ATWOOD OCEANICS, INC.

2004 ANNUAL REPORT

2004 ANNUAL REPORT TO SHAREHOLDERSTHE COMPANY

We are engaged in the international offshore drilling and completion of

exploratory and developmental oil and gas wells and related support, manage-

ment and consulting services. Presently, we own and operate a premium, modern

fleet of eight mobile offshore drilling units as well as manage the operations of

two operator-owned platform drilling units in Northwest Australia. We also own a

semisubmersible hull, named the SEASCOUT, which we plan to convert to a

tender assist vessel once an acceptable contract opportunity is secured. From

fiscal year 1997 to 2003, we have invested approximately $460 million in

upgrading seven mobile offshore drilling units and constructing an ultra-premium

jack-up unit. We support our operations from our Houston headquarters and

offices located in Australia, Malaysia, Egypt, Indonesia, Singapore and the United

Kingdom.

FINANCIAL HIGHLIGHTS

2004 2003

(In Thousands)

FOR THE YEAR ENDED SEPTEMBER 30:

REVENUES $163,454 $144,765

NET INCOME (LOSS) 7,587 (12,802)

CAPITAL EXPENDITURES 6,527 101,819

AT SEPTEMBER 30:

NET PROPERTY AND EQUIPMENT $401,141 $443,102

TOTAL ASSETS 498,936 522,674

TOTAL SHAREHOLDERS’ EQUITY 271,589 263,467

2

0

20

40

60

80

100

120

140

160

180

2003 2004200220012000

0

8

16

24

32

40

48

56

64

2003 2004200220012000-15

-10

-5

0

5

10

15

20

25

30

2003 2004200220012000

0

10

20

30

40

50

60

70

80

90

100

110

2003 2004200220012000

CONTRACT REVENUES($ MILLIONS)

NET INCOME (LOSS)($ MILLIONS)

CAPITAL EXPENDITURES($ MILLIONS)

OPERATING INCOME($ MILLIONS)

PRESIDENT’S MESSAGE

TO OUR SHAREHOLDERS AND EMPLOYEES:

During fiscal year 2004, we returned to profitability with a net income of approximately $8 million or$.54 per diluted share after incurring our first loss in ten years in fiscal year 2003. The past year has alsobeen positive in other respects with a recent successful stock offering enabling us to strengthen our balancesheet by reducing our outstanding long-term debt, an equipment utilization rate of 93%, continuing highstandards of safety, health, environmental and security performance and recent activity in the offshoreindustry that indicates an improving market.

With our fleet’s improved capability and competitiveness, we are now well-positioned to benefit frommarket improvements. Our $460 million major capital program which commenced in fiscal year 1997 toupgrade seven existing units and construct a new unit was successfully completed last year. We now haveeight premium offshore units, targeted to meet our clients’ future needs, available to operate and takeadvantage of the upside from an improving market environment. Our strategy continues to focus onproviding premium equipment and safe, quality services in attractive international markets based on long-standing client relationships. We believe this strategy, our current positioning in four key markets, and theability to take advantage of attractive international opportunities will provide attractive financial returns overthe longer term.

For fiscal year 2004, our short-term goals were (1) to strive for full utilization of our fleet, (2) to staystrong in all respects and (3) to be well-positioned to benefit from longer-term market improvements andopportunities. We believe those goals were accomplished. Our current contract backlog provides theopportunity to seek improving dayrates in late fiscal year 2005 and into fiscal year 2006.

Of our current drilling contracts, the VICKSBURG has the only contract term that extends beyond fiscalyear 2005, with the contract term for the ATWOOD HUNTER expected to extend to the end of fiscal year2005. We expect options to be exercised on the ATWOOD EAGLE, ATWOOD FALCON and ATWOODBEACON that could also extend those contracts through fiscal year 2005. Despite not currently having long-term commitments, we are pursuing opportunities that should keep the RICHMOND, in the Gulf of Mexico,and the ATWOOD SOUTHERN CROSS, in Southeast Asia, highly utilized during fiscal year 2005. TheSEAHAWK has commenced a short-term drilling program in Malaysia which is expected to extend to theend of January 2005. Contract opportunities for the SEAHAWK, following that work, are being pursued inSoutheast Asia and West Africa for fiscal years 2005 and 2006.

At the beginning of fiscal year 2004, world-wide utilization of offshore drilling units was less than 80%and today it is around 85%. We believe that oil and gas demand fundamentals and the potential forincreasing exploration and development expenditures support further market improvement, increasingworldwide utilization and higher dayrates.

We are pleased and proud of the Company’s performance during fiscal year 2004 which was achievedthrough the hard work and talent of our employees around the world. Our achievement of safe operationsand value-adding performance during the year has been recognized by our clients. Being responsive to ourclients’ needs and building longer-term client relationships are the cornerstones of our endeavor to be apreferred provider of offshore drilling and completion services.

We look forward to the challenges and opportunities ahead and will continue striving to reward theconfidence and trust of our shareholders and our other stakeholders.

JOHN R. IRWIN

3

4

RICHMOND

SEASCOUT

Corporate Headquarters

Office / Shorebase

Rig*

Legend

Great Yarmouth

WORLD WIDE

* Rig locations are as of December 10, 2004

5

ATWOOD EAGLE

VICKSBURG

SEAHAWK

ATWOOD FALCON

ATWOOD SOUTHERN CROSS

ATWOOD BEACON

ATWOOD HUNTER

Jakarta

Kuala Lumpur

Singapore

Perth

Melbourne

NORTH RANKIN ‘A’GOODWYN ‘A’

Cairo

OPERATIONS

6

ATWOOD SOUTHERN CROSSIN EARLY FISCAL YEAR 2004, THE ATWOODSOUTHERN CROSS WAS MOVED FROM THEMEDITERRANEAN SEA TO SOUTHEAST ASIA.THE RIG’S CURRENT DRILLING COMMITMENTSCOULD EXTEND INTO MAY 2005. SINCEJANUARY 2001, THE RIG HAS BEEN HIGHLYUTILIZED WHILE WORKING FOR TENOPERATORS IN SIX COUNTRIES.

ATWOOD RICHMONDFOR MANY YEARS, THE RICHMOND HASBEEN A HIGHLY UTILIZED DRILLING UNIT INTHE GULF OF MEXICO. THE RIG IS DESIGNEDTO OPERATE IN SHALLOW WATER DEPTHSRANGING FROM 9 TO 70 FEET AND CANOPERATE IN MODERATELY SEVERE SEACONDITIONS. THE RIG’S CURRENT DRILLINGCOMMITMENT COULD EXTEND INTOJUNE/JULY 2005.

7

ATWOOD FALCONTHE ATWOOD FALCON HAS SUCCESSFULLY COMPLETED CONTRACTS OVER THE LAST

YEAR IN MALAYSIA, JAPAN AND CHINA. THE RIG IS CURRENTLY WORKING OFFSHORE MALAYSIAON A DRILLING PROGRAM ESTIMATED TO BE EXTENDED INTO FEBRUARY 2005. IMMEDIATELY

UPON COMPLETION OF ITS CURRENT CONTRACT, THE RIG WILL BE MOVED BACK TO JAPAN TOCOMMENCE A TWO-FIRM WELL PROGRAM WHICH SHOULD TAKE UNTIL APPROXIMATELY AUGUST

2005 TO COMPLETE.

Atwood Oceanics, Inc. and Subsidiaries

FIVE-YEAR FINANCIAL REVIEW

At or For the Years Ended September 30,

(In thousands, except per share amounts, fleetdata and ratios) 2004 2003 2002 2001 2000

STATEMENTS OF OPERATIONS DATA:Revenues ******************************* $163,454 $144,765 $149,157 $147,541 $135,973Contract drilling costs ******************** (98,936) (98,500) (75,088) (70,014) (60,709)General and administrative expenses******* (11,389) (14,015) (10,080) (9,250) (8,449)Depreciation **************************** (31,582) (25,758) (23,882) (25,579) (29,624)

OPERATING INCOME******************** 21,547 6,492 40,107 42,698 37,191Other expense ************************** (9,145) (4,856) (1,330) (1,577) (1,293)Tax provision**************************** (4,815) (14,438) (10,492) (13,775) (12,750)

NET INCOME (LOSS) **************** $ 7,587 $ (12,802) $ 28,285 $ 27,346 $ 23,148

PER SHARE DATA:Earnings (loss) per common share:

Basic********************************* $ 0.55 $ (0.92) $ 2.04 $ 1.98 $ 1.68Diluted ******************************* $ 0.54 $ (0.92) $ 2.02 $ 1.96 $ 1.66

Average common shares outstanding:Basic********************************* 13,859 13,846 13,839 13,828 13,763Diluted ******************************* 14,032 13,846 13,994 13,978 13,916

FLEET DATA:Number of rigs owned or managed, at end

of period ***************************** 11 11 10 11 11Utilization rate for in-service rigs(1) ******** 93% 92% 86% 83% 71%

BALANCE SHEET DATA:Cash and cash equivalents**************** $ 16,416 $ 21,551 $ 27,655 $ 12,621 $ 42,661Working capital************************** 32,913 26,063 43,735 25,057 47,433Net property and equipment ************** 401,141 443,102 368,397 306,254 224,107Total assets ***************************** 498,936 522,674 445,238 353,878 313,251Total long-term debt (including current

portion)******************************* 181,000 205,000 115,000 60,000 46,000Shareholders’ equity(2) ******************* 271,589 263,467 276,133 247,636 218,205Ratio of current assets to current liabilities** 1.55 1.52 2.44 2.21 3.71

Notes —(1) Excludes managed rigs, the SEASCOUT, and contractual downtime on rigs upgraded.

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

8

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lved

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e tw

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gs

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gra

ms.

SECURITIES LITIGATION SAFE HARBOR STATEMENT

Statements included in this report which are ) the extent to which customers and poten-not historical facts (including any statements tial customers continue to pursue deep-concerning plans and objectives of management water drilling;for future operations or economic performance,

) exploration success or lack of explorationor assumptions related thereto) are ‘‘forward-success by our customers and potentiallooking statements’’ within the meaning of thecustomers;Private Securities Litigation Reform Act of 1995.

In addition, we and our representatives may ) the highly competitive and cyclical naturefrom to time to time make other oral or written of our business, with periods of lowstatements which are also forward-looking demand and excess rig availability;statements.

) the impact of the war with Iraq or othermilitary operations, terrorist acts or em-These forward-looking statements are madebargoes elsewhere;based upon management’s current plans, expec-

tations, estimates, assumptions and beliefs con- ) our ability to enter into and the terms ofcerning future events impacting us and therefore future drilling contracts;involve a number of risks and uncertainties. We

) the availability of qualified personnel;caution that forward-looking statements are notguarantees and that actual results could differ

) our failure to retain the business of one ormaterially from those expressed or implied in themore significant customers;forward-looking statements.

) the termination or renegotiation of con-Important factors that could cause our ac- tracts by customers;

tual results of operations or our actual financial) the availability of adequate insurance at aconditions to differ include, but are not necessa-

reasonable cost;rily limited to:

) the occurrence of an uninsured loss;) our dependence on the oil and gas

) the risks of international operations, in-industry;cluding possible economic, political, social

) the operational risks involved in drilling or monetary instability, and compliancefor oil and gas; with foreign laws;

) the effect SARS or other public health) changes in rig utilization and dayrates inconcerns could have on our internationalresponse to the level of activity in the oiloperations and financial results;and gas industry, which is significantly

affected by indications and expectations ) compliance with or breach of environmen-regarding the level and volatility of oil and tal laws;gas prices, which in turn are affected by

) the incurrence of secured debt or addi-such things as political, economic andtional unsecured indebtedness or otherweather conditions affecting or potentiallyobligations by us or our subsidiaries;affecting regional or worldwide demand

for oil and gas, actions or anticipated) the adequacy of sources of liquidity;

actions by OPEC, inventory levels, deliver-ability constraints, and future market ) currently unknown rig repair needs and/oractivity; additional opportunities to accelerate

11

planned maintenance expenditures due to ) changes in accepted interpretations ofpresently unanticipated rig downtime; accounting guidelines and other account-

ing pronouncements and tax laws;) higher than anticipated accruals for per-

) the risks involved in the construction,formance-based compensation due to bet-upgrade, and repair of our drilling units;ter than anticipated performance by us,andhigher than anticipated severance ex-

penses due to unanticipated employee ) such other factors as may be discussed interminations, higher than anticipated legal our reports filed with the Securities andand accounting fees due to unanticipated Exchange Commission, or SEC.financing or other corporate transactions,

These factors are not necessarily all of theand other factors that could increaseimportant factors that could cause actual resultsgeneral and administrative expenses;to differ materially from those expressed in anyof our forward-looking statements. Other un-) the actions of our competitors in theknown or unpredictable factors could also haveoffshore drilling industry, which couldmaterial adverse effects on future results. Thesignificantly influence rig dayrates andwords ‘‘believe,’’ ‘‘impact,’’ ‘‘intend,’’ ‘‘esti-utilization;mate,’’ ‘‘anticipate,’’ ‘‘plan’’ and similar expres-

) changes in the geographic areas in which sions identify forward-looking statements. Theseour customers plan to operate, which in forward-looking statements are found at variousturn could change our expected effective places throughout this report. When consideringtax rate; any forward-looking statement, you should also

keep in mind the risk factors described in other) changes in oil and gas drilling technology

reports or filings we make with the SEC fromor in our competitors’ drilling rig fleets

time to time. Undue reliance should not bethat could make our drilling rigs less

placed on these forward-looking statements,competitive or require major capital in-

which are applicable only on the date hereof.vestments to keep them competitive;

Neither we nor our representatives have ageneral obligation to revise or update these) rig availability;forward-looking statements to reflect events or

) the effects and uncertainties of legal and circumstances that arise after the date hereof oradministrative proceedings and other to reflect the occurrence of unanticipated events.contingencies;

) the impact of governmental laws andregulations and the uncertainties involvedin their administration, particularly insome foreign jurisdictions;

12

MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OUTLOOK fiscal year 2004 and have averaged approxi-mately 90% utilization over the last ten years.

After incurring our first loss in ten years infiscal year 2003, we returned to profitability in In October 2004, we sold in a public offeringfiscal year 2004. Of our eight active drilling units, 1,175,000 shares of our common stock at anseven have current drilling commitments with effective net price (before expenses) of $45.83 forone, the ATWOOD BEACON, currently in a total proceeds (before expenses) of approximatelyshipyard in Singapore being repaired from the $53.9 million. We used these proceeds and ondamages it incurred on July 25, 2004 to all three cash on hand to repay $55 million outstandinglegs and the derrick while positioning for its under our revolving credit agreement. Prior tonext well offshore Indonesia. We have insurance the stock offering, our ratio of outstanding debtto cover the costs of repairs in excess of a to total capitalization was around 40%. It is now$1 million deductible which was recorded as an approximately 30%. With our premium, modernexpense in the fourth quarter of fiscal year 2004. fleet of drilling units and a strengthened balanceAt September 30, 2004, the book basis of the sheet, we feel that we are well positioned toATWOOD BEACON has been reduced by benefit from an improving market environment.$16.3 million which is the estimated reduction in

At the beginning of fiscal year 2004, world-value caused by the incident. In addition,

wide utilization of offshore drilling units was less$7.7 million of costs were incurred related to the

that 80%. Today, worldwide utilization is approx-recovery of the rig of which $6.7 million is

imately 85%, with semisubmersibles continuingrecorded as an insurance receivable at Septem-

to be the weakest sector of the drilling marketber 30, 2004 and $1.0 million was expensed

with current utilization of approximately 84%during the fourth quarter of fiscal year 2004 to

compared to current jack-up utilization of ap-account for the insurance deductible. We also

proximately 90%. Despite continuing geopoliticalhave loss of hire insurance coverage of

uncertainties in Iraq, Venezuela, Nigeria as well$70,000 per day up to 180 days, which began

as other areas of the world, we expect increas-after a 30-day waiting period commencing

ing world energy demand. The oil and gasJuly 28, 2004. Revenue recognized from this

industry will play a major part in meeting thisinsurance coverage totaled approximately

increasing demand. At the current level of$2.4 million in fiscal year 2004, and accordingly,

worldwide utilization of offshore drilling units,a $2.4 million insurance receivable is recorded

we anticipate that oil and gas companies will berelated to these revenues as of September 30,

unable to provide crude oil and natural gas to2004.

consumers in sufficient quantities such thatThe ATWOOD BEACON has been awarded prices will be near the averages of the last

a contract in Vietnam which is to commence decade. We believe that based on the currentbetween January 15 and April 15, 2005. Based gap between crude oil demand and the world’son our current schedule of repairs, we believe current supply potential, a significant drillingthe rig will be ready to begin operations under campaign will be required to increase thethe contract by the end of January 2005, with world’s crude oil and natural gas supply capac-our loss of hire coverage not scheduled to expire ity. Thus, we expect continued improvement inuntil the end of February 2005. We will continue worldwide offshore drilling activities during fiscalour emphasis on maintaining high utilization of year 2005; however, a major slow down in worldour drilling equipment throughout industry cy- economic activity could negatively impact thiscles. We had a 93% equipment utilization rate in expectation.

13

Of our current drilling contracts, the VICKS- comparative analysis of revenues by rig for fiscalBURG has the only contract term that extends years 2004 and 2003 is as follows:beyond fiscal year 2005, with the contract term REVENUES

(In millions)for the ATWOOD HUNTER expected to extend toFiscal Fiscalthe end of fiscal year 2005. We expect options to2004 2003 Variancebe exercised on the ATWOOD EAGLE, ATWOOD

ATWOOD BEACON ******** $ 20.7 $ 3.0 $ 17.7FALCON and ATWOOD BEACON that could alsoATWOOD EAGLE********** 30.4 19.8 10.6extend these contracts through fiscal year 2005.ATWOOD HUNTER ******** 19.4 17.2 2.2Despite not currently having long-term contractRICHMOND*************** 9.6 8.3 1.3commitments, we expect that the RICHMOND,GOODWYN ‘A’/NORTH

in the Gulf of Mexico, and the ATWOOD RANKIN ‘A’************* 2.0 1.8 0.2SOUTHERN CROSS, in Southeast Asia, will be VICKSBURG*************** 24.3 25.0 (0.7)highly utilized during fiscal year 2005. The ATWOOD SOUTHERNSEAHAWK has commenced a short-term drilling CROSS ***************** 12.5 14.5 (2.0)

SEAHAWK**************** 18.6 22.8 (4.2)program in Malaysia which is expected toATWOOD FALCON ******** 26.0 32.4 (6.4)extend to the end of January 2005. Contract

$163.5 $144.8 $ 18.7opportunities for the SEAHAWK, following thatcontract, are being pursued in Southeast Asia

The ATWOOD BEACON was available forand West Africa. With market trends supportingoperations during the fiscal year 2004 year-to-continued increases in drilling activities, coupleddate period up to its July accident compared towith our leverage to improving dayrates, weonly two months in the prior fiscal year while rigexpect improved cash flows and operating re-was under construction. The increase in revenuesults in fiscal year 2005 compared to fiscal yearfor the ATWOOD EAGLE was due to higher2004 and remain optimistic about the longer-dayrates earned during fiscal year 2004 of ap-term utilization and fundamentals of the offshoreproximately $90,000 to $110,000 compared todrilling market.fiscal year 2003 dayrate of approximately $85,000and to higher utilization in the current fiscal yearRESULTS OF OPERATIONSas the rig was undergoing its upgrade and

Fiscal Year 2004 Versus Fiscal Year 2003 relocating to West Africa during the first fivemonths of the prior fiscal year. The increase inRevenues for the current fiscal year in-revenue for the ATWOOD HUNTER and thecreased 13% compared to prior fiscal year. ARICHMOND was due to higher average dayratesearned during the current fiscal year of $57,000and $27,000, respectively as compared to theprior fiscal year average dayrates of $54,000 and$23,000, respectively. The ATWOOD HUNTERwas also utilized for approximately 20 more daysduring fiscal year 2004 as compared to fiscal year2003. Since the end of fiscal year 2001, there hasbeen a planned break in drilling activities on theGOODWYN ‘A’ and NORTH RANKIN ‘A’ plat-form rigs. We continue to provide a limitedamount of maintenance services to these plat-form rigs during this planned idle period. TheVICKSBURG had average per day revenues of

14

$66,000 during fiscal year 2004 compared to The ATWOOD BEACON incurred operating$68,500 during fiscal year 2003. The decrease in costs for all of fiscal year 2004 compared to onlyrevenue for the ATWOOD SOUTHERN CROSS two months in the prior fiscal year, as the rigwas due to lower dayrates earned in the current was under construction for most of fiscal yearfiscal year of $30,000 to $35,000 compared to the 2003. The recording of a $1 million insuranceprior fiscal year of $45,000 to $60,000. The deductible resulting from the damage incurredimpact of lower dayrates during fiscal year 2004 by the ATWOOD BEACON in its July 2004was partially offset by higher utilization of the incident also contributed to an increase in costs.rig during fiscal year 2004 of 83% compared to The increase in daily operating costs of the70% during fiscal year 2003. During the first ATWOOD EAGLE from $53,200 in fiscal yearquarter of the current fiscal year, the amortiza- 2003 to $56,700 in fiscal year 2004 was primarilytion of deferred revenue related to the 1999 due to an increase in labor costs. Since drillingclient reimbursement of the upgrade costs for activities were suspended on the GOODWYN ‘A’the SEAHAWK was completed, leading to the and NORTH RANKIN ‘A’ platforms at the end ofdecrease in revenue for this rig. The decrease in fiscal year 2001, we have continued to provide arevenue for the ATWOOD FALCON was prima- limited level of maintenance services to theserily due to lower dayrates earned during the rigs. Decreases in operating costs for the RICH-current fiscal year of $70,000 to $85,000 com- MOND, SEAHAWK and ATWOOD HUNTER werepared to $75,000 to $110,000 in the prior fiscal due to declines in maintenance related costs.year and also due to the rig being idle during The decrease in drilling costs for the VICKS-July 2004 while undergoing quarters upgrade BURG was due to the temporary suspension ofand planned maintenance compared to being its contract with ExxonMobil during the currentfully utilized during fiscal year 2003. fiscal year (the contract resumed during the first

quarter of fiscal year 2005), which in turn,In total, contract drilling costs for the cur-

suspended the amortization of expenses relatedrent fiscal year were comparable to the prior

to the upgrade costs incurred for this specificfiscal year. A comparative analysis of contract

contract. In addition, agent fees were lowerdrilling costs by rig for fiscal years 2004 and

compared to prior fiscal year as the VICKSBURG2003 is as follows:

did not incur any agent fees while working inThailand during the second half of fiscal yearCONTRACT DRILLING2004. During fiscal 2004, the ATWOOD SOUTH-COSTS

(In millions) ERN CROSS worked in India and MalaysiaFiscal Fiscal where daily operating costs are lower than Italy,2004 2003 Variance

its primary operating area in fiscal year 2003.ATWOOD BEACON *********** $10.2 $ 1.4 $ 8.8 The decrease in drilling costs for the ATWOODATWOOD EAGLE ************* 20.7 19.4 1.3 FALCON was due to the rig operating inGOODWYN ‘A’/NORTH RANKIN Australia for seven months of fiscal year 2003 at

‘A’ ************************ 2.1 2.0 0.1an approximate $25,000 per day higher operatingRICHMOND ****************** 7.9 8.2 (0.3)costs compared to Asia, its location for all ofSEAHAWK ******************* 9.0 9.7 (0.7)fiscal year 2004. The higher operating costsATWOOD HUNTER************ 12.0 12.9 (0.9)

VICKSBURG ****************** 8.3 9.3 (1.0) resulted from Australian labor regulations requir-ATWOOD SOUTHERN CROSS ** 12.3 14.3 (2.0) ing that marine union personnel must be em-ATWOOD FALCON************ 15.1 18.7 (3.6) ployed for all offshore vessels that haveOTHER ********************** 1.3 2.6 (1.3) propulsion. During the period that the ATWOOD

$98.9 $98.5 $ 0.4 FALCON worked in Australia, it was equipped

15

with propulsion assist, which required the em- General and administrative expense de-ployment of marine personnel that was not creased 19% in fiscal year 2004 compared torequired when the rig worked in Asia. fiscal year 2003 primarily due to a reduction in

professional fees related to our worldwide re-Depreciation expense for the current fiscal structuring initiative incurred in the prior fiscal

year increased 22% as compared to the prior year. Our worldwide group of consolidated enti-fiscal year. A comparative analysis of deprecia- ties derives substantially all of their operatingtion expense by rig for fiscal years 2004 and revenues from international offshore drilling of2003 is as follows: exploratory and developmental oil and gas wells

and related support services. At the beginning ofDEPRECIATIONEXPENSE fiscal year 2003, we initiated a restructuring of(In millions)

our foreign subsidiaries and deployment of ourFiscal Fiscal

worldwide assets to focus potential civil litiga-2004 2003 Variancetion which may arise from future offshore activi-

ATWOOD BEACON *********** $ 5.2 $ 0.7 $ 4.5 ties in foreign operations in the jurisdictions ofATWOOD EAGLE ************* 4.8 3.1 1.7

the areas of those operations, to simplify ourSEAHAWK ******************* 5.1 4.7 0.4worldwide organizational structure for adminis-ATWOOD SOUTHERN CROSS ** 4.2 4.0 0.2trative and marketing reasons, to facilitate moreVICKSBURG ****************** 2.6 2.5 0.1

ATWOOD FALCON************ 2.7 2.6 0.1 efficient management and control of businessATWOOD HUNTER************ 5.4 5.4 — operations, and to deploy our worldwide assetsRICHMOND ****************** 0.9 1.9 (1.0) and capital in a more efficient manner amongOTHER ********************** 0.7 0.9 (0.2) our consolidated group of companies. In addition

$31.6 $25.8 $ 5.8 to these operational efficiencies, it is expectedthat this restructuring will also provide long-term

The increase in depreciation expense for the tax efficiencies. A significant part of this restruc-ATWOOD BEACON was due to a full year of turing involved the contribution of a majority ofdepreciation expense during fiscal year 2004 our non-U.S. operations to Atwood Oceanicscompared to only two months in fiscal year 2003 Pacific Limited, a wholly-owned Cayman Islandsas the rig was under construction for most of the company, which had historically served as ourprior fiscal year. The increase in depreciation offshore company for marketing, negotiating, andexpense for the ATWOOD EAGLE was also due performing drilling contracts outside of theto a full year of depreciation expense during the United States. At September 30, 2003, most ofcurrent fiscal year compared to only seven our planned restructuring initiative had beenmonths in the prior fiscal year as the rig was completed, with approximately $3 million of thebeing upgraded during the first five months of increase in general and administrative expensesfiscal year 2003. During the period when a rig is related to professional fees associated with thisout of service for a significant upgrade that restructuring process.extends its useful life, no depreciation is recog-

The $4.2 million increase in net interestnized. The decrease in depreciation expense forexpense was due to having no capitalizedthe RICHMOND was due to extending its re-interest in fiscal year 2004 compared to $4.2 mil-maining useful life from 2 to 5 years effectivelion of capitalized interest in fiscal year 2003 as aOctober 1, 2003. The depreciable life of this rigresult of the completion of the upgrades programwas extended based upon an assessment of itsand construction of the ATWOOD BEACONcommercial viability, coupled with our intent toduring fiscal year 2003.continue marketing and operating the rig beyond

2 years.

16

Virtually all of our tax provision for fiscal during fiscal year 2003 was approximatelyyear 2004 relates to taxes in foreign jurisdictions. $85,000 compared to $75,000 in the prior year.The $9.6 million decrease in provision for income Fiscal year 2003 also included $2.7 million oftaxes in fiscal year 2004 compared to fiscal year mobilization revenue for the rig’s relocation to2003 was primarily due to the recording of a West Africa. The ATWOOD BEACON com-$4.7 million deferred foreign tax liability in fiscal menced operations in August 2003 while beingyear 2003 relating to Australian and Malaysian under construction all of the prior fiscal year.taxes after reassessing certain tax planning Fiscal year 2003 revenues for the VICKSBURGstrategies in conjunction with the reorganization included $2.0 million of client reimbursementsof our foreign subsidiaries undertaken in fiscal for capital upgrades, as utilization and averageyear 2003 and a reduction of $2.1 million in dayrates were consistent with the prior year.current foreign tax provisions in fiscal year 2004 The increase in revenue for the RICHMOND wascompared to fiscal year 2003 primarily due to tax primarily due to the rig being 100% utilized inefficiencies resulting from the fiscal year 2003 fiscal year 2003 compared to having 76 days ofreorganization. idle time in fiscal year 2002. The decrease in

revenue for the ATWOOD FALCON was due toFiscal Year 2003 Versus Fiscal Year 2002 its mobilization to Australia and back to Malay-

sia during fiscal year 2003 compared to workingRevenues for fiscal year 2003 decreased 3%at full operating dayrates for all of fiscal yearcompared to the prior year. A comparative2002. Due to the softness of the Mediterraneananalysis of revenues by rig for fiscal years 2003market, utilization for the ATWOOD SOUTHERNand 2002 is as follows:CROSS decreased from approximately 85% in

REVENUES fiscal year 2002 to 70% in fiscal year 2003.(In millions)

Average dayrates for the ATWOOD HUNTERFiscal Fiscal

decreased from approximately $90,000 to $54,0002003 2002 Variancefor the same periods.

ATWOOD EAGLE *********** $ 19.8 $ 15.2 $ 4.6ATWOOD BEACON ********* 3.0 — 3.0 Contract drilling costs for fiscal year 2003VICKSBURG**************** 25.0 22.5 2.5

increased 31% as compared to the prior year. AsRICHMOND **************** 8.3 7.1 1.2

discussed below, in order to maintain relativelySEAHAWK ***************** 22.8 22.3 0.5high utilization of our fleet during a downturn inGOODWYN ‘A’/NORTHthe offshore drilling market, we pursued short-RANKIN ‘A’ ************** 1.8 1.9 (0.1)term contract opportunities for the ATWOODATWOOD FALCON********** 32.4 33.5 (1.1)EAGLE, ATWOOD FALCON and ATWOODATWOOD SOUTHERN CROSS 14.5 19.3 (4.8)

ATWOOD HUNTER ********* 17.2 27.4 (10.2) SOUTHERN CROSS in high operating cost areasof West Africa, Australia and Italy. Compared to$144.8 $149.2 $ (4.4)fiscal year 2002, approximately 95% of the in-

While utilization was consistent with prior crease in contract drilling costs in fiscal yearyear, the average dayrate for ATWOOD EAGLE 2003 related to these three rigs. A comparative

17

analysis of contract drilling costs by rig for fiscal Australia, it was equipped with propulsion as-years 2003 and 2002 is as follows: sist, which required the employment of marine

personnel that was not required when the rigCONTRACTworked in Southeast Asia. We also incurredDRILLING COSTS

(In millions) approximately $2.0 million in mobilization costsFiscal Fiscal re-locating the ATWOOD FALCON to and from2003 2002 Variance

Australia.ATWOOD EAGLE ************* $19.4 $ 9.0 $10.4

The increase in costs for the ATWOODATWOOD FALCON************ 18.7 10.2 8.5SOUTHERN CROSS resulted from the amortiza-ATWOOD SOUTHERN CROSS ** 14.3 11.1 3.2tion of the planned maintenance and upgradeATWOOD BEACON *********** 1.4 — 1.4costs to meet Italian operating standards, as wellSEAHAWK ******************* 9.7 9.2 0.5

GOODWYN ‘A’/NORTH as higher costs of operating in Italy for travel,RANKIN ‘A’ **************** 2.0 2.1 (0.1) shorebase operations and rentals. In addition,

VICKSBURG ****************** 9.3 9.5 (0.2) Italian regulations do not allow drilling rigs toATWOOD HUNTER************ 12.9 13.4 (0.5) operate in Italian waters without having originalRICHMOND ****************** 8.2 9.3 (1.1) certification for all electrical equipment. WeOTHER ********************** 2.6 1.3 1.3 incurred additional operating costs in complying

$98.5 $75.1 $23.4 with this requirement. The ATWOOD BEACONcommenced operations in August 2003 whilebeing under construction all of the prior fiscalContract drilling costs for the ATWOODyear. The decrease in costs for the RICHMONDEAGLE include $8.2 million of mobilization ex-for fiscal year 2003 was due to the shipyardpenses incurred during the rig’s relocation torepairs incurred during the prior fiscal year.West Africa. In addition, daily operating costs of

the ATWOOD EAGLE increased as operating Depreciation expense for fiscal year 2003costs in West Africa were approximately 30% increased 8% as compared to the prior fiscalhigher than in the Mediterranean, the rig’s year. A comparative analysis of depreciationprevious location. This increase in daily operat- expense by rig for fiscal year 2003 and 2002 is asing costs relates primarily to a significantly follows:higher onshore cost of services to support our

DEPRECIATIONoffshore operations, plus higher local labor costs. EXPENSE

(In millions)Due to limited office and living facilities in WestFiscal FiscalAfrica compared to the rig’s previous location in2003 2002 Variancethe Mediterranean, the daily costs for such

ATWOOD HUNTER************ $ 5.4 $ 4.2 $ 1.2facilities and other services in West Africa wereATWOOD EAGLE ************* 3.1 2.2 0.9significantly higher than most other areas of theATWOOD BEACON *********** 0.7 — 0.7world. During fiscal year 2003, the ATWOODRICHMOND ****************** 1.9 1.6 0.3FALCON worked seven months in Australia,VICKSBURG ****************** 2.5 2.3 0.2

where operating costs are higher than Southeast ATWOOD SOUTHERN CROSS ** 4.0 3.9 0.1Asia, its primary operating location for all of the SEAHAWK ******************* 4.7 4.8 (0.1)prior fiscal year, by approximately $25,000 per ATWOOD FALCON************ 2.6 2.7 (0.1)day due to increased personnel-related costs. OTHER ********************** 0.9 2.2 (1.3)Australian labor regulations require that marine $25.8 $23.9 $ 1.9union personnel must be employed for all off-shore vessels that have propulsion. During the During the period when a rig is out ofperiod that the ATWOOD FALCON worked in service for a significant upgrade that extends its

18

useful life, no depreciation expense is recog- provide long-term tax efficiencies. A significantnized. The increased depreciation on the part of this restructuring involved the contribu-ATWOOD HUNTER in fiscal year 2003 was due tion of a majority of our non-U.S. operations toto a full year of depreciation expense compared Atwood Oceanics Pacific Limited, a wholly-to only three quarters in the prior fiscal year as owned Cayman Islands company, which hadthe rig was completing its upgrade and reloca- historically served as our offshore company fortion to the Mediterranean during the first quarter marketing, negotiating, and performing drillingof fiscal year 2002. The increase for the contracts outside of the United States. At Sep-ATWOOD EAGLE was due to an increase in the tember 30, 2003, most of our planned restructur-rig’s depreciable basis resulting from the com- ing initiative had been completed, withpletion of its $90 million upgrade during fiscal approximately $3 million of the increase inyear 2003. The ATWOOD BEACON commenced general and administrative expenses related tooperations in August 2003 while being under professional fees associated with this restructur-construction during all of fiscal year 2002. We ing process.increased the depreciable basis of the RICH-

The $3.4 million increase in net interestMOND by approximately $1 million during fiscalexpense was due to an increase in the averageyear 2003 which will be depreciated over theamount of debt outstanding, a $1.2 million writerig’s remaining useful life which was 5 years atoff of deferred financing costs related to the priorthe time the change was made. Other deprecia-credit facility, and due to a $1.9 million decreasetion expense decreased due to the fact that RIG-in capitalized interest as compared to prior fiscal200 (sold in May 2003) was fully depreciated toyear as a results of the completion of theits salvage value in fiscal year 2002 and thus hadupgrade program and construction of theno depreciation expense for fiscal year 2003.ATWOOD BEACON during fiscal year 2003.

General and administrative expense in- Virtually all of our tax provision for fiscalcreased 39% in fiscal year 2003 primarily due to year 2003 relates to taxes in foreign jurisdictions.higher professional fees related to our worldwide Due to the low level of operating income in therestructuring initiative. Our worldwide group of United States, in addition to operating losses inconsolidated entities derives substantially all of certain nontaxable foreign jurisdictions, our ef-their operating revenues from international off- fective tax rate for the fiscal year 2003 signifi-shore drilling of exploratory and developmental cantly exceeded the United States statutory rate.oil and gas wells and related support services. At During fiscal year 2003, we recorded deferredthe beginning of fiscal year 2003, we initiated a foreign tax liabilities of $4.7 million relating torestructuring of our foreign subsidiaries and Australian and Malaysian taxes after reassessingdeployment of our worldwide assets to focus certain tax planning strategies in conjunctionpotential civil litigation which may arise from with the reorganization of our foreign subsidiar-future offshore activities in foreign operations in ies undertaken in fiscal year 2003. This deferredthe jurisdictions of the areas of those operations, tax expense had no cash effect during fiscal yearto simplify our worldwide organizational struc- 2003.ture for administrative and marketing reasons, tofacilitate more efficient management and control LIQUIDITY AND CAPITAL RESOURCESof business operations, and to deploy our world-wide assets and capital in a more efficient We currently operate eight active offshoremanner among our consolidated group of compa- drilling units. Since fiscal year 1997, we havenies. In addition to these operational efficiencies, expended approximately $340 million on upgrad-it is expected that this restructuring will also ing seven existing drilling units and approxi-

19

mately $120 million on constructing our eighth proceeds, and current rig operations will bedrilling unit, the ATWOOD BEACON. After ex- funded from current operating cash flows.pending approximately $100 million in each of

We funded our equipment upgrade andthe fiscal years 2001, 2002 and 2003 on ourconstruction programs through a combination ofupgrade and rig construction programs, ourinternally generated funds and funds borrowedcapital expenditures declined to approximatelyunder credit facilities. On April 1, 2003, we$6.5 million in fiscal year 2004. We operate in aexecuted a $225 million senior secured creditcyclical industry. Maintaining high equipmentfacility, or the Credit Facility, with four industryutilization in up, as well as down, cycles, is abanks to refinance our prior existing indebted-key factor in generating cash to satisfy currentness and to provide for on-going working capitaland future obligations. For fiscal years 1999and general corporate needs. In June 2003, thethough 2003, net cash provided by operatingborrowing capacity under the Credit Facility wasactivities ranged from a low of approximatelyincreased to $250 million, with five additional$13.7 million in fiscal year 2003 to a high ofbanks joining the syndication group. The Creditapproximately $70.9 million in fiscal year 1999Facility contains financial covenants, includingcompared to net cash provided by operatingbut not limited to, requirements for maintainingactivities of approximately $25.6 million for fiscalcertain net worth and other financial ratios, andyear 2004. Our operating cash flows are primarilyrestrictions on disposing of any material assets,driven by our operating income, which reflectspaying cash dividends or repurchasing any ofdayrates and rig utilization. The low level of netour outstanding common stock and incurringcash provided by operating activities in fiscalany additional indebtedness in excess of $3 mil-year 2003 was due to a downturn in marketlion. In June 2003, we also amended the Creditconditions during which we pursued short-termFacility to increase the allowed ratio limit ofcontract opportunities in high operating costoutstanding debt to earnings before interest,areas in order to maintain a high utilization ofincome taxes and depreciation. However, theour fleet. Market conditions improved in fiscalratio, as amended in June 2003, was based uponyear 2004 which enabled us to have higher cashestimates that did not assume a continuingflows and earnings compared to fiscal year 2003.decline in market conditions which negativelyWe anticipate continuing improvements in mar-impacted our fiscal year 2003 fourth quarterket conditions in fiscal year 2005 and accord-results. Therefore, in November 2003, the Creditingly, expect continuing improvements in cashFacility was further amended, effective as offlows and earnings. Our existing cash commit-September 30, 2003, to redefine the calculationments for fiscal year 2005 and beyond, outside ofof the ratio of outstanding debt to earnings,completing the funding of repair costs of thebefore interest, income taxes and depreciation.ATWOOD BEACON and funding current rigThe November amendment increased the per-operations, include annual capital expendituresmitted ratio levels from 5.75 to 6.25 at Decem-of $6 to $10 million for maintenance of our eightber 31, 2003, reducing to 5.50 at March 31 andactive drilling rigs and required quarterly repay-June 30, 2004, 4.00 at September 30, 2004 andments under the term facility of our credit3.00 thereafter. We are in compliance with allagreement which will total $36 million for fiscalfinancial covenants at September 30, 2004 andyear 2005. We expect to generate sufficient cashexpect to remain in compliance with all financialflows from operations to satisfy these obligations.covenants during fiscal year 2005. Further, at allRepair costs for the ATWOOD BEACON aretimes during fiscal years 2002, 2003 and 2004estimated to be approximately $25 million, all ofwhen we were required to determine compliancewhich is expected to be covered by insurancewith our financial covenants, we were in compli-

20

ance with the covenants. Aside from the finan- on the SEASCOUT, with a conversion andcial covenants, no other provisions exist in the upgrade not to be undertaken until an accept-Credit Facility that could result in acceleration of able contract opportunity has been secured andthe April 1, 2008 maturity date. adequate financing is in place. We continue to

periodically increase and adjust our plannedThe Credit Facility consists of a 5-year capital expenditures and financing of such ex-

$150 million amortizing Term Loan Facility and a penditures in light of current market conditions.5-year $100 million non-amortizing revolving loan

Our portfolio of accounts receivable is com-facility. The term loan facility requires quarterlyprised of major international corporate entitiespayments of $6 million commencing on Decem-with stable payment experience. Historically, weber 31, 2003, increasing to quarterly payments ofhave not encountered significant difficulty in$9 million commencing on December 31, 2004collecting receivables and typically do not re-until maturity on April 1, 2008. The Creditquire collateral for our receivables. The insuranceFacility permits prepayment of principal at any-receivable of approximately $25 million at Sep-time without incurring a penalty. At Septem-tember 30, 2004 relates to repairs being made tober 30, 2004, we had $55 million outstandingthe ATWOOD BEACON. We expect to encounterunder the revolving loan facility and $126 millionno difficulty in collecting these receivables. Weoutstanding under the term loan facility. Withhave no allowances for doubtful accounts atthe repayment in October 2004 of the thenSeptember 30, 2004.$55 million outstanding under our revolving loan

facility from proceeds received from the publicoffering of 1,175,000 shares of our common stock COMMITMENTS (In Thousands)and cash on hand, we currently have approxi-mately $99 million of available borrowing capac- The following table summarizes our obliga-ity and with a debt to total capitalization ratio tions and commitments at September 30, 2004:currently less that 30%, we expect to remain in Fiscal Fiscal Fiscal Fiscal

2005 2006 2007 2008compliance with all financial covenants duringLong-Term Debt(1) *********** $36,000 $36,000 $36,000 $73,000fiscal year 2005.Operating Leases ************ 628 647 647 108

The collateral at September 30, 2004 for the $36,628 $36,647 $36,647 $73,108Credit Facility consists primarily of preferredmortgages on all eight of our active drilling units(with an aggregate net book value at Septem- (1) The $55 million loan outstanding under theber 30, 2004 totaling approximately $384 million). revolving credit facility, due 2008, was repaidWe are not required to maintain compensating from the proceeds of our stock offering inbalances; however, we are required to pay a fee October 2004 and cash on hand.of approximately .80% per annum on the unused

Excluded from the above table is interestportion of the revolving loan facility and certainassociated with borrowings under the Creditother administrative costs.Facility because the applicable interest rate is

The SEASCOUT, a semisubmersible hull variable. After payment of the $55 million revolv-planned for future conversion and upgrade to a ing portion of the Credit Facility, the principalsemisubmersible tender assist vessel, continues amount outstanding under the Credit Facilityto be cold-stacked. The cost to convert and included in the above table is $126 million whichupgrade the SEASCOUT will be around $70 mil- currently bears interest at a rate of approxi-lion. There are no current capital commitments mately 3.8%.

21

Critical Accounting Policies our intent to continue marketing and operatingthe rig beyond 2 years. Depreciation expense

Significant accounting policies are includedwas recorded over the past fiscal year on a

in Note 2 to our consolidated financial state-straight-line method and will continue to be

ments for the year ended September 30, 2004.recorded on a straight-line method over the next

These policies, along with the underlying as-4 years. However, as a result of the change in

sumptions and judgments made by managementdepreciable life and related depreciation ex-

in their application, have a significant impact onpenses being extended into years 3 to 5,

our consolidated financial statements. We iden-depreciation expense was lower in the last fiscal

tify our most critical accounting policies as thoseyear than it otherwise would have been, and the

that are the most pervasive and important to thesame will be true for fiscal year 2005.

portrayal of our financial position and results ofoperations, and that require the most difficult,

We evaluate the carrying value of oursubjective and/or complex judgments by man-

property and equipment when events or changesagement regarding estimates about matters that

in circumstances indicate that the carrying valueare inherently uncertain. Our most critical ac-

of such assets may be impaired. Asset impair-counting policies are those related to property

ment evaluations are, by nature, highly subjec-and equipment, impairment of assets, income

tive. Operations of our drilling equipment aretaxes, and employee stock-based compensation.

subject to the offshore drilling requirements of oilWe currently operate eight active offshore and gas exploration and production companies

drilling units. All of these assets are premium and agencies of foreign governments. Theseequipment and should provide many years of requirements are, in turn, subject to fluctuationsquality service. At September 30, 2004, the in government policies, world demand and pricecarrying value of our property and equipment for petroleum products, proved reserves in rela-totaled $401.1 million, which represents 80% of tion to such demand and the extent to whichtotal assets. This carrying value reflects the such demand can be met from onshore sources.application of our property and equipment ac- The critical estimates which result from thesecounting policies, which incorporate estimates, dynamics include projected utilization, dayrates,assumptions and judgments by management and operating expenses, each of which impactrelative to the useful lives and salvage values of our estimated future cash flows. Over the lastour rigs and vessels. The estimated useful lives ten years, our equipment utilization rate hasof our drilling units and related equipment range averaged approximately 90%; however, if a drill-from 3 years to 25 years and our salvage values ing vessel incurs significant idle time or receivesare generally based on 5% of capitalized costs. dayrates below operating costs, its carryingAny future increases in our estimates of useful value could become impaired. The estimates,lives or salvage values will have the effect of assumptions and judgments used by manage-decreasing future depreciation expense in earlier ment in the application of our property andfuture years and spreading the expense to later equipment and asset impairment policies reflectyears. Any future decreases in our useful lives or both historical experience and expectations re-salvage values will have the effect of accelerat- garding future industry conditions and opera-ing future depreciation expense. For example, tions. The use of different estimates,effective October 1, 2003, we extended the assumptions and judgments, especially thoseremaining depreciable life of the RICHMOND involving the useful lives of our rigs and vesselsfrom 2 to 5 years, due to our recent assessment and expectations regarding future industry con-of the rig’s commercial viability, coupled with ditions and operations, would likely result in

22

materially different carrying values of assets and employees’ stock options equals the market priceresults of operations. of the underlying stock on the date of the grant,

no compensation expense is recognized.We conduct operations and earn income in

On March 31, 2004, the FASB issued anumerous foreign countries and are subject toproposed Statement, Share-Based Payment, thatthe laws of taxing jurisdictions within thoseaddresses the accounting for share-based pay-countries, as well as United States federal andment transactions in which an enterprise re-state tax laws. At September 30, 2004, we haveceives employee services in exchange foran $18.6 million net deferred income tax liability.(a) equity instruments of the enterprise orThis balance reflects the application of our(b) liabilities that are based on the fair value ofincome tax accounting policies in accordancethe enterprise’s equity instruments or that maywith statement of Financial Accounting Stan-be settled by the issuance of such equitydards No. 109, ‘‘Accounting for Income Taxes’’.instruments. The proposed Statement wouldSuch accounting policies incorporate estimates,eliminate the ability to account for share-basedassumptions and judgments by managementcompensation transaction using APB Opinionrelative to the interpretation of applicable taxNo. 25 and generally would require instead thatlaws, the application of accounting standards,such transactions be accounted for using a fair-and future levels of taxable income. The esti-value-based method. If adopted, it is currentlymates, assumptions and judgments used byanticipated that the proposed Statement wouldmanagement in connection with accounting forbe effective for us beginning in the fourthincome taxes reflect both historical experiencequarter of fiscal year 2005.and expectations regarding future industry con-

ditions and operations. Changes in these esti-mates, assumptions and judgments could result RECENTLY ISSUED ACCOUNTINGin materially different provisions for deferred and PRONOUNCEMENTScurrent income taxes.

In December 2003, the FASB issued aWe currently measure compensation ex- revised version of Interpretation No. 46, ‘‘Consol-

pense for our employee stock-based compensa- idation of Variable Interest Entities — An Inter-tion plan using the intrinsic value method pretation of ARB No. 51 (‘‘FIN 46-R’’) which wasprescribed by Accounting Principles Board originally issued in January 2003. A variable(APB) Opinion No. 25, Accounting for Stock interest entity (‘‘VIE’’) is created when: (i) theIssued to Employees and provide pro forma equity investment at risk is not sufficient todisclosures of the effect on net income and permit the entity from financing its activitiesearnings per share as if the fair value-based without additional subordinated financial supportmethod had been applied in measuring compen- for other parties; (ii) equity holders at risk either:sation expense. We have elected to follow APB (a) lack direct or indirect ability to make deci-Opinion No. 25 because, as further discussed at sions about the entity, (b) are not obligated toNote 2 of the Notes to Consolidated Financial absorb expected losses of the entity or (c) do notStatements, the alternative fair value accounting have the right to receive expected residualprovided for under SFAS No. 123, Accounting for returns of the entity if they occur; or (iii) theStock-Based Compensation, requires use of op- equity holders have voting rights that are dispro-tion valuation models that were not developed portionate to their economic interests, and thefor use in valuing employee stock options and activities of the VIE involve or are conducted onemployee stock purchase plan shares. Under behalf of an equity holder with a disproportion-APB Opinion No. 25, when the exercise price of ately small voting interest. If an entity is deemed

23

to be a VIE, pursuant to FIN 46-R, an enterprise DISCLOSURES ABOUT MARKET RISKthat absorbs the majority of the expected losses

We are exposed to market risk, includingof the VIE is considered the primary beneficiaryadverse changes in interest rates and foreignand must consolidate the VIE. The application ofcurrency exchange rates as discussed below.FIN 26 (as amended by FIN 46-R) is required in

financial statements of public entities that haveInterest Rate Riskinterest in variable interest entities or potential

variable interest entities commonly referred to asAll of the $181 million of long-term debtspecial-purpose entities for periods ending after

outstanding at September 30, 2004, was floatingDecember 15, 2003. Application by public enti-rate debt. As a result, our annual interest coststies (other than small business issuers) for allin fiscal year 2005 will fluctuate based onother types of entities is required in financialinterest rate changes. Because the interest ratestatements for periods ending after March 15,on our long-term debt is a floating rate, the fair2004. We adopted this interpretation in Decem-value of our long-term debt approximates carry-ber 2003 and implementation of this interpreta-ing value as of September 30, 2004. The impacttion did not have a material effect on our resultson annual cash flow of a 10% change in theof operations, our financial position or cashfloating rate (approximately 40 basis points)flows.would be approximately $0.7 million, which we

In December 2003, the Securities and Ex- believe to be immaterial. We did not have anychange Commission issued Staff Accounting open derivative contracts relating to our floatingBulletin (‘‘SAB’’) No. 104, ‘‘Revenue Recogni- rate debt at September 30, 2004.tion,’’ which supersedes SAB No. 101, ‘‘RevenueRecognition in Financial Statements.’’ Foreign Currency RiskSAB No. 104’s primary purpose is to rescindaccounting guidance contained in SAB No. 101 Certain of our subsidiaries have monetaryrelated to multiple element revenue arrange- assets and liabilities that are denominated in aments, which was superseded as a result of the currency other than their functional currencies.issuance of Emerging Issues Task Force (‘‘EITF’’) Based on September 30, 2004 amounts, a de-No. 00-21, ‘‘Revenue Arrangements with Multi- crease of 10% in the foreign currency valueple Deliverables.’’ While the wording of relative to the United States dollar from the year-SAB No. 104 has changed to reflect the issuance end exchange rates would not result in aof EITF No. 00-21, the revenue recognition material foreign currency transaction loss. Thus,principles of SAB No. 101 remain largely un- we consider our current risk exposure to foreignchanged by the issuance of SAB No. 104. The currency exchange rate movements, based onimplementation of SAB No. 104 is not expected net cash flows, to be immaterial. We did notto affect our financial position, results of opera- have any open derivative contracts relating totions or cash flows. foreign currencies at September 30, 2004.

24

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 consolidatedstatements of operations, of cash flows and of changes in shareholder’s equity present fairly, in allmaterial respects, the financial position of Atwood Oceanics, Inc. (the ‘‘Company’’) and its subsidiariesas of September 30, 2004 and September 30, 2003, and the results of their operations and their cashflows for each of the three years in the period ended September 30, 2004, in conformity withaccounting principles generally accepted in the United States of America. These financial statementsare the responsibility of the Company’s management. Our responsibility is to express an opinion onthese financial statements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, and evaluating the overallfinancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP

Houston, TexasDecember 10, 2004

25

Atwood Oceanics, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

September 30,

(In thousands) 2004 2003

ASSETSCURRENT ASSETS:

Cash and cash equivalents ********************************************* $ 16,416 $ 21,551Accounts receivable *************************************************** 32,475 30,864Insurance receivable*************************************************** 25,433 —Income tax receivable ************************************************* — 3,278Inventories of materials and supplies ************************************ 12,648 12,583Deferred tax assets **************************************************** 290 550Prepaid expenses and other ******************************************** 5,704 7,186

Total Current Assets************************************************* 92,966 76,012

NET PROPERTY AND EQUIPMENT *************************************** 401,141 443,102

DEFERRED COSTS AND OTHER ASSETS********************************** 4,829 3,560

$498,936 $522,674

LIABILITIES AND SHAREHOLDERS’ EQUITYCURRENT LIABILITIES:

Current maturities of long-term debt************************************* $ 36,000 $ 24,000Accounts payable ***************************************************** 9,398 10,403Accrued liabilities***************************************************** 13,822 8,851Deferred credits******************************************************* 833 6,695

Total Current Liabilities ********************************************** 60,053 49,949

LONG-TERM DEBT, net of current maturities******************************* 145,000 181,000

OTHER LONG-TERM LIABILITIES:Deferred income taxes ************************************************* 18,930 21,217Deferred credits and other********************************************** 3,364 7,041

22,294 28,258

COMMITMENTS AND CONTINGENCIES (NOTE 10)SHAREHOLDERS’ EQUITY:

Preferred stock, no par value; 1,000,000 shares authorized, none outstanding** — —Common stock, $1 par value; 20,000,000 shares authorized with 13,873,000

and 13,851,000 issued and outstanding at September 30, 2004 and 2003,respectively ******************************************************** 13,873 13,851

Paid-in capital ******************************************************** 57,917 57,404Retained earnings***************************************************** 199,799 192,212

Total Shareholders’ Equity******************************************** 271,589 263,467

$498,936 $522,674

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

26

Atwood Oceanics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended September 30,

(In thousands, except per share amounts) 2004 2003 2002

REVENUES:Contract drilling********************************************* $161,074 $144,765 $149,157Business interruption proceeds******************************** 2,380 — —

163,454 144,765 149,157

COSTS AND EXPENSES:Contract drilling********************************************* 98,936 98,500 75,088Depreciation************************************************ 31,582 25,758 23,882General and administrative *********************************** 11,389 14,015 10,080

141,907 138,273 109,050

OPERATING INCOME ***************************************** 21,547 6,492 40,107

OTHER INCOME (EXPENSE):Interest expense, net of capitalized interest ********************* (9,202) (5,014) (1,658)Investment income ****************************************** 57 158 328

(9,145) (4,856) (1,330)

INCOME BEFORE INCOME TAXES ***************************** 12,402 1,636 38,777PROVISION FOR INCOME TAXES******************************* 4,815 14,438 10,492

NET INCOME (LOSS) ****************************************** $ 7,587 $ (12,802) $ 28,285

EARNINGS (LOSS) PER COMMON SHARE:Basic ****************************************************** $ 0.55 $ (0.92) $ 2.04Diluted***************************************************** 0.54 (0.92) 2.02

AVERAGE COMMON SHARES OUTSTANDING:Basic ****************************************************** 13,859 13,846 13,839Diluted***************************************************** 14,032 13,846 13,994

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

27

Atwood Oceanics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

For Years Ended September 30,

(In thousands) 2004 2003 2002

CASH FLOW FROM OPERATING ACTIVITIES:Net income (loss) ***************************************************** $ 7,587 $ (12,802) $ 28,285Adjustments to reconcile net income to net cash provided by

operating activities:Depreciation ******************************************************* 31,582 25,758 23,882

Amortization of debt issuance costs*********************************** 711 2,101 358Amortization of deferred items *************************************** 603 185 77Deferred federal income tax provision (benefit) ************************* (2,040) 5,350 2,500(Gain) loss on sale of assets****************************************** 163 (421)

Changes in assets and liabilities:Increase in accounts receivable ************************************** 1,667 (5,200) (8,930)Increase in insurance receivable************************************** (9,133) — —Increase in inventory************************************************ (65) (3,449) (23)Increase in deferred costs and other assets **************************** (970) (94) (6,275)Increase (decrease) in accounts payable ******************************* (487) 4,780 759Increase (decrease) in accrued liabilities ******************************* 4,971 (4,958) 600Increase in deferred credits and other liabilities ************************ (3,678) 4,051 6,615Net mobilization fees and credits ************************************* (5,311) (1,062) (1,177)Other decreases **************************************************** 13 (565) (3,229)

18,026 26,476 15,157

Net Cash Provided by Operating Activities ************************** 25,613 13,674 43,442

CASH FLOW FROM INVESTING ACTIVITIES:Capital expenditures ************************************************** (6,527) (101,819) (89,416)Non-cash portion of capital expenditures ******************************** — — 1,269Proceeds from sale of assets ******************************************* — 1,131 —Other *************************************************************** — (23) 92

Net Cash Used by Investing Activities ****************************** (6,527) (100,711) (88,055)

CASH FLOW FROM FINANCING ACTIVITIES:Proceeds from exercises of stock options ******************************** 460 78 181Debt issuance costs paid ********************************************** (681) (4,122) (557)Proceeds from credit facilities ****************************************** — 264,500 60,000Proceeds from short-term note payable ********************************** — — 6,154Principal payments on debt ******************************************** (24,000) (179,523) (6,131)

Net Cash Provided by Financing Activities ************************** (24,221) 80,933 59,647

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ********** $ (5,135) $ (6,104) $ 15,034CASH AND CASH EQUIVALENTS, at beginning of period ******************* $ 21,551 $ 27,655 $ 12,621

CASH AND CASH EQUIVALENTS, at end of period************************* $ 16,416 $ 21,551 $ 27,655

Supplemental disclosure of cash flow information:Cash paid during the year for domestic and foreign income taxes*********** $ 5,549 $ 7,914 $ 10,589

Cash paid during the year for interest, net of amounts capitalized ********** $ 9,208 $ 4,003 $ 1,704

Non-cash Activities:Increase in receivable related to reduction in value of the ATWOOD BEACON $ 16,300 $ — $ —

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

28

Atwood Oceanics, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

TotalPaid-in Retained Stockholders’Common Stock

(In thousands) Shares Amount Capital Earnings Equity

September 30, 2001 *************************** 13,832 $13,832 $57,075 $176,729 $247,636Net income ******************************** — — — 28,285 28,285Exercise of employee stock options************ 13 13 168 — 181Tax benefit from exercise of employee stock

options ********************************** — — 31 — 31

September 30, 2002 *************************** 13,845 13,845 57,274 205,014 276,133Net loss *********************************** — — — (12,802) (12,802)Exercise of employee stock options************ 6 6 72 — 78Tax benefit from exercise of employee stock

options ********************************** — — 58 — 58

September 30, 2003 *************************** 13,851 13,851 57,404 192,212 263,467Net income ******************************** — — — 7,587 7,587Exercise of employee stock options************ 22 22 438 — 460Tax benefit from exercise of employee stock

options ********************************** — — 75 — 75

September 30, 2004 *************************** 13,873 $13,873 $57,917 $199,799 $271,589

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

29

Atwood Oceanics, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — NATURE OF OPERATIONS ments of operations. We recorded no foreignexchange gains or losses during fiscal year 2004

Atwood Oceanics, Inc., together with its and recorded a foreign exchange loss of $.9 mil-wholly owned subsidiaries (collectively referred lion in fiscal year 2003 and a foreign exchangeto herein as ‘‘we’’, ‘‘our’’ or the ‘‘Company’’), is gain of $.1 million in fiscal year 2002.engaged in offshore drilling and completion ofexploratory and developmental oil and gas wells Accounts Receivable —and related support, management and consulting

We record trade accounts receivable at theservices principally in international locations.amount we invoice our customer. These ac-Presently, we own and operate a premium,counts do not bear interest. Our portfolio ofmodern fleet of eight mobile offshore drillingaccounts receivable is comprised of major inter-units and are involved in maintenance of twonational corporate entities and government orga-operator-owned platform drilling units in North-nizations with stable payment experience.west Australia for future drilling programs. InHistorically, our uncollectible accounts receivableDecember 2000, we purchased a semisubmer-have been immaterial, and typically, we do notsible unit for a future conversion to a tenderrequire collateral for our receivables. We provideassist vessel once an acceptable contract oppor-an allowance for uncollectible accounts, as nec-tunity is secured (see Note 3). Currently, we areessary, on a specific identification basis. How-involved in active operations in the territorialever, we had no allowance for doubtful accountswaters of Australia, Malaysia, Egypt, and theat September 30, 2004 or 2003.United States.

Inventories of Material and Supplies —NOTE 2 — SUMMARY OF SIGNIFICANTACCOUNTING POLICIES Inventories consist of spare parts, material

Consolidation — and supplies held for consumption and arestated principally at the lower of average cost or