments, especially those involving the useful lives of our        rigs and vessels and expectations regarding future industry conditions and operations,        would likely result in materially different carrying values of assets and results of        operations.

         

We conduct operations and earn income in numerous foreign countries and are        subject to the laws of taxing jurisdictions within those countries, as well as United        States federal and state tax laws. At September 30, 2007, we have a $14.3 million net        deferred income tax liability. This balance reflects the application of our income tax        accounting policies in accordance with statement of Financial Accounting Standards No. 109,        “Accounting for Income Taxes”. Such accounting policies incorporate estimates,        assumptions and judgments by management relative to the interpretation of applicable tax        laws, the application of accounting standards, and future levels of taxable income. The        estimates, assumptions and judgments used by management in connection with accounting for        income taxes reflect both historical experience and expectations regarding future industry        conditions and operations. Changes in these estimates, assumptions and judgments could        result in materially different provisions for deferred and current income taxes.

         

Effective October 1, 2005, we adopted Statement of Financial Accounting        Standards No. 123(R), “Share-Based Payment”, or SFAS 123(R), using the modified        prospective application transition method. Under this method, stock-based compensation cost        is measured at the grant date, based on the calculated fair value of the award, and is        recognized as an expense over the requisite service period (generally the vesting period of        the equity grant). In addition, stock-based compensation cost recognized includes        compensation cost for unvested stock-based awards as of October 1, 2005. Prior to October        1, 2005, we accounted for share-based compensation in accordance with Accounting Principles        Board Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB        No. 25. No share-based employee compensation cost has been reflected in net income prior to        October 1, 2005. Before that date, we reported the entire tax benefit related to the        exercise of stock options as an operating cash flow. SFAS 123(R) requires us to report the        tax benefit from the tax deduction that is in excess of recognized compensation costs        (excess tax benefits) as a financing cash flow rather than as an operating cash flow. The        cumulative effect of the change in accounting principle from APB No. 25 to FAS 123(R) was        not material.

 

 

19

 

**RECENTLY        ISSUED ACCOUNTING PRONOUNCEMENTS**

 

In June 2006, the Financial Accounting Standards Board issued FIN 48,        “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement        109.”  FIN 48 prescribes a comprehensive model for recognizing, measuring,        presenting, and disclosing uncertain tax positions within the financial statements.         The provisions of FIN 48 are effective for fiscal years beginning after December 15,        2006.  While we arestillfinalizing our        evaluation of theimpactof the adoption of FIN 48, we believethe adoption will result in a decrease to shareholders equity        of approximately $4 to $5 million at October 1, 2007.

         

In February 2007, the FASB issued SFAS No. 159, “The Fair        Value Option for Financial Assets and Financial Liabilities”, which provides        companies with an option to report selected financial assets and liabilities at fair value        and establishes presentation and disclosure requirements to facilitate comparisons between        companies that choose different measurement attributes for similar types of assets and        liabilities. GAAP has required different measurement attributes for different assets and        liabilities that can create artificial volatility in earnings. The objective of SFAS No.        159 is to help mitigate this type of volatility in the earnings by enabling companies to        report related assets and liabilities at fair value, which would likely reduce the need for        companies to comply with complex hedge accounting provisions. SFAS No. 159 is effective for        fiscal years beginning after November 15, 2007. We are currently analyzing the        provisions of SFAS No. 159 and determining how it will affect accounting policies and        procedures, but we have not yet made a determination of the impact the adoption will have        on our consolidated financial position, results of operations and cash flows.

         

In September 2005, the FASB issued SFAS No. 157, “Fair Value        Measurements”, which defines fair value, establishes methods used to measure fair        value and expands disclosure requirements about fair value measurements. SFAS No. 157 is        effective for financial statements issued for fiscal years beginning after November 15,        2007, and interim periods within those fiscal periods. We are currently analyzing the        provisions of SFAS No. 157 and determining how it will affect accounting policies and        procedures, but we have not yet made a determination of the impact the adoption will have        on our consolidated financial position, results of operations and cash flows.

         

**DISCLOSURES ABOUT MARKET RISK**

 

We are exposed to market risk, including adverse changes in interest rates        and foreign currency exchange rates as discussed below.

         

*Interest Rate Risk*

         

All of the $18 million of long-term debt outstanding under our prior credit        facility at September 30, 2007, was floating rate debt. Any debt we incur under our new        credit facility will also be floating rate debt. As a result, our annual interest costs in        fiscal year 2008 will fluctuate based on interest rate changes. Because the interest rate        on our long-term debt is a floating rate and due to the fact that our debt maturing under        our prior credit facility would have matured in 2008, the fair value of our long-term debt        approximated carrying value as of September 30, 2007. The impact on annual cash flow of a        10% change in the floating rate (approximately 70 basis points) would be immaterial. We did        not have any open derivative contracts relating to our floating rate debt at September 30,        2007.

         

*Foreign Currency Risk*

         

Certain of our subsidiaries have monetary assets and liabilities that are        denominated in a currency other than their functional currencies. Based on September 30,        2007 amounts, a decrease in the value of 10% in the foreign currencies relative to the        United States dollar from the year-end exchange rates would result in a foreign currency        transaction gain of approximately $0.3 million. Thus, we consider our current risk exposure        to foreign currency exchange rate movements, based on net cash flows, to be immaterial. We        did not have any open derivative contracts relating to foreign currencies at September 30,        2007.

         

20

 

**MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL        REPORTING**

 

Company management is responsible for establishing and maintaining adequate        internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under        the Securities Exchange Act of 1934. Our internal control over financial reporting was        designed by management, under the supervision of the Chief Executive Officer and Chief        Financial Officer, to provide reasonable assurance regarding the reliability of financial        reporting and the preparation of financial statements for external purposes in accordance        with accounting principles generally accepted in the United States, and includes those        policies and procedures that:

 

|   | (i) | pertain to the maintenance of records that in reasonable                        detail accurately and fairly reflect the transactions and dispositions of                        the assets of the Company; |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (ii) | provide reasonable assurance that transactions are recorded                        as necessary to permit preparation of financial statements in accordance                        with accounting principles generally accepted in the United States, and                        that receipts and expenditures of the Company are being made only in                        accordance with authorizations of management and directors of the Company;                        and |
|--------|------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iii) | provide reasonable assurance regarding prevention or timely                        detection of unauthorized acquisition, use or disposition of the                        Company’s assets that could have a material effect on the financial                        statements. |
|--------|-------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

Because of its inherent limitations, internal control over financial        reporting may not prevent or detect misstatements. Also, projections of any evaluation of        effectiveness to future periods are subject to the risk that controls may become inadequate        because of changes in conditions, or that the degree of compliance with the policies and        procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal        control over financial reporting as of September 30, 2007. In making this assessment,        management used the criteria set forth by the Committee of Sponsoring Organizations of the        Treadway Commission (COSO) in Internal Control-Integrated Framework.

 

Based on our evaluation under the framework in Internal Control        –Integrated Framework, management has concluded that the Company maintained effective        internal control over financial reporting as of September 30, 2007. PricewaterhouseCoopers        LLP, our independent registered public accounting firm, has audited our assessment of the        effectiveness of the Company’s internal control over financial reporting as of        September 30, 2007, as stated in their report, which appears on the following        page.

 

**ATWOOD        OCEANICS, INC.**

 

by

 

| /s/ John R. Irwin | /s/ James M. Holland |
|-------------------|----------------------|

| John R. Irwin | James M. Holland |
|---------------|------------------|

| Director, President | Senior Vice President, Chief |
|---------------------|------------------------------|

| and Chief Executive Officer | Financial Officer and Secretary |
|-----------------------------|---------------------------------|

 

November        29, 2007

 

 

21

 

**REPORT        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the        Board of Directors and Shareholders of Atwood Oceanics, Inc.

 

In our opinion, the accompanying consolidated balance sheets and the related        consolidated statements of operations, of cash flows and of changes in shareholders' equity        present fairly, in all material respects, the financial position of Atwood Oceanics, Inc.        and its subsidiaries at September 30, 2007 and 2006, and the results of their operations        and their cash flows for each of the three years in the period ended September 30, 2007 in        conformity with accounting principles generally accepted in the United States of America.        Also in our opinion, the Company maintained, in all material respects, effective internal        control over financial reporting as of September 30, 2007, based on criteria established        in*Internal Control - Integrated Framework*issued by the Committee of Sponsoring Organizations of the Treadway        Commission (COSO). The Company's management is responsible for these financial statements,        for maintaining effective internal control over financial reporting and for its assessment        of the effectiveness of internal control over financial reporting, included in the        accompanying Management's Report on Internal Control Over Financial Reporting, which        appears on the preceding page. Our responsibility is to express opinions on these financial        statements and on the Company's internal control over financial reporting based on our        integrated audits. We conducted our audits in accordance with the standards of the Public        Company Accounting Oversight Board (United States). Those standards require that we plan        and perform the audits to obtain reasonable assurance about whether the financial        statements are free of material misstatement and whether effective internal control over        financial reporting was maintained in all material respects. Our audits of the financial        statements included examining, on a test basis, evidence supporting the amounts and        disclosures in the financial statements, assessing the accounting principles used and        significant estimates made by management, and evaluating the overall financial statement        presentation. Our audit of internal control over financial reporting included obtaining an        understanding of internal control over financial reporting, assessing the risk that a        material weakness exists, and testing and evaluating the design and operating effectiveness        of internal control based on the assessed risk. Our audits also included performing such        other procedures as we considered necessary in the circumstances. We believe that our        audits provide a reasonable basis for our opinions.

 

As discussed in Note 3 to the consolidated financial statements, in 2006 the        company charged its method of accounting for share-based compensation as a result of        adopting the provisions of the Statement of Financial Standards No. 123(R), "Share-Based        Payment."

 

A company’s internal control over financial reporting is a process        designed to provide reasonable assurance regarding the reliability of financial reporting        and the preparation of financial statements for external purposes in accordance with        generally accepted accounting principles. A company’s internal control over financial        reporting includes those policies and procedures that (i) pertain to the maintenance        of records that, in reasonable detail, accurately and fairly reflect the transactions and        dispositions of the assets of the company; (ii) provide reasonable assurance that        transactions are recorded as necessary to permit preparation of financial statements in        accordance with generally accepted accounting principles, and that receipts and        expenditures of the company are being made only in accordance with authorizations of        management and directors of the company; and (iii) provide reasonable assurance        regarding prevention or timely detection of unauthorized acquisition, use, or disposition        of the company’s assets that could have a material effect on the financial        statements.

 

Because of its inherent limitations, internal control over financial        reporting may not prevent or detect misstatements. Also, projections of any evaluation of        effectiveness to future periods are subject to the risk that controls may become inadequate        because of changes in conditions, or that the degree of compliance with the policies or        procedures may deteriorate.

 

 

 

PricewaterhouseCoopers LLP

Houston,        Texas

November        28, 2007

22

 

 

**Atwood        Oceanics, Inc. and Subsidiaries**

CONSOLIDATED BALANCE SHEETS

 

|                                                                                                                                            |        |        |
|--------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                         |   |   | **   September                    30,**    |
| (In thousands)                                                                                                                             |   |   |   | **2007** |   |   | **2006** |   |
|                                                                                                                                            |        |        |
| **ASSETS**                                                                                                                                 |   |   |  |  |  |  |  |  |
|                                                                                                                                            |        |        |
| **CURRENT                ASSETS:**                                                                                                         |   |   |  |  |  |  |  |  |
|     Cash and cash                equivalents                                                                           |   |   | **$** | **100,361** |   | $ | 32,276 |   |
|     Accounts receivable,                net of an allowance                                                            |   |   |  |  |  |  |  |  |
|         of                $164 and $750 at September 30, 2007                                      |   |   |  |  |  |  |  |  |
|         and                2006, respectively                                                      |   |   |   | **76,597** |   |   | 80,222 |   |
|     Income tax                receivable                                                                               |   |   |   | **1,870** |   |   | 65 |   |
|     Insurance                receivable                                                                                |   |   |   | **--** |   |   | 550 |   |
|     Inventories of                materials and supplies                                                               |   |   |   | **26,721** |   |   | 22,124 |   |
|     Deferred tax                assets                                                                                 |   |   |   | **390** |   |   | 2,563 |   |
|     Prepaid expenses and                deferred costs                                                                 |   |   |   | **10,240** |   |   | 9,873 |   |
|       Total                Current Assets                                                                    |   |   |   | **216,179** |   |   | 147,673 |   |
|                                                                                                                                            |        |        |
| **NET                PROPERTY AND EQUIPMENT**                                                                                              |   |   |   | **493,851** |   |   | 436,166 |   |
|                                                                                                                                            |        |        |
| **DEFERRED                COSTS AND OTHER ASSETS**                                                                                         |   |   |   | **7,694** |   |   | 9,990 |   |
|                                                                                                                                       |   |   | **$** | **7 17,724** |   | $ | 593,829 |   |
|                                                                                                                                            |        |        |
| **LIABILITIES AND SHAREHOLDERS'                EQUITY**                                                                                    |   |   |  |  |  |  |  |  |
|                                                                                                                                            |        |        |
| **CURRENT                LIABILITIES:**                                                                                                    |   |   |  |  |  |  |  |  |
|    Current maturities of notes                payable                                                                       |   |   | **$** | **18,000** |   | $ | 36,000 |   |
|    Accounts                payable                                                                                          |   |   |   | **11,769** |   |   | 11,760 |   |
|    Accrued                liabilities                                                                                       |   |   |   | **27,861** |   |   | 13,201 |   |
|    Deferred                credits                                                                                          |   |   |   | **--** |   |   | 404 |   |
|        Total                Current Liabilities                                                         |   |   |   | **57,630** |   |   | 61,365 |   |
|                                                                                                                                            |        |        |
| **LONG-TERM DEBT,**                                                                                                                        |   |   |  |  |  |  |  |  |
|    net of current                maturities:                                                                                |   |   |   | **--** |   |   | 28,000 |   |
|                                                                                                                                       |   |   |   | **--** |   |   | 28,000 |   |
| **LONG                TERM LIABILITIES:**                                                                                                  |   |   |  |  |  |  |  |  |
|      Deferred income                taxes                                                                         |   |   |   | **14,729** |   |   | 18,591 |   |
|      Deferred                credits                                                                              |   |   |   | **24,093** |   |   | 23,284 |   |
|      Other                                                                                                        |   |   |   | **5,417** |   |   | 3,695 |   |
|                                                                                                                                       |   |   |   | **44,239** |   |   | 45,570 |   |
|                                                                                                                                            |        |        |
| **COMMITMENTS AND CONTENGENCIES (SEE                NOTE 11)**                                                                             |   |   |  |  |  |  |  |  |
|                                                                                                                                            |        |        |
| **SHAREHOLDERS'                EQUITY:**                                                                                                   |   |   |  |  |  |  |  |  |
|     Preferred stock, no                par value;                                                                      |   |   |  |  |  |  |  |  |
|          1,000                shares authorized, none outstanding                             |   |   |   | **--** |   |   | -- |   |
|     Common stock, $1 par                value, 50,000 shares                                                           |   |   |  |  |  |  |  |  |
|           authorized                with 31,675 and 31,046 issued                        |   |   |  |  |  |  |  |  |
|           and                outstanding at September 30, 2007                           |   |   |  |  |  |  |  |  |
|           and                2006, respectively                                          |   |   |   | **31,675** |   |   | 31,046 |   |
|     Paid-in                capital                                                                                     |   |   |   | **133,224** |   |   | 115,916 |   |
|     Retained                earnings                                                                                   |   |   |   | **450,956** |   |   | 311,932 |   |
|         Total                Shareholders' Equity                                                  |   |   |   | **615,855** |   |   | 458,894 |   |
|                                                                                                                                       |   |   | **$** | **717,724** |   | $   | 593,829 |   |
|                                                                                                                                            |        |        |

The        accompanying notes are an integral part of these consolidated financial        statements.

 

23

 

**Atwood        Oceanics, Inc. and Subsidiaries**

CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                             |        |                                        |                                        |                     |                                   |                     |                                         |
|-------------------------------------------------------------|--------|----------------------------------------|----------------------------------------|---------------------|-----------------------------------|---------------------|-----------------------------------------|
|                                                             |        |                                        | For Years Ended September 30,          |
| (In thousands, except per share                    amounts) |   |                                        | **                     2007**     |                     | **2006     ** |                     | ** 2005     ** |
|                                                        |   |                                        |                                   |                     |                              |                     |                                    |
| REVENUES:                                                   |   |                                        |                                   |                     |                              |                     |                                    |
|    Contract drilling                              |        | **$                    400,479 ** |                                        | **$ 276,625 ** |                                   | **$ 168,500 ** |
|    Business interruption proceeds                 |        | **2,558 **                        |                                        | **- **         |                              | **7,656 **     |
|                                                        |   |                                        | **403,037 **                      |                     | 276,625                      |                     | **176,156 **                       |
| COSTS AND EXPENSES:                                         |   |                                        |                                   |                     |                              |                     |                                    |
|    Contract drilling                              |        | **186,949 **                      |                                        | **144,366 **   |                                   | **102,849 **   |
|    Depreciation                                   |        |                                        | **33,366 **                       |                     | **26,401 **                  |                     | **26,735 **                        |
|    General and administrative                     |   |                                        | **23,929 **                       |                     | **20,630 **                  |                     | **14,245 **                        |
|    Gain on sale of equipment                      |   |                                        | **(414)**                              |                     | **(10,548)**                      |                     | **- **                             |
|                                                        |   |                                        | **243,830 **                      |                     | **180,849 **                 |                     | **143,829 **                       |
| OPERATING INCOME                                            |   |                                        | **159,207 **                      |                     | 95,776                       |                     | 32,327                             |
| OTHER INCOME (EXPENSE):                                     |   |                                        |                                   |                     |                              |                     |                                    |
|    Interest expense, net of capitalized interest  |        |                                        | **(1,689)**                            |                     | **(5,166)**                       |                     | **(7,352)**                             |
|    Interest income                                |        |                                        | **2,441 **                        |                     | **1,226 **                   |                     | **633 **                           |
|                                                        |   |                                        | **752 **                          |                     | **(3,940)**                       |                     | **(6,719)**                             |
| INCOME BEFORE INCOME TAXES                                  |   |                                        | **159,959 **                      |                     | **91,836 **                  |                     | **25,608 **                        |
| PROVISION (BENEFIT) FOR INCOME TAXES                        |   |                                        | **20,935 **                       |                     | **5,714 **                   |                     | **(403)**                               |
| NET                    INCOME                               |   |                                        | **$                    139,024 ** |                     | ** $ 86,122 **          |                     | **$ 26,011 **                      |
| EARNINGS PER COMMON SHARE:                                  |   |                                        |                                   |                     |                              |                     |                                    |
|    Basic                                          |   |                                        | **$                    4.44 **    |                     | **$ 2.78 **                  |                     | **$ 0.86 **                        |
|    Diluted                                        |        |                                        | **4.37 **                         |                     | **2.74 **                    |                     | **0.83 **                          |
| AVERAGE COMMON SHARES OUTSTANDING:                          |   |                                        |                                   |                     |                              |                     |                                    |
|    Basic                                          |   |                                        | **31,343 **                       |                     | **30,936 **                  |                     | **30,412 **                        |
|    Diluted                                        |        |                                        | **31,814 **                       |                     | **31,442 **                  |                     | **31,220 **                        |

 

The        accompanying notes are an integral part of these consolidated financial        statements.

 

24

 

**Atwood        Oceanics, Inc. and Subsidiaries**

CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                                                                         |        |        |                                                                                                  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------------------------------------------------------------------------------------------------|
|                                                     |   |   |   For Years                    Ended September 30,       |
| (In thousands)                                                                                                                                          |   |   |                                                                                             | **2007** |   |   | 2006 |   |   | 2005 |   |
| CASH FLOW FROM                OPERATING ACTIVITIES:                                                                                                     |   |   |                                                                                                  |  |  |  |  |  |  |  |  |
|      Net                income                                                                                                 |   |   | **$**                                                                                            | **139,024** |   | $ | 86,122 |   | $ | 26,011 |   |
|      Adjustments to                reconcile net income to net cash provided by                                                |   |   |                                                                                                  |  |  |  |  |  |  |  |  |
|           operating                activities:                                                        |   |   |                                                                                                  |  |  |  |  |  |  |  |  |
|           Depreciation                                                                                |   |   |                                                                                             | **33,366** |   |   | 26,401 |   |   | 26,735 |   |
|           Amortization                of debt issuance costs                                          |   |   |                                                                                             | **804** |   |   | 804 |   |   | 804 |   |
|           Amortization                of deferred items                                               |   |   |                                                                                             | **(25,729** | **)** |   | (1,254 | ) |   | 292 |   |
|           Provision                for doubtful accounts                                              |   |   |                                                                                             | **127** |   |   | 726 |   |   | 189 |   |
|           Provision                for inventory obsolescence                                         |   |   |                                                                                             | **240** |   |   | -- |   |   | -- |   |
|           Deferred                federal income tax benefit                                          |   |   |                                                                                             | **(2,169** | **)** |   | (1,032 | ) |   | (1,580 | ) |
|           Stock-based                compensation expense                                             |   |   |                                                                                             | **5,005** |   |   | 4,568 |   |   | -- |   |
|           Gain                on sale of assets                                                       |   |   |                                                                                             | **(414** | **)** |   | (10,548 | ) |   | -- |   |
|      Changes in                assets and liabilities:                                                                         |   |   |                                                                                                  |  |  |  |  |  |  |  |  |
|           (Increase)                decrease in accounts receivable                                   |   |   |                                                                                             | **3,498** |   |   | (41,083 | ) |   | (7,579 | ) |
|           Decrease                in insurance receivable                                             |   |   |                                                                                             | **--** |   |   | -- |   |   | 9,133 |   |
|           (Increase)                decrease in income tax receivable                                 |   |   |                                                                                             | **(1,805** | **)** |   | 3,213 |   |   | (3,278 | ) |
|           Increase                in inventory                                                        |   |   |                                                                                             | **(4,837** | **)** |   | (6,484 | ) |   | (2,839 | ) |
|           (Increase)                decrease in prepaid expenses                                      |   |   |                                                                                             | **(1,454** | **)** |   | (5,061 | ) |   | 1,585 |   |
|           Increase                in deferred costs and other assets                                  |   |   |                                                                                             | **(4,506** | **)** |   | (11,419 | ) |   | (10,422 | ) |
|           Increase                (decrease) in accounts payable                                      |   |   |                                                                                             | **9** |   |   | 5,287 |   |   | (2,925 | ) |
|           Increase                (decrease) in accrued liabilities                                   |   |   |                                                                                             | **14,660** |   |   | 3,985 |   |   | (2,734 | ) |
|           Increase                in deferred credits and other liabilities                           |   |   |                                                                                             | **34,941** |   |   | 31,226 |   |   | 5,429 |   |
|           Tax                benefit from the exercise of stock options                               |   |   |                                                                                             | **--** |   |   | -- |   |   | 2,250 |   |
|           Other                                                                                       |   |   |                                                                                             | **--** |   |   | 1 |   |   | 21 |   |
|                                                                                                                                                    |   |   |                                                                                             | **51,736** |   |   | (670 | ) |   | 15,081 |   |
|                Net                Cash Provided by Operating Activities      |   |   |                                                                                             | **190,760** |   |   | 85,452 |   |   | 41,092 |   |
| CASH FLOW FROM                INVESTING ACTIVITIES:                                                                                                     |   |   |                                                                                                  |  |  |  |  |  |  |  |  |
|      Capital                expenditures                                                                                       |   |   |                                                                                             | **(91,306** | **)** |   | (78,464 | ) |   | (25,563 | ) |
|      Collection of                insurance receivable                                                                         |   |   |                                                                                             | **550** |   |   | -- |   |   | 15,750 |   |
|      Proceeds from                sale of assets                                                                               |   |   |                                                                                             | **669** |   |   | 26,239 |   |   | -- |   |
|                Net                Cash Used by Investing Activities          |   |   |                                                                                             | **(90,087** | **)** |   | (52,225 | ) |   | (9,813 | ) |
| CASH FLOW FROM                FINANCING ACTIVITIES:                                                                                                     |   |   |                                                                                                  |  |  |  |  |  |  |  |  |
|      Proceeds from                debt                                                                                         |   |   |                                                                                             | **--** |   |   | 20,000 |   |   | 10,000 |   |
|      Principal                payments on debt                                                                                 |   |   |                                                                                             | **(46,000** | **)** |   | (46,000 | ) |   | (101,000 | ) |
|      Proceeds from                common stock offering                                                                        |   |   |                                                                                             | **--** |   |   | -- |   |   | 53,607 |   |
|      Tax benefit                from the exercise of stock options                                                             |   |   |                                                                                             | **3,432** |   |   | -- |   |   | -- |   |
|      Proceeds from                exercise of stock options                                                                    |   |   |                                                                                             | **9,980** |   |   | 6,067 |   |   | 8,680 |   |
|                Net                Cash Provided Used by Financing Activities |   |   |                                                                                             | **(32,588** | **)** |   | (19,933 | ) |   | (28,713 | ) |
| NET INCREASE IN                CASH AND CASH EQUIVALENTS                                                                                                |   |   | **$**                                                                                            | **68,085** |   | $ | 13,294 |   | $ | 2,566 |   |
| CASH AND CASH                EQUIVALENTS, at beginning of period                                                                                        |   |   | **$**                                                                                            | **32,276** |   | $ | 18,982 |   | $ | 16,416 |   |
| CASH AND CASH                EQUIVALENTS, at end of period                                                                                              |   |   | **$**                                                                                            | **100,361** |   | $ | 32,276 |   | $ | 18,982 |   |
| Supplemental                disclosure of cash flow information:                                                                                        |   |   |                                                                                                  |  |  |  |  |  |  |  |  |
|      Cash paid                during the year for domestic and foreign income taxes                                            |   |   | **$**                                                                                            | **13,095** |   | $ | 2,654 |   | $ | 5,977 |   |
|      Cash paid                during the year for interest, net of amounts capitalized                                         |   |   | **$**                                                                                            | **1,822** |   | $ | 5,033 |   | $ | 7,705 |   |
|                                                                                                                                                         |        |        |                                                                                                  |

The        accompanying notes are an integral part of these consolidated financial        statements.

25

**Atwood        Oceanics, Inc. and Subsidiaries**

CONSOLIDATED STATEMENTS OF CHANGES IN

SHAREHOLDERS’ EQUITY

|                                          |
|------------------------------------------------------------------------|
|                                                                   |   |   |   |   | Total |
|                                                                   | Common Stock | Paid-in | Retained | Stockholders’ |
| (In                    thousands)                                      |                          Shares       |                         Amount     | Capital | Earnings | Equity |
|                                                                   |   |   |   |   |   |
| **September 30, 2004**                                                 | **27,746** | **$ 27,746** | **$ 44,044 ** | **$ 199,799** | **$ 271,589** |
| Net                    income                                          | - | - | -  | 26,011 | 26,011 |
| Exercise of employee stock options                                     | 586 | 586 | 8,094  | - | 8,680 |
| Common stock offering                                                  | 2,350 | 2,350 | 51,257  | - | 53,607 |
| Tax                    benefit from exercise of employee stock options | - | - | 2,250  | - | 2,250 |
| **September 30, 2005**                                                 | **30,682** | **$ 30,682** | **$ 105,645 ** | **$ 225,810** | **$ 362,137** |
| Net                    income                                          | - | - | -  | 86,122 | 86,122 |
| Restricted stock awards                                                | 5 | 5 | (5) | - | - |
| Exercise of employee stock options                                     | 359 | 359 | 5,708  | - | 6,067 |
| Stock option and restricted stock                                      |   |   |   |   |   |
|     award compensation expense                          | - | - | 4,568  | - | 4,568 |
| **September 30, 2006**                                                 | **31,046** | **$ 31,046** | **$ 115,916 ** | **$ 311,932** | **$ 458,894** |
| Net                    income                                          | - | - | -  | 139,024 | 139,024 |
| Restricted stock awards                                                | 7 | 7 | (7) | - | - |
| Exercise of employee stock options                                     | 622 | 622 | 9,358  | - | 9,980 |
| Stock option and restricted stock                                      |   |   |   |   |   |
|     award compensation expense                          |   |   | 5,005  |   | 5,005 |
| Tax                    benefit from exercise of employee stock options | - | - | 2,952  | - | 2,952 |
| **September 30, 2007**                                                 | **31,675** | **$ 31,675** | **$ 133,224 ** | **$ 450,956** | **$ 615,855** |

The        accompanying notes are an integral part of these consolidated financial        statements.

 

26

 

**Atwood        Oceanics, Inc. and Subsidiaries**

**NOTES        TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE 1        - NATURE OF OPERATIONS**

Atwood Oceanics, Inc., together with its subsidiaries (collectively referred        to herein as “we,” “our” or the “Company”), is engaged        in offshore drilling and completion of exploratory and developmental oil and gas wells and        related support, management and consulting services principally in international locations.        Presently, we own and operate a premium, modern fleet of eight mobile offshore drilling        units. Upon its expected delivery in October/November 2008, the ATWOOD AURORA will be our        ninth owned active mobile offshore drilling unit. Currently, we are involved in active        operations in the territorial waters of Australia, Malaysia, Thailand, India, Bulgaria,        Egypt, Equatorial Guinea and the United States.

**NOTE 2        - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

*Consolidation*

The consolidated financial statements include the accounts of Atwood        Oceanics, Inc. and all of its domestic and foreign subsidiaries. All significant        intercompany accounts and transactions have been eliminated in consolidation.

*Cash        and cash equivalents*

Cash and cash equivalents consist of cash in banks and highly liquid debt        instruments, which mature within three months of the date of purchase.

*Foreign        exchange*

The United States dollar is the functional currency for all areas of our        operations. Accordingly, monetary assets and liabilities denominated in foreign currency        are converted to United States dollars at the rate of exchange in effect at the end of the        fiscal year, items of income and expense are remeasured at average monthly rates, and        property and equipment and other nonmonetary amounts are remeasured at historical rates.        Gains and losses on foreign currency transactions and remeasurements are included in        contract drilling costs in our consolidated statements of operations. While we did not        record a foreign exchange gain or loss during fiscal year 2007, we did record a foreign        exchange loss of $0.1 million during fiscal year 2006 and a foreign exchange gain of $0.1        million during fiscal year 2005.

*Accounts Receivable*

We record trade accounts receivable at the amount we invoice our customers.        Our portfolio of accounts receivable is comprised of major international corporate entities        and government organizations with stable payment experience. Included within our accounts        receivable at September 30, 2007 is an unbilled receivable balance totaling $13.1 million        that represents amounts for which contract drilling services have been performed, revenue        has been earned based on contractual dayrate provisions and for which collection is deemed        probable. Such unbilled amounts were billed subsequent to the current fiscal year end.        Historically, our uncollectible accounts receivable have been immaterial, and typically, we        do not require collateral for our receivables. We provide an allowance for uncollectible        accounts, as necessary, on a specific identification basis. We had an allowance for        doubtful accounts of $0.2 million and $0.8 million, as of September 30, 2007 and 2006,        respectively.

*Insurance receivable*

We had an insurance receivable of $0.6 million as of September 30, 2006,        related to a claim filed as a result of damage sustained by the ATWOOD BEACON in July 2004        while positioning for a well offshore Indonesia. We collected the remaining receivable        during fiscal year 2007. See Note 4 for further discussion regarding the ATWOOD BEACON        incident.

 

27

 

*Inventories of Material and Supplies*

Inventories consist of spare parts, material and supplies held for        consumption and are stated principally at the lower of average cost or market, net of        reserves for excess and obsolete inventory of $1.2 million and $1.3 million at September        30, 2007 and 2006, respectively.

*Income        taxes*

We account for income taxes in accordance with Statement of Financial        Accounting Standards (“SFAS”) No. 109 “Accounting for Income        Taxes.” Under SFAS No. 109, deferred income taxes are recorded to reflect the tax        consequences on future years of differences between the tax basis of assets and liabilities        and their financial reporting amounts at each year-end given the provisions of enacted tax        laws in each respective jurisdiction. Deferred tax assets are reduced by a valuation        allowance when, based upon management’s estimates, it is more likely than not that a        portion of the deferred tax assets will not be realized in a future period.

*Property and equipment*

Property and equipment are recorded at cost. Interest costs related to        property under construction are capitalized as a component of construction costs. Interest        capitalized during fiscal years 2007 and 2006 was $2.6 million and $1.6 million,        respectively. We had no capitalized interest during fiscal year 2005.

Once a rig is placed in service, it is depreciated on the straight-line        method over its estimated useful life, with depreciation discontinued only during the        period when a drilling unit is out of service while undergoing a significant upgrade that        extends its useful life. Our estimated useful lives of our various classifications of        assets are as follows:

|                                                                    | Years         |
|-------------------------------------------------------------------------|---------------|
| Drilling vessels and related equipment

Drill pipe

Furniture and other | 5-25

3

3-10 |

         

Maintenance, repairs and minor replacements are charged against income as        incurred; major replacements and upgrades are capitalized and depreciated over the        remaining useful life of the asset as determined upon completion of the work. The cost and        related accumulated depreciation of assets sold, retired or otherwise disposed are removed        from the accounts at the time of disposition, and any resulting gain or loss is reflected        in the Consolidated Statements of Operations for the applicable period.

*Impairment of property and equipment*

We periodically evaluate our property and equipment to determine that their        net carrying value is not in excess of their net realizable value. These evaluations are        performed when we have sustained significant declines in utilization and dayrates and        recovery is not contemplated in the near future. We consider a number of factors such as        estimated future cash flows, appraisals and current market value analysis in determining an        asset’s fair value. Assets are written down to their fair value if the carrying        amount of the asset is not recoverable and exceeds its fair value.

*Deferred drydocking costs*

We defer the costs of scheduled drydocking and charge such costs to expense        over the period to the next scheduled drydocking (normally 30 months). At September 30,        2007 and 2006, deferred drydocking costs totaling $1.9 million and $0.6 million,        respectively, were included in Deferred Costs and Other Assets in the accompanying        Consolidated Balance Sheets.

 

28

 

*Revenue        recognition*

We account for drilling and management contract revenue in accordance with        the term of the underlying drilling or management contract. These contracts generally        provide that revenue is earned and recognized on a daily basis. We provide crewed rigs to        customers on a daily rate (i.e. “dayrate”) basis. Dayrate contracts can be for        a specified period of time or the time required to drill a specified well or number of        wells. Revenues from dayrate drilling operations, which are classified under contract        drilling services, are recognized on a per day basis as the work progresses. In addition,        business interruption proceeds are also recognized on a per day basis. See Note 4 for        further discussion of the ATWOOD BEACON incident.

*Deferred fees and costs*

Lump-sum fees received at commencement of the drilling contract as        compensation for the cost of relocating drilling rigs from one major operating area to        another, as well as equipment and upgrade costs reimbursed by the customer are recognized        as earned on a straight-line method over the term of the related drilling contract, as are        the dayrates associated with such contract. However, lump-sum fees received upon        termination of a drilling contract are recognized as earned during the period termination        occurs. In addition, we defer the mobilization costs relating to moving a drilling rig to a        new area and customer requested equipment purchases that will revert to the customer at the        end of the applicable drilling contract. We amortize such costs on a straight-line basis        over the life of the applicable drilling contract. Contract revenues and drilling costs are        reported in the Statements of Operations at their gross amounts.

At September 30, 2007 and 2006, deferred fees associated with mobilization        as well as equipment purchases and upgrades totaled $24.1 million and $23.7 million,        respectively. At September 30, 2007 and 2006, deferred costs associated with mobilization        and equipment purchases and deferred mobilization costs totaled $4.8 million and $9.0        million, respectively. Deferred fees and deferred costs are classified as current or        long-term in the accompanying Consolidated Balance Sheets based on the expected term of the        applicable drilling contracts.

*Share-based compensation*

Effective October 1, 2005, we adopted Statement of Financial Accounting        Standards No. 123(R), “Share-Based Payment”, or SFAS 123(R), using the modified        prospective application transition method. Under this method, stock-based compensation cost        is measured at the grant date, based on the calculated fair value of the award, and is        recognized as an expense over the requisite service period (generally the vesting period of        the equity grant). In addition, stock-based compensation cost recognized includes        compensation cost for unvested stock-based awards as of October 1, 2005. Prior to October        1, 2005, we accounted for share-based compensation in accordance with Accounting Principles        Board Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB        No. 25. No share-based employee compensation cost has been reflected in net income prior to        October 1, 2005. Before that date, we reported the entire tax benefit related to the        exercise of stock options as an operating cash flow. SFAS 123(R) requires us to report the        tax benefit from the tax deduction that is in excess of recognized compensation costs        (excess tax benefits) as a financing cash flow rather than as an operating cash flow. The        cumulative effect of the change in accounting principle from APB No. 25 to SFAS 123(R) was        not material. See Note 3 for additional information.

 

*Earnings per common share*

Basic and diluted earnings per share have been computed in accordance with        SFAS No. 128, “Earnings per Share” (EPS). “Basic” EPS excludes        dilution and is computed by dividing net income (loss) by the weighted-average number of        common shares outstanding for the period. “Diluted” EPS reflects the issuance        of additional shares in connection with the assumed conversion of stock options. Under the        modified prospective application transition method of SFAS 123(R), we have included the        impact of pro forma deferred tax assets in calculating the potential windfall and shortfall        tax benefits to determine the amount of diluted shares using the treasury stock        method.

 

29

 

The computation of basic and diluted earnings per share under SFAS No. 128        for each of the past three fiscal years is as follows (in thousands, except per share        amounts):

|             |                                        |   |                                               |                                           |          |
|------------------|---------------------------------------------|--------|----------------------------------------------------|------------------------------------------------|---------------|
|             |                                        |   |                                               |                                           | **Per Share** |
|             |                                        |   | **                     **Net Income** ** | **                     **Shares** ** | **Amount**    |
| **Fiscal 2007:** |                                        |   |                                               |                                           |          |
|             | Basic earnings per                    share |   | $ 139,024                                          | 31,343                                         | $ 4.44   |
|             | Effect of dilutive securities –       |   |                                               |                                           |          |
|             |    Stock options                  |   | -                                                  | 471                                            | (0.07)        |
|             | Diluted earnings per share                  |   | $ 139,024                                          | 31,814                                         | $ 4.37   |
| **Fiscal 2006:** |                                        |   |                                               |                                           |          |
|             | Basic earnings per                    share |   | $ 86,122                                           | 30,936                                         | $ 2.78   |
|             | Effect of dilutive securities –       |   |                                               |                                           |          |
|             |    Stock options                  |   | -                                                  | 506                                            | (0.04)        |
|             | Diluted earnings per share                  |   | $ 86,122                                           | 31,442                                         | $ 2.74   |
| **Fiscal 2005:** |                                        |   |                                               |                                           |          |
|             | Basic earnings per                    share |   | $ 26,011                                           | 30,412                                         | $ 0.86   |
|             | Effect of dilutive securities –       |   |                                               |                                           |          |
|             |    Stock options                  |   | -                                                  | 808                                            | (0.03)        |
|             | Diluted earnings per share                  |   | $ 26,011                                           | 31,220                                         | $ 0.83   |

The calculation of diluted earnings per share for the years ended September        30, 2006 excludes consideration of shares of common shares which may be issued in        connection with outstanding stock options of 125,200 because such options were        antidilutive. These options could potentially dilute basic EPS in the future. For the years        ended September 30, 2007 and 2005, there were no antidilutive options.

*Use of        estimates*

The preparation of financial statements in conformity with accounting        principles generally accepted in the United States requires management to make extensive        use of estimates and assumptions that affect the reported amounts of assets and liabilities        and disclosure of contingent assets and liabilities at the date of the financial statements        and the reported amounts of revenues and expenses during the reporting period. Actual        results could differ from those estimates.

**NOTE 3 -        SHARE-BASED COMPENSATION**

 

Effective October 1, 2005, we adopted SFAS 123(R), using the modified        prospective application transition method. Under this method, stock-based compensation cost        is measured at the grant date, based on the calculated fair value of the award, and is        recognized as an expense over the requisite service period (generally the vesting period of        the equity grant). In addition, stock-based compensation cost recognized includes        compensation cost for unvested stock-based awards as of October 1, 2005. Prior to October        1, 2005, we accounted for share-based compensation in accordance with APB No. 25. No        share-based employee compensation cost has been reflected in net income prior to        October 1, 2005. Before that date, we reported the entire tax benefit related to the        exercise of stock options as an operating cash flow. SFAS 123(R) requires us to report the        tax benefit from the tax deduction that is in excess of recognized compensation costs        (excess tax benefits) as a financing cash flow rather than as an operating cash flow. The        cumulative effect of the change in accounting principle from APB No. 25 to FAS 123(R) was        not material.

 

30

 

On December 7, 2006, our Board of Directors adopted, and our shareholders        subsequently approved on February 8, 2007, the Atwood Oceanics, Inc. 2007 Long-Term        Incentive Plan, which is referred to herein as the "2007 Plan." The effective date of the        2007 Plan was December 7, 2006, and awards may be made under the 2007 Plan through December        6, 2017. Under our 2007 Plan, up to 2,000,000 shares of common stock may be issued to        eligible participants in the form of restricted stock awards or upon exercise of stock        options granted pursuant to the 2007 Plan. We also have two other stock incentive plans,        the 2001 Plan and the 1996 Plan, under which there are outstanding stock options and        restricted stock awards. However, no additional options or restricted stock will be awarded        under the 2001 or 1996 plans.

         

A summary of share and stock option data for our three stock incentive plans        as of September 30, 2007 is as follows:

         

|                                         |                          |   |                                       |   |                                                                     |
|----------------------------------------------|-------------------------------|--------|--------------------------------------------|--------|--------------------------------------------------------------------------|
|                                         | 2007                          |   | 2001                                       |   | 1996                                                                     |
|                                         |    Plan   |   |     Plan     |   |                         Plan     |
|                                         |                          |   |                                       |   |                                                                     |
| Shares available for future awards or grants | 1,997,636                     |   | -                                          |   | -                                                                        |
| Outstanding stock option grants              | -                             |   | 737,638                                    |   | 143,750                                                                  |
| Outstanding unvested restricted stock awards | 2,364                         |   | 158,050                                    |   | -                                                                        |

 

Awards of restricted stock and stock options have both been granted under        our stock incentive plans as of September 30, 2007. We deliver newly issued shares of        common stock for restricted stock awards upon vesting and upon exercise of stock options.        All stock incentive plans currently in effect have been approved by the shareholders of our        outstanding common stock.

         

The recognition of share-based compensation expense had the following effect        on our consolidated statements of operations (in thousands, except per share        amounts):

         

|                                            |   |                                 |         |                              |
|-------------------------------------------------|--------|--------------------------------------|--------------|-----------------------------------|
|                                            |   | Year Ended September 30,             |
|                                            |   | **2007**                             |         | **2006**                          |
|                                            |   |                                 |         |                              |
| Increase in contract drilling expenses          |   | **$                    1,277 ** |         | **$    840 ** |
| Increase in general and administrative expenses |   | **3,728 **                      |    | **3,728 **                   |
| Decrease in income tax provision                |   | **(1,305)**                          |         | **(1,305)**                       |
| Decrease in net income                          |   | **3,700 **                      |         | **3,263 **                   |
|                                                 |   |                                 |         |                              |
| Decrease in earnings per share:                 |   |                                 |         |                              |
| Basic                                           |   | **$                    0.12 **  |         | **$ 0.11 **                  |
| Diluted                                         |   | **$                    0.12 **  |         | **$ 0.10 **                  |

         

 

31

 

We recognize compensation expense on grants of share-based compensation        awards on a straight-line basis over the required service period for each award.        Unrecognized compensation cost, net of estimated forfeitures, related to stock options and        restricted stock awards and the relating remaining weighted average service period is as        follows:

         

|                                              |   |                                                      |   |                                                      |
|---------------------------------------------------|--------|-----------------------------------------------------------|--------|-----------------------------------------------------------|
|                                              |   | September 30,                                             |
|                                              |   | **     2007    ** |   | **     2006    ** |
| Unrecognized Compensation Cost                    |   |                                                      |   |                                                      |
|      Stock options            |   | **$                    3,674**                            |   | **$ 4,546**                                               |
|      Restricted stock awards  |   | **3,902**                                                 |   | **2,710**                                                 |
| Total                                             |   | **$                    7,576**                            |   | **$ 7,256**                                               |
|                                              |   |                                                      |   |                                                      |
| Remaining weighted average service period (Years) |   | **2.1**                                                   |   | **2.4**                                                   |

         

**Stock        Options**

 

Under our stock incentive plans, the exercise price of each stock option        must be equal to or greater than the fair market value of one share of our common stock on        the date of grant, with all outstanding options having a maximum term of 10 years. Options        vest ratably over a period from the end of the first to the fourth year from the date of        grant under the 2007 and 2001 Plans and from the end of the second to the fifth year from        the date of grant under the 1996 Plan. Each option is for the purchase of one share of our        common stock.

 

The total fair value of stock options vested during years ended September        30, 2007, 2006 and 2005 was $2.1 million, $3.2 million and $2.9 million, respectively. The        per share weighted average fair value of stock options granted during years ended September        30, 2007, 2006 and 2005 was $23.64, $17.87 and $10.22, respectively. We estimated the fair        value of each stock option on the date of grant using the Black-Scholes pricing model and        the following assumptions:

         

|                    |                                                      |                                                      |                                                      |
|-------------------------|-----------------------------------------------------------|-----------------------------------------------------------|-----------------------------------------------------------|
|                    | **Fiscal**                                                | **Fiscal**                                                | **Fiscal**                                                |
|                    | **     2007    ** | **     2006    ** | **     2005    ** |
| Risk-Free Interest Rate | **4.53%**                                                 | **4.50%**                                                 | **4.27%**                                                 |
| Expected Volatility     | **45.96%**                                                | **41.62%**                                                | **35.00%**                                                |
| Expected Life (Years)   | **5.25**                                                  | **6**                                                     | **6**                                                     |
| Dividend Yield          | **None**                                                  | **None**                                                  | None                                                      |

         

The average risk-free interest rate is based on the five-year United States        treasury security rate in effect as of the grant date. We determined expected volatility        using a two to six year historical volatility figure and determined the expected term of        the stock options using 10 to 15 years of historical data. The expected dividend yield is        based on the expected annual dividend as a percentage of the market value of our common        stock as of the grant date.

 

32

 

A summary of stock option activity for years ended September 30, 2005, 2006        and 2007 is as follows:

         

|                                  |       |                                               |                                  |                                                                     |                                    |
|---------------------------------------|------------|----------------------------------------------------|---------------------------------------|--------------------------------------------------------------------------|-----------------------------------------|
|                                  |       |                                               |                                  | **Wtd. Avg.**                                                            |                                    |
|                                  |       |                                               | **Wtd. Avg.**                         | **Remaining**                                                            | **Aggregate**                           |
|                                  |       | **    Number of   ** | **   Exercise  ** | **Contractual**                                                          | **Intrinsic**                           |
|                                  |       | **Options**                                        | **Price**                             | **    Life                    (Years)   ** | ****Value                    (000s**)** |
| Outstanding at October 1, 2004        |       | 1,965,350                                     | $ 15.46                               |                                                                     |                                    |
| Granted                               |       | 340,000                                       | 25.16                                 |                                                                     |                                    |
| Exercised                             |       | (586,800)                                          | 14.69                                 |                                                                     | $                    10,095             |
| Forfeited                             |       | (15,250)                                           | 17.85                                 |                                                                     |                                    |
| Outstanding at September 30, 2005     |       | 1,703,300                                     | $                    17.64            | 6.5                                                                      | $                    42,342             |
| Exercisable at September 30, 2005     |       | 934,926                                       | $                    16.27            | 5.1                                                                      | $                    24,527             |
|                                  |       |                                               |                                  |                                                                     |                                    |
| Outstanding at October 1, 2005        |       | 1,703,300                                     | $                    17.64            |                                                                     |                                    |
| Granted                               |       | 130,300                                       | 38.21                                 |                                                                     |                                    |
| Exercised                             |       | (359,450)                                          | 16.93                                 |                                                                     | $                    10,184             |
| Forfeited                             |       | (37,200)                                           | 22.64                                 |                                                                     |                                    |
| Outstanding at September 30, 2006     |       | 1,436,950                                     | $                    19.56            | 6.4                                                                      | $                    36,518             |
| Exercisable at September 30, 2006     |       | 889,500                                       | $                    16.61            | 5.3                                                                      | $                    25,227             |
|                                  |       |                                               |                                  |                                                                     |                                    |
| **Outstanding at October 1, 2006**    |       | **1,436,950 **                                | **$ 19.56**                           |                                                                     |                                    |
| **Granted**                           | ** ** | **79,400 **                                   | **49.97**                             |                                                                     |                                    |
| **Exercised**                         | ** ** | **(621,874)**                                      | **16.05**                             | ** **                                                               | **$ 27,680**                            |
| **Forfeited**                         | ** ** | **(13,088)**                                       | **32.95**                             | ** **                                                               | ** **                              |
| **Outstanding at September 30, 2007** | ** ** | **881,388 **                                  | **$ 24.54**                           | **6.5**                                                                  | **$ 45,854**                            |
| **Exercisable at September 30, 2007** | ** ** | **480,245 **                                  | **$ 19.62**                           | **5.5**                                                                  | **$ 27,345**                            |

 

**Restricted Stock**

         

We have also awarded restricted stock to certain employees and to our        non-employee directors. The awards of restricted stock to employees are subject to three        year vesting. Awards of restricted stock to non-employee directors prior to March 2007        vested immediately while awards granted in March 2007 are subject to three year vesting.        All restricted stock awards granted to date are restricted from transfer for three years        from the date of grant, whether vested or unvested. We value restricted stock awards at        fair market value of our common stock on the date of grant.

 

A summary of restricted stock activity for the years ended September 30,        2006 and 2007 is as follows:

         

|                                                                                                                                                  |       |                                                          |                                                      |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------|-----------------------------------------------------------|
|                                                                                                                                                  |       | **   **Number                    of  **** | **   Wtd.                    Avg.  ** |
| ** **                                                                                                                                            | ** ** | **Shares**                                                    | **Fair                    Value**                         |
| Unvested at October 1, 2005                                                                                                                           |       | **- **                                                   |                                                      |
|                                                                                                                                                  |       |                                                          |                                                      |
| Granted                                                                                                                                               |       | 102,151                                                  | $ 38.46                                                   |
| Vested                                                                                                                                                |       | (5,151)                                                       |  46.57                                               |
| Forfeited                                                                                                                                             |       | (4,400)                                                       | 37.15                                                     |
| **Unvested at September 30,                    2006                ** |       | **92,600 **                                              | **$ 38.07**                                               |
|                                                                                                                                                  |       |                                                          |                                                      |
| Granted                                                                                                                                               |       | 78,314                                                   | $ 49.99                                                   |
| Vested                                                                                                                                                |       | (7,300)                                                       |  45.58                                               |
| Forfeited                                                                                                                                             |       | (3,200)                                                       |  45.96                                               |
| **Unvested at September 30, 2007**                                                                                                                    |       | **160,414 **                                             | **$ 43.39**                                               |

 

33

 

         

**Prior        Year Pro Forma Expense**

 

The following table illustrates the effect on net income and earnings per        share as if the fair value-based method provided by SFAS 123(R) had been applied for all        outstanding and unvested awards for periods prior to our adoption of SFAS 123(R) as of        October 1, 2005 (in thousands, except per share amounts):

         

|                                                                                                                                                                                                                                    |   |           |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
|                                                                                                                                                                                                                                    |   | Fiscal         |
|                                                                                                                                                                                                                                    |   | 2005           |
|                                                                                                                                                                                                                                    |   |           |
| Net income, as reported                                                                                                                                                                                                                 |   | $ 26,011  |
| Deduct: Total stock-based                                                                                                                                                                                                               |   |           |
|                           employee compensation                                                                                                                                                           |   |           |
|                           expense determined under fair                                                                                                                                                   |   |           |
|                           value based method for all                                                                                                                                                      |   |           |
|                           awards, net of related tax                    effects                                      |   | (1,671)        |
| Pro Forma, net income                                                                                                                                                                                                                   |   | $ 24,340  |
| Earnings per share:                                                                                                                                                                                                                     |   |           |
| Basic – as reported                                                                                                                                                                                                               |   | $ 0.86    |
| Basic – pro forma                                                                                                                                                                                                                 |   | $ 0.80    |
| Diluted – as reported                                                                                                                                                                                                             |   | $ 0.83    |
| Diluted – pro forma                                                                                                                                                                                                               |   | $ 0.78    |

**NOTE 4 - PROPERTY AND        EQUIPMENT**

A summary of property and equipment by classification is as follows (in        thousands):

|                                                                                                                                                       |                                                                         |   |                                                                                                              |                                                                                                                   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                       |                                                                         |   | September 30,                                                                                                     |
|                                                                                                                                                       |                                                                         |   | **                           2007        ** | **                           2006        ** |
| **Drilling vessels and related equipment**                                                                                                                 |                            |   |                                                                                                              |                                                                                                                   |
|                              Cost                                                                             |                                                                         |   | **$ 778,469 **                                                                                               | **$ 691,289 **                                                                                                    |
|                              Accumulated depreciation                                                         |                                                                         |   | **(292,790)**                                                                                                     | **(261,682)**                                                                                                          |
|                                         Net book value |                                                                         |   | **485,679 **                                                                                                 | **429,607 **                                                                                                      |
|                                                                                                                                                       |                                                                         |   |                                                                                                              |                                                                                                                   |
| **Drill Pipe**                                                                                                                                             |                                                                         |   |                                                                                                              |                                                                                                                   |
|                              Cost                                                                             |                                                                              |   | **15,587 **                                                                                                  | **13,271 **                                                                                                       |
|                              Accumulated depreciation                                                         |                                                                         |   | **(9,970)**                                                                                                       | **(8,257)**                                                                                                            |
|                     Net                    book value  |                                                                         |   | **5,617 **                                                                                                   | **5,014 **                                                                                                        |
|                                                                                                                                                       |                                                                         |   |                                                                                                              |                                                                                                                   |
| **Furniture and other**                                                                                                                                    |                                                                         |   |                                                                                                              |                                                                                                                   |
|                              Cost                                                                             |                                                                         |   | **9,211 **                                                                                                   | **7,920 **                                                                                                        |
|                              Accumulated depreciation                                                         |                                                                         |   | **(6,656)**                                                                                                       | (6,375**)**                                                                                                            |
|                                       Net book value             |                                                                         |   | **2,555 **                                                                                                   | **1,545 **                                                                                                        |
|                                                                                                                                                       |                                                                         |   |                                                                                                              |                                                                                                                   |
| **NET PROPERTY AND EQUIPMENT**                                                                                                                             |                                                                         |   | **$ 493,851 **                                                                                               | **$ 436,166 **                                                                                                    |

 

34

 

***ATWOOD BEACON -***

The ATWOOD BEACON incurred damage to all three legs and its derrick while        positioning for a well offshore of Indonesia in July 2004. The rig and its damaged legs        were transported to the builder’s shipyard in Singapore for inspections and repairs.        We had loss of hire insurance coverage of $70,000 per day up to 180 days, which began after        a 30-day waiting period commencing July 28, 2004. Revenue recognized from this insurance        coverage totaled approximately $7.7 million in fiscal year 2005 and is reflected as        business interruption proceeds on the Consolidated Statement of Operations. The rig        subsequently went back to work and continued to work through the beginning of fiscal year        2007, when we completed the remaining work to repair the rig, and recognized additional        loss of hire revenue of $2.6 million, which is reflected as business interruption proceeds        on the Consolidated Statement of Operations. As of September 30, 2007 and 2006, all costs        incurred to date and business interruption proceeds earned related to this incident had        been reimbursed by the insurance carrier.

 

**NOTE 5        – LONG-TERM DEBT**

A summary of long-term debt is as follows (in thousands):

         

|                                                                                                                                                                       |   |                                                                                                  |                                                                                                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                       |   | September 30,                                                                                         |
|                                                                                                                                                                       |   | **       2007                          ** | **     **** **                    2006        |
| Credit facility, bearing interest                                                                                                                                          |   |                                                                                                  |                                                                                                           |
|       (market adjustable) at                approximately 7% per                annum           |   |                                                                                                  |                                                                                                           |
|       at September 30, 2007 and                2006                                                                                               |        | **$                    18,000**                                                                       | **$ 64,000**                                                                                                   |
| Less                    - current maturities                                                                                                                               |   | **18,000**                                                                                            | **36,000**                                                                                                     |
|                                                                                                                                                                       |   | **$            -**                                  | **$ 28,000**                                                                                                   |
|                                                                                                                                                                       |   |                                                                                                  |                                                                                                           |

         

Our $250 million senior secured credit facility in place at September 30,        2007, consisted of a 5-year $150 million amortizing term loan facility and a 5-year $100        million non-amortizing revolving loan facility. The term portion of that credit facility        required quarterly payments of $9 million until maturity on April 1, 2008. The credit        facility permitted prepayment of principal at anytime without incurring a penalty. At        September 30, 2006, we had $54 million outstanding under the term portion of our credit        facility and $10 million outstanding under the revolving portion of our credit facility        while at September 30, 2007, we had $18 million outstanding under the term portion of our        credit facility and none outstanding under the revolving portion of our credit facility.        The collateral at September 30, 2007 for the credit facility consisted primarily of        preferred mortgages on all eight of our active drilling units (with an aggregate net book        value at September 30, 2007 totaling approximately $378 million). We were not required to        maintain compensating balances; however, we were required to pay a fee of approximately        0.60% per annum on the unused portion of the revolving portion of our credit facility and        certain other administrative costs.

The credit facility in place at September 30, 2007, contained financial        covenants, including but not limited to, requirements for maintaining certain net worth and        other financial ratios, and restrictions on disposing of any material assets, paying cash        dividends or repurchasing any of our outstanding common stock and incurring any additional        indebtedness in excess of $3 million. We were in compliance with all financial covenants at        September 30, 2007. Further, at all times during fiscal year 2005, 2006 and 2007 when we        were required to determine compliance with our financial covenants, we were in compliance        with the covenants. Aside from the financial covenants, no other provisions existed in the        credit facility that could have resulted in acceleration of the April 1, 2008 maturity        date.

         

The credit facility also supported issuance, when required, of standby        letters of credit. At September 30, 2007, standby letters of credit in the aggregate amount        of approximately $7.1 million were outstanding.

         

35

 

Subsequent to September 30, 2007, we entered into a new credit agreement        with several banks with Nordea Bank Finland PLC, New York Branch, as Administrative Agent        for the lenders, as well as Lead Arranger and Book Runner. The new credit agreement        provides for a secured 5-year $300,000,000 non-amortizing revolving loan facility with        maturity in October 2012, subject to acceleration upon certain specified events of        defaults, including breaches of representations or covenants. Loans under the new facility        will bear interest at varying rates ranging from 0.70% to 1.25% over Eurodollar        Rate**,**depending upon the ratio of        outstanding debt to earnings before interest, taxes and depreciation. The new credit        agreement supports the issuance, when required, of standby letters of credit. The standby        letters of credit previously outstanding under our prior credit facility were incorporated        into our new credit facility and are deemed issued thereunder.

         

The collateral for the new credit agreement consists primarily of preferred        mortgages on three of our active drilling units (ATWOOD EAGLE, ATWOOD HUNTER and ATWOOD        BEACON). The new credit agreement contains various financial covenants that, among other        things, require the maintenance of certain leverage and interest expense coverage ratios.        Under the new credit agreement, we are required to pay a fee ranging from 0.225% to 0.375%        per annum on the unused portion of the credit facility and certain other administrative        costs. The credit facility will provide funding for future growth opportunities and for        general corporate needs. As of November 27, 2007, no funds have been borrowed under the new        credit facility. In conjunction with the establishment of the new credit agreement, we        terminated our prior senior secured credit facility and repaid the remaining $18 million        outstanding in October 2007. We will write off the remaining unamortized loan costs of        approximately $0.4 million related to the prior credit facility in the first quarter of        fiscal year 2008.

 

**NOTE 6        - INCOME TAXES**

Domestic and foreign income before income taxes for the three-year period        ended September 30, 2007 is as follows (in thousands):

         

|                                      |                                  |                              |                              |
|-------------------------------------------|---------------------------------------|-----------------------------------|-----------------------------------|
|                                      | **Fiscal**                            | **Fiscal**                        | **Fiscal**                        |
|                                      | **2007**                              | **   2006  ** | **   2005  ** |
| Domestic income (loss)     | **$ 8,788                     ** | **$ 5,738  **                | $                    (45**)**     |
| Foreign income                            | **151,171                     ** | **86,098  **                 | **25,653 **                  |
|                                      | **$ 159,959  **                  | **$ 91,836  **               | **$ 25,608 **                |

         

The provision (benefit) for domestic and foreign taxes on income consists of        the following (in thousands):

|                                                                                                                 |                                 |                                                      |                             |
|----------------------------------------------------------------------------------------------------------------------|--------------------------------------|-----------------------------------------------------------|----------------------------------|
|                                                                                                                 | **Fiscal**                           | **Fiscal**                                                | **Fiscal**                       |
|                                                                                                                 | **   2007  **    | **     2006    ** | ** 2005   ** |
| Current - domestic                                                                                                   | **$                    3,432 ** | **$ 58  **                                           | **$ (3,278)**                    |
| Deferred -                    domestic              | **(1,921)**                          | **(392) **                                           | **(270)**                        |
| Current - foreign                                                                                                    | **19,672 **                     | **6,688  **                                          | **2,205 **                  |
| Deferred - foreign                                                                                                   | **(248)**                            | **(640) **                                           | **940 **                    |
|                                                                                                                 | **$ 20,935 **                   | **$ 5,714  **                                        | **$ (403)**                      |
|                                                                                                                 |                                 |                                                      |                             |
|                                                                                                                 |                                 |                                                      |                             |

         

36

 

The components of the deferred income tax assets (liabilities) as of        September 30, 2007 and 2006 are as follows (in thousands):

|                                                                                                                                                                                    |   |                                  |              |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-------------------|
|                                                                                                                                                                                    |   | September 30,                         |
|                                                                                                                                                                                    |   | **2007**                              | **2006**          |
| Deferred tax assets -                                                                                                                                                                   |   |                                  |              |
|      Net operating loss carryforwards                                                                                                                               |   | **$ 1,110                     ** | **$ 2,550 ** |
|      Tax credit carryforwards                                                                                                                                       |   | **708                     **     | **1,400 **   |
|      Stock option compensation expense                                                                                                                              |   | **1,944                     **   | **1,215 **   |
|      Book accruals                                                                                                                                                  |   | **266                     **     | **- **       |
|                                                                                                                                                                                    |   | **4,028  **                      | **5,165 **   |
| Deferred tax liabilities -                                                                                                                                                              |   |                                  |              |
|      Difference in book and tax basis of equipment                                                                                                                  |   | **(16,937) **                    | **(20,553)**      |
|      Unrecognized currency exchange gain                                                                                                                            |   | **(722) **                       | **-**             |
|                                                                                                                                                                                    |   | **(17,659) **                    | **(20,553)**      |
|                                                                                                                                                                                    |   |                                  |              |
| Net                    deferred tax liabilities before valuation                    allowance                |   | **(13,631) **                    | **(15,388)**      |
| Valuation allowance                                                                                                                                                                     |   | **(708) **                       | **(640)**         |
|                                                                                                                                                                                    |   | **$ (14,339) **                  | **$ (16,028)**    |
|                                                                                                                                                                                    |   |                                  |              |
| Net                    current deferred tax assets                                                                                                                                      |   | **$ 390                     **   | **$ 2,563 ** |
| Net                    noncurrent deferred tax liabilities                                                                                                                              |   | **(14,729)**                          | **(18,591)**      |
|                                                                                                                                                                                    |   | **$ (14,339)**                        | **$ (16,028)**    |
|                                                                                                                                                                                    |   |                                  |              |

The $1.1 million of net operating loss carryforward        (“NOL’s”), relates to the Australian NOL which does not expire.        Management does not expect that the tax credit carryforward of $0.7 million will be        utilized to offset future tax obligations before the credits begin to expire in 2012. Thus,        a corresponding $0.7 million valuation allowance is recorded as of September 30, 2007. An        analysis of the change in the valuation allowance during the current fiscal year is as        follows (in thousands):

|                                                                                                                                                                               |                                                                               |                     |                                                                   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------|--------------------------|------------------------------------------------------------------------|
|                                                                                                                                                                               |                                                                               |                     |                                                                   |
| Valuation Allowance as of September 30,                    2006                                    |                             |     $ 640 |                           |
|                                     Foreign tax credit carryforwards generated |                                                                               |  68                 |                                                                        |
| Valuation Allowance as of September 30, 2007                                                                                                                                       |                                                                               | $ 708                    |                                                                   |

Under SFAS 123(R), $7.3 million of United States NOL’s relates to        windfall tax benefits, which will not be realized or recorded until the deduction reduces        our United States income taxes payable. At such time, the amount will be recorded as an        increase to paid-in-capital. We apply the “with-and-without” approach when        utilizing certain tax attributes whereby windfall tax benefits are used last to offset        taxable income.

We do not record federal income taxes on the undistributed earnings of our        foreign subsidiaries that we consider to be permanently reinvested in foreign operations.        The cumulative amount of such undistributed earnings was approximately $128 million at        September 30, 2007. It is not practicable to estimate the amount of any deferred tax        liability associated with the undistributed earnings. If these earnings were to be remitted        to us, any United States income taxes payable would be substantially reduced by foreign tax        credits generated by the repatriation of the earnings. Such foreign tax credits totaled        approximately $57 million at September 30, 2007.

 

37

 

The differences between the United States statutory and our effective income        tax rate are as follows:

|                                                                                                                           | **    Fiscal   ** | **     Fiscal    ** | **    Fiscal    ** |
|--------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------|-------------------------------------------------------------|-------------------------------------------------------|
|                                                                                                                           | **2007**                                   | **2006**                                                    | **2005**                                              |
| Statutory income tax rate                                                                                                      | **35%**                                    | **35%**                                                     | **35%**                                               |
| Resolution of prior period tax items                                                                                           | **(1)   **                       | **(7)  **                                              | **(23)  **                                       |
| Decrease in tax rate resulting from -                                                                                          |                                       |                                                        |                                                  |
|    Foreign tax rate differentials, net                    of foreign tax credit utilization      | **(21)   **                      | **(22)  **                                             | **(14)  **                                       |
| Effective income tax rate                                                                                                      | **13%**                                    | **6%**                                                      | **(2%)**                                              |
|                                                                                                                           |                                       |                                                        |                                                  |

As a result of working in foreign jurisdictions, we earned a high level of        operating income earned in certain nontaxable and deemed profit tax jurisdictions which        significantly reduced our effective tax rate for fiscal years 2007, 2006 and 2005 when        compared to the United States statutory rate. There were no significant transactions that        impacted our effective tax rate from the current fiscal year; however, other significant        transactions that impacted our effective tax rate from prior fiscal years are as        follows:

         

We reversed a $1.8 million tax contingent liability due to the expiration of        the statute of limitations in a foreign jurisdiction during the third quarter of fiscal        year 2006. In addition, we were advised by a foreign tax authority that it had approved        acceptance of certain amended prior year tax returns. The acceptance of these amended tax        returns, along with the fiscal year 2005 tax return in this foreign jurisdiction, resulted        in the recognition of a $4.6 million tax benefit in the third quarter of fiscal year        2006.

         

During the first quarter of fiscal year 2005, we received a $1.7 million tax        refund in Malaysia related to a previously reserved tax receivable. A $1.0 million deferred        tax benefit was recognized in June 2005 due to the filing and subsequent acceptance by the        local tax authority, of amended prior year tax returns. We received notification from the        United States Department of Treasury that a previously reserved United States income tax        refund we had been pursuing for over two years had been approved for payment. Based upon        this approval, we reduced our income tax provision by the refund amount of $3.3 million for        the year ended September 30, 2005.

         

During July 2007, we were notified by the Malaysian tax authorities        regarding a potential proposed adjustment relating to fiscal years 2000 to 2003. Although        we believe we are in compliance with applicable rules and regulations, we are currently        evaluating the merit of the assertions by the Malaysian tax authorities and currently plan        to vigorously contest these assertions. While we cannot predict or provide assurance as to        the final outcome of these allegations, we do not expect them to have a material adverse        effect on our consolidated financial position, results of operations or cash        flows.

         

**NOTE 7        - CAPITAL STOCK**

*Preferred Stock*

In 1975, 1,000,000 shares of preferred stock with no par value were        authorized. In October 2002, we designated Series A Junior Participating Preferred Stock.        No preferred shares have been issued.

 

38

 

*Common        Stock*

In February 2006, our shareholders approved a proposal to increase the        authorized shares of our common stock from 20,000,000 shares to 50,000,000        shares.

*Rights        Agreement*

In September 2002, we authorized and declared a dividend of one Right (as        defined in Rights Agreement effective October 18, 2002, which governs the Rights) for each        outstanding share of common stock as of November 5, 2002, subject to lender approval and        consent, which was obtained. One Right will also be associated with each share of common        stock that becomes outstanding after November 5, 2002 but before the earliest of the        Distribution Date, the Redemption Date and the Final Expiration Date (as defined in Rights        Agreement). The Rights are not exercisable until a person or group of affiliated or        associated persons begin to acquire or acquires beneficial ownership of 15 percent or more        of our outstanding common stock. This provision does not apply to shareholders already        holding 15 percent or more of our outstanding common stock as of November 5, 2002 until        they acquire an additional 5 percent.

In connection with our 2006 stock split, and in accordance with the Rights        Agreement, we decreased from one one-thousandth to one two-thousandth of a share the number        of shares of our Series A Junior Participating Preferred Stock, no par value, purchasable        at a price of $150 upon the exercise of each Right, when exercisable. The redemption price        of the Rights was also decreased from $0.01 to $0.005 in connection with the stock split.        The Rights are subject to further adjustment for certain future events including any future        stock splits. The Rights will expire on November 5, 2012. At September 30, 2007, 500,000        preferred shares have been reserved for issuance in the event that Rights are        exercised.

         

**NOTE 8        - RETIREMENT PLANS**

We have two contributory retirement plans (the “Plans”) under        which qualified participants may make contributions, which together with our contributions,        can be up to 100% of their compensation, as defined, to a maximum of $40,000. After six        consecutive months of service, an employee can elect to become a participant in a Plan.        Participants must contribute from 1 to 5 percent of their earnings as a required        contribution (“the basic contribution”). We make contributions to the Plans        equal to twice the basic contributions. Our contributions vest 100% to each participant        after three years of service with us including any period of ineligibility mandated by the        Plans. If a participant terminates employment before becoming fully vested, the unvested        portion is credited to our account and can be used only to offset our future contribution        requirements. During fiscal years 2007, 2006 and 2005, no forfeitures were utilized to        reduce our cash contribution requirements. In fiscal years 2007, 2006 and 2005, our actual        cash contributions totaled approximately $3.5 million, $3.1 million and $2.7 million,        respectively. As of September 30, 2007, there were approximately $0.2 million of        contribution forfeitures, which can be utilized to reduce our future cash contribution        requirements.

         

**NOTE 9        - FAIR VALUE OF FINANCIAL INSTRUMENTS**

The carrying values of cash and cash equivalents, accounts receivable,        accounts payable and accrued liabilities included in the accompanying Consolidated Balance        Sheets approximate fair value due to the short maturity of these instruments. Since our        prior credit facility (as described in Note 5) had a market adjustable interest rate, the        carrying value approximated fair value as of September 30, 2007 and 2006.

 

 

39

 

**NOTE 10        - CONCENTRATION OF MARKET AND CREDIT RISK**

All of our customers are in the oil and gas offshore exploration and        production industry. This industry concentration has the potential to impact our overall        exposure to market and credit risks, either positively or negatively, in that our customers        could be affected by similar changes in economic, industry or other conditions. However, we        believe that the credit risk posed by this industry concentration is offset by the        creditworthiness of our customer base.

Revenues from significant customers from the prior three fiscal years are as        follows (in thousands):

|                                                                                                |                      |                              |                            |
|-----------------------------------------------------------------------------------------------------|---------------------------|-----------------------------------|---------------------------------|
|                                                                                                | **Fiscal**                | **Fiscal**                        | **Fiscal**                      |
|                                                                                                | **  2007 **     | **   2006  ** | **2005**                        |
|                                                                                                |                      |                              |                            |
| Woodside Energy Ltd.                                                                                | **   $ 68,032** | **   $ 78,442**         | **    $ 30,757** |
| BHP Billiton Petoleum PTY                                                                           | **53,410**                | **5,151**                         | **9,070**                       |
| Sarawak Shell Bhd.                                                                                  | **50,502**                | **32,841**                        | **24,446**                      |
| Burullus Gas Company                                                                                | **12,991**                | **39,053**                        | **22,118**                      |
| Hoang Long & Hoan Vu Joint Operating                    Companies      | **2,800**                 | **32,114**                        | **16,557**                      |

**NOTE        11 – COMMITMENTS AND CONTINGENCIES**

*OPERATING LEASES*

Future minimum lease payments for operating leases for fiscal years ending        September 30 are as follows (in thousands):

|   | 2008 | $  1,644 |
|--------|------|---------------|

|   | 2009 |     1,029 |
|--------|------|--------------------------|

|   | 2010 |    854 |
|--------|------|------------------|

|   | 2011 |    842 |
|--------|------|------------------|

|   | 2012 and thereafter |    2,730 |
|--------|---------------------|--------------------|

         

Total rent expense under operating leases was approximately $3.6 million,        $3.5 million and $1.8 million for fiscal years ended September 30, 2007, 2006, and 2005,        respectively.

*LITIGATION*

We are party to a number of lawsuits which are ordinary, routine litigation        incidental to our business, the outcome of which, individually, or in the aggregate, is not        expected to have a material adverse effect on our financial position, results of operations        or cash flows.

 

**NOTE 12        – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS**

In June 2006, the Financial Accounting Standards Board issued FIN 48,        “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement        109.”  FIN 48 prescribes a comprehensive model for recognizing, measuring,        presenting, and disclosing uncertain tax positions within the financial statements.         The provisions of FIN 48 are effective for fiscal years beginning after December 15,        2006.  While we are stillfinalizing our evaluation of theimpactof the adoption        of FIN 48, we believethe adoption will result in a        decrease to shareholders equity of approximately $4 to $5 million at October 1,        2007.

40

 

In February 2007, the FASB issued SFAS No. 159, “The Fair        Value Option for Financial Assets and Financial Liabilities”, which provides        companies with an option to report selected financial assets and liabilities at fair value        and establishes presentation and disclosure requirements to facilitate comparisons between        companies that choose different measurement attributes for similar types of assets and        liabilities. GAAP has required different measurement attributes for different assets and        liabilities that can create artificial volatility in earnings. The objective of SFAS No.        159 is to help mitigate this type of volatility in the earnings by enabling companies to        report related assets and liabilities at fair value, which would likely reduce the need for        companies to comply with complex hedge accounting provisions. SFAS No. 159 is effective for        fiscal years beginning after November 15, 2007. We are currently analyzing the        provisions of SFAS No. 159 and determining how it will affect accounting policies and        procedures, but we have not yet made a determination of the impact the adoption will have        on our consolidated financial position, results of operations and cash flows.

         

In September 2005, the FASB issued SFAS No. 157, “Fair Value        Measurements”, which defines fair value, establishes methods used to measure fair        value and expands disclosure requirements about fair value measurements. SFAS No. 157 is        effective for financial statements issued for fiscal years beginning after November 15,        2007, and interim periods within those fiscal periods. We are currently analyzing the        provisions of SFAS No. 157 and determining how it will affect accounting policies and        procedures, but we have not yet made a determination of the impact the adoption will have        on our consolidated financial position, results of operations and cash flows.

 

**NOTE 13        - OPERATIONS BY GEOGRAPHIC AREAS**

We are engaged in offshore contract drilling. Our contract drilling        operations consist of contracting owned or managed offshore drilling equipment primarily to        major oil and gas exploration companies. Operating income is contract revenues less        operating costs, general and administrative expenses and depreciation. In computing        operating income (expense) for each geographic area, other income (expense) and domestic        and foreign income taxes were not considered. Total assets are those assets that we use in        operations in each geographic area.

 

41

 

A summary of revenues and operating margin for the fiscal years ended        September 30, 2007, 2006 and 2005 and identifiable assets by geographic areas as of        September 30, 2007, 2006 and 2005 is as follows (in thousands):

|                                                                                                       |                                          |                                               |                                              |
|------------------------------------------------------------------------------------------------------------|-----------------------------------------------|----------------------------------------------------|---------------------------------------------------|
|                                                                                                       | **Fiscal**                                    | **Fiscal**                                         | **Fiscal**                                        |
|                                                                                                       | **2007**                                      | **2006**                                           | **2005**                                          |
| **REVENUES:**                                                                                              |                                          |                                               |                                              |
| United States                                                                                              | **$ 29,484**                                  | **$ 20,249**                                       | **$ 11,869**                                      |
| Southeast Asia & India                                                                                 | **130,390**                                   | **99,884**                                         | **100,631**                                       |
| Mediterranean & Black Sea                                                                              | **112,385**                                   | **68,970**                                         | **23,829**                                        |
| Africa                                                                                                     | **65,893**                                    | **27,676**                                         | **-**                                             |
| Australia                                                                                                  | **64,885**                                    | **59,846**                                         | **39,827**                                        |
|                                                                                                       | **   $                    403,037** | **       $ 276,625** | **$ 176,156**                                     |
|                                                                                                       |                                          |                                               |                                              |
| **OPERATING INCOME (EXPENSE):**                                                                            |                                          |                                               |                                              |
| United States                                                                                              | **$ 8,484**                                   | **$ 6,778**                                        | **$ (622)**                                       |
| Southeast Asia & India                                                                                 | **106,544**                                   | **68,875**                                         | **45,432**                                        |
| Mediterranean & Black Sea                                                                              | **27,471**                                    | **25,592**                                         | **2,142**                                         |
| Africa                                                                                                     | **27,528**                                    | **4,768**                                          | **-**                                             |
| Australia                                                                                                  | **13,109**                                    | **10,393**                                         | **(380)**                                         |
| Coporate general and administrative                    expenses         | **(23,929)**                                  | (20,630**)**                                       | **(14,245)**                                      |
|                                                                                                       | **$ 159,207**                                 | **$ 95,776**                                       | **       $ 32,327** |
|                                                                                                       |                                          |                                               |                                              |
| **TOTAL ASSETS:**                                                                                          |                                          |                                               |                                              |
| United States                                                                                              | **$ 182,687**                                 | **$ 69,651**                                       | **$ 32,583**                                      |
| Southeast Asia & India                                                                                 | **241,754**                                   | **241,655**                                        | **302,354**                                       |
| Mediterranean & Black Sea                                                                              | **126,214**                                   | **42,447**                                         | **36,980**                                        |
| Africa                                                                                                     | **36,074**                                    | **117,760**                                        | **980**                                           |
| Australia                                                                                                  | **121,968**                                   | **117,637**                                        | **115,523**                                       |
| General corporate and other                                                                                | **9,027**                                     | **4,679**                                          | **7,274**                                         |
|                                                                                                       | **$ 717,724**                                 | **$ 593,829**                                      | **$ 495,694**                                     |
|                                                                                                       |                                          |                                               |                                              |

         

42

 

**NOTE        14 - QUARTERLY FINANCIAL DATA (UNAUDITED)**

Summarized quarterly results for fiscal years 2007 and 2006 are as follows        (in thousands, except per share amounts):

         

|                                                                                |                                                   |                                                       |                                               |                                                    |
|-------------------------------------------------------------------------------------|--------------------------------------------------------|------------------------------------------------------------|----------------------------------------------------|---------------------------------------------------------|
|                                                                                | **QUARTERS ENDED**(1)                                  |
|                                                                                |                                                   |                                                       |                                               |                                                    |
|                                                                                | **  December                    31,  ** | **   March 31,                      ** | **  June                    30,  ** | **  September                    30,  ** |
| Fiscal 2007                                                                         |                                                   |                                                       |                                               |                                                    |
| Revenues                                                                            | $ 88,800                                               | $ 94,262                                                   | $ 98,371                                           | $ 121,604                                               |
| Income before income taxes                                                          | 24,463                                                 | 37,618                                                     | 36,569                                             | 61,309                                                  |
| Net                    income                                                       | 21,085                                                 | 31,757                                                     | 32,033                                             | 54,149                                                  |
| Earnings per common share -                           |                                                   |                                                       |                                               |                                                    |
| Basic                                                                               | 0.68                                                   | 1.02                                                       | 1.02                                               | 1.71                                                    |
| Diluted                                                                             | 0.67                                                   | 1.01                                                       | 1.00                                               | 1.69                                                    |
|                                                                                |                                                   |                                                       |                                               |                                                    |
| Fiscal 2006                                                                         |                                                   |                                                       |                                               |                                                    |
| Revenues                                                                            | $ 55,414                                               | $ 67,529                                                   | $ 71,865                                           | $ 81,817                                                |
| Income before income taxes                                                          | 17,027                                                 | 18,318                                                     | 28,606                                             | 27,885                                                  |
| Net                    income                                                       | 14,523                                                 | 15,629                                                     | 32,791                                             | 23,179                                                  |
| Earnings per common share -                                                         |                                                   |                                                       |                                               |                                                    |
| Basic                                                                               | 0.47                                                   | 0.51                                                       | 1.06                                               | 0.75                                                    |
| Diluted                                                                             | 0.47                                                   | 0.50                                                       | 1.04                                               | 0.74                                                    |
|                                                                                |                                                   |                                                       |                                               |                                                    |

 

**_____**

|   | (1) | The sum of the individual quarterly net income per common                        share amounts may not agree with year-to-date net income per common share                        as each quarterly computation is based on the weighted average number of                        common shares outstanding during that period. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

43

 

| DIRECTORS

DEBORAH A. BECK (2, 3, 4)

Corporate Executive, Retired

Milwaukee, Wisconsin

ROBERT W. BURGESS (2, 3, 4)

Financial Executive, Retired

Orleans, Massachusetts

GEORGE S. DOTSON (1, 2, 3, 4)

Corporate Executive, Retired

Tulsa, Oklahoma

HANS HELMERICH (1, 4)

President, Chief Executive Officer

Helmerich & Payne, Inc.

Tulsa, Oklahoma

JOHN R. IRWIN (1)

President, Chief Executive Officer

Atwood Oceanics, Inc.

Houston, Texas

JAMES M. MONTAGUE (3, 4)

Corporate Executive, Retired

Houston, Texas

                         

WILLIAM J. MORRISSEY (2, 4)

Bank Executive, Retired

Elkhorn, Wisconsin

(1) Executive Committee

(2) Audit Committee

(3) Compensation Committee

(4) Nominating & Corporate Governance                        Committee

                         

___________________________________________

                          | OFFICERS

JOHN R. IRWIN

President, Chief Executive Officer

JAMES M. HOLLAND

Senior Vice President, Chief Financial Officer                        and

Secretary

GLEN P. KELLEY

Senior Vice President - Marketing and                        Administration

DARRYL SMITH

Vice President - Operations

ALAN QUINTERO

Vice President - Engineering

                          |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

44

 

**ANNUAL        MEETING**

The annual meeting of stockholders will be held at 10:00 A.M., Central        Standard Time, on Thursday, February 14, 2008 at our principal office: 15835 Park Ten Place        Drive, Houston, Texas, 77084. A formal notice of the meeting together with a proxy        statement and form of proxy will be mailed to stockholders on or about January 15,        2008.

**TRANSFER AGENT AND REGISTRAR**

Continental Stock Transfer & Trust Company

2 Broadway

New York, New York 10004

**FORM        10-K**

A copy of our Form 10-K to which this Annual Report is an exhibit is filed        with the Securities and Exchange Commission and is available free on request by writing        to:

Secretary, Atwood Oceanics, Inc.

P. O. Box 218350

Houston, Texas 77218

We file our annual report on Form 10-K, quarterly and current reports, proxy        statements, and other information with the SEC. Our annual report on Form 10-K for the year        ended September 30, 2007 includes as exhibits all required Sarbanes-Oxley Act Section 302        certifications by our CEO and CFO regarding the quality of our public disclosure. Our SEC        filings are available to the public over the internet at the SEC’s web site at        http://www.sec.gov. Our website address is www.atwd.com. We make available free of charge        on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q,        and current reports on Form 8-K, and amendments to those reports filed or furnished        pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable        after we electronically file such material with, or furnish it to, the SEC. Information on        our website is not incorporated by reference into this report or made a part hereof for any        purpose. You may also read and copy any document we file, including our Form 10-K, at the        SEC’s Public Reference Room at 100F Street, NE, Washington, DC 20549. Please call the        SEC at 1-800-SEC-0330 for further information on the public reference rooms and copy        charges.

Each year, our CEO must certify to the NYSE that he is not aware of any        violations of NYSE corporate governance listing standards by us. Our CEO’s        certification for fiscal year 2006 was submitted to the NYSE during fiscal year 2007, and        our CEO will certify fiscal year 2007 during fiscal year 2008.

**STOCK        PRICE INFORMATION -**

The common stock of Atwood Oceanics, Inc. is traded on the New York Stock        Exchange (“NYSE”) under the symbol “ATW”. No cash dividends on        common stock were paid in fiscal year 2006 or 2007, and none are anticipated in the        foreseeable future. We have approximately 10,700 beneficial owners of our common stock        based upon information provided to us by a third party shareholder services provider dated        November 20, 2007. As of November 27, 2007, the closing sale price of the common stock of        Atwood Oceanics, Inc., as reported by NYSE, was $76.22 per        share. The following table sets forth the range of high and low sales prices per share of        common stock as reported by the NYSE for the periods indicated.

|                                                                  | **Fiscal**                                                                    |                                                         | **Fiscal**                                                                   |
|-----------------------------------------------------------------------|-------------------------------------------------------------------------------|--------------------------------------------------------------|------------------------------------------------------------------------------|
|                                                                  |       **2007**                        |                                                         |                         **2006**     |
| Quarters                    Ended       | Low                                                                           |       High      |                                                                         | Low |      High     |
| December 31                                                           |   $ 40.72                                                                | $                    52.12                                   |                                                                         | $                    32.55    | $                    42.75 |
| March 31                                                              | 43.77                                                                         |   58.97                                                 |                                                                         | 39.90 | 51.66 |
| June                    30                                            | 58.11                                                                         |  70.12                                                  |                                                                         | 42.29 | 58.44 |
| September 30                                                          | 61.02                                                                         |  81.60                                                  |                                                                         | 39.86 | 50.64 |
|                                                                  |                                                                          |                                                         |                                                                         |   |   |

         

45

 

**COMMON        STOCK PRICE PERFORMANCE GRAPH**

 

Below is a comparison of five (5) year cumulative total returns* among        Atwood Oceanics, Inc. and the center for research in security prices (“CRSP”)        index for the NYSE/AMEX/NASDAQ stock markets, and our self-determined peer group of        drilling companies.

 

|                                                                                   |                                            |                                      |                          |                          |                          |                          |
|----------------------------------------------------------------------------------------|-------------------------------------------------|-------------------------------------------|-------------------------------|-------------------------------|-------------------------------|-------------------------------|
| **GRAPH**                                                                              |
|                                                                                   |                                            |                                      |                          |                          |                          |                          |
|                                                                                   | **Fiscal Year Ended September 30,**   |
| CRSP Total Returns Index for:                                                          |     2002          |     2003    |    2004   |    2005   |    2006   |    2007   |
|                                                                                   |                                            |                                      |                          |                          |                          |                          |
| Atwood Oceanics, Inc.                                                                  | 100.0                                           | 82.0                                      | 162.5                         | 287.9                         | 307.5                         | 523.5                         |
| NYSE/AMEX/Nasdaq Stock Markets                           | 100.0                                           | 126.6                                     | 144.9                         | 165.9                         | 183.1                         | 213.3                         |
| (US                    Companies)                                                      |                                            |                                      |                          |                          |                          |                          |
| Self-determined Peer Group                                                             | 100.0                                           | 107.4                                     | 151.9                         | 240.6                         | 260.3                         | 389.1                         |

Constituents of the Self-Determined Peer Group (weighted according to market        capitalization):

 

| Diamond Offshore Drilling, Inc. | GlobalSantaFe Corporation | Rowan Companies, Inc. | Transocean, Inc. |
|---------------------------------|---------------------------|-----------------------|------------------|

| ENSCO International, Inc. | Noble Corporation | Pride International, Inc. |
|---------------------------|-------------------|---------------------------|

 

 

* Assumptions: (1) $100 invested on September 30, 2002; (2) dividends, if        any, were reinvested; and (3) a September 30 fiscal year end.

 

46

 

| **BAR CHART - REVENUES ($ MILLIONS)**               |
|-----------------------------------------------------|
| 2003                                                | 2004 | 2005 | 2006 | 2007 |
| $144.8                                              | $163.5 | $176.2 | $276.6 | $403.0 |
|                                 |
| **BAR CHART - CAPITAL EXPENDITURES ($ MILLIONS)**   |
| 2003                                                | 2004 | 2005 | 2006 | 2007 |
| $101.8                                              | $6.5 | $25.6 | $78.5 | $91.3 |
|                                 |
| **BAR CHART – OPERATING INCOME ($ MILLIONS)** |
| 2003                                                | 2004 | 2005 | 2006 | 2007 |
| $6.5                                                | $21.5 | $32.3 | $95.8 | $159.2 |
|                                 |
| **BAR CHART - NET INCOME (LOSS) ($ MILLIONS)**      |
| 2003                                                | 2004 | 2005 | 2006 | 2007 |
| ($12.8)                                             | $7.6 | $26.0 | $86.1 | $139.0 |

 

 

47