TRANSOCEAN OFFSHORE INC, 10-K, 1998-03-20

TRANSOCEAN OFFSHORE INC
10-K, 1998-03-20
DRILLING OIL & GAS WELLS

Previous: MUNICIPAL BOND TRUST SERIES 60, 24F-2NT, 1998-03-20

Next: TIMBERLINE SOFTWARE CORPORATION, DEF 14A, 1998-03-20

<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

----------------

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997

COMMISSION FILE NUMBER 1-7746

----------------

TRANSOCEAN OFFSHORE INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

----------------

DELAWARE 72-0464968
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)

4 GREENWAY PLAZA 77046
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 871-7500

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

<TABLE>
<CAPTION>
TITLE OF CLASS EXCHANGE ON WHICH REGISTERED
-------------- ----------------------------
<S> <C>
Common Stock, $0.01 par value New York Stock Exchange, Inc.
</TABLE>

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]

As of January 31, 1998, 99,916,638 shares of common stock were outstanding
and the aggregate market value of shares held by non-affiliates was
approximately $3.9 billion (based on the reported closing market price of the
common stock on such date of $39.75 and assuming that all directors and
executive officers of the Company are "affiliates," although the Company does
not acknowledge that any such person is actually an "affiliate" within the
meaning of the federal securities laws).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission within 120 days of December 31, 1997, for
its annual meeting of stockholders to be held May 14, 1998, are incorporated
by reference into Part III of this Form 10-K.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

TRANSOCEAN OFFSHORE INC.

INDEX TO REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
ITEM PAGE
---- ----
<C> <S> <C>
PART I
ITEMS 1 THROUGH 4
Item 1. Business..................................................... 1
Background................................................... 1
Business Strategy............................................ 1
Recent Developments.......................................... 2
Drilling Rig Fleet........................................... 3
Drilling Services............................................ 6
Drilling Contracts........................................... 7
Industry Conditions and Competition.......................... 8
Operating Risks.............................................. 9
International Operations..................................... 9
Regulation................................................... 10
Employees.................................................... 11
Item 2. Properties................................................... 11
Item 3. Legal Proceedings............................................ 12
Item 4. Submission of Matters to a Vote of Security Holders.......... 13
PART II
ITEMS 5 THROUGH 9
Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters...................................................... 14
Item 6. Selected Consolidated Financial Data......................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 16
Item 7A. Quantitative and Qualitative Disclosures About Market Risk... 27
Item 8. Financial Statements and Supplementary Data.................. 28
Item 9. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 57
PART III
ITEMS 10 THROUGH 13
Item 10. Directors and Executive Officers of the Registrant........... 58
Item 11. Executive Compensation....................................... 58
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... 58
Item 13. Certain Relationships and Related Transactions............... 58
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K.......................................................... 58
</TABLE>
<PAGE>

PART I

ITEM 1. BUSINESS

Transocean Offshore Inc. (together with its subsidiaries, unless the context
requires otherwise, the "Company" or "Transocean") is a leading international
provider of deepwater and harsh environment contract drilling services for oil
and gas wells. The Company currently owns, has ownership interests in or
operates 30 mobile offshore drilling rigs, including one unit not yet in
service. Transocean's fleet consists of seven fourth-generation
semisubmersibles, fourteen second- and third-generation semisubmersibles,
three drillships and six jackup rigs. In addition, the Company has under
construction a new technologically advanced, ultra-deepwater drillship, to be
named the "Discoverer Enterprise," and has announced contract commitments to
construct two additional Discoverer Enterprise-class drillships. The Company
contracts these drilling rigs, related equipment and work crews primarily on a
dayrate basis to drill offshore wells. The Company also provides additional
drilling services, including turnkey drilling, coiled tubing drilling and well
engineering and planning.

Transocean Offshore Inc. is a Delaware corporation with its principal
executive offices located at 4 Greenway Plaza, Houston, Texas 77046. Its
telephone number at that address is (713) 871-7500.

BACKGROUND

The Company was founded in 1953 by predecessors of Sonat Inc. and J. Ray
McDermott & Co., Inc. to design and construct the first jackup rig in the Gulf
of Mexico. The Company, then known as "The Offshore Company," began
international drilling operations in the late 1950s and was one of the first
contractors to offer drilling services in the North Sea. The Company was
publicly traded from 1967 until 1978, when it became a wholly owned subsidiary
of Sonat Inc. In June 1993, the Company, then known as "Sonat Offshore
Drilling Inc.," completed an initial public offering of approximately 60
percent of the outstanding shares of its common stock. In July 1995, Sonat
Inc. sold its remaining 40 percent interest in the Company through a secondary
public offering and currently owns no capital stock of the Company. In 1996,
the Company acquired over 99 percent of the outstanding capital shares of
Transocean ASA, a Norwegian company operating a fleet of 13 mobile offshore
drilling rigs (the "Combination"), and changed its name to "Transocean
Offshore Inc." All remaining publicly held shares were purchased in July 1997.
The aggregate purchase price of $1,504.8 million consisted of $1,198.2 million
in common stock and $306.6 million in cash, including direct transaction
costs. The Combination was deemed effective for accounting purposes as of
September 1, 1996.

BUSINESS STRATEGY

The Company is committed to remaining an industry leader in offshore
drilling and in achieving long-term growth through a strategy of (i)
concentrating its resources in the most technically demanding segments of the
offshore drilling industry, particularly in the ultra-deepwater and harsh
environment markets, (ii) continuing its technological leadership in the
development of offshore drilling methodologies, (iii) upgrading its existing
fleet and investing in selected fleet additions to meet increasing customer
demand and (iv) using its foreign operating experience and engineering
expertise to capitalize on drilling services opportunities worldwide.
Consistent with this strategy, the Company made significant capital
expenditures to upgrade and expand its rig fleet in 1997, including $111.6
million on construction of its technologically advanced, ultra-deepwater
drillship Discoverer Enterprise, $108.2 million on conversion of the
semisubmersible multi-service vessel Transocean Marianas (formerly, the P.
Portia), and an aggregate of $133.5 million on upgrades to the deepwater
drillship Discoverer Seven Seas, the fourth-generation semisubmersible
Transocean Leader and the second-generation semisubmersible Transocean
Amirante. In addition, as of February 9, 1998, the Company had announced plans
to construct two additional Discoverer Enterprise-class drillships for
delivery to customers in 2000 under firm, long-term contract commitments, for
aggregate estimated capital expenditures in excess of $618 million. See "--
Recent Developments."

The Company's fleet includes full or partial ownership in seven of the
world's thirteen fourth-generation semisubmersibles and full ownership of
eight third-generation semisubmersibles and two deepwater drillships.

1
<PAGE>

Other than those being constructed or converted, all of the Company's drilling
rigs currently are being utilized, with most committed to long-term contracts
expiring from 1999 through 2002.

The Company remains a leader in deepwater and ultra-deepwater drilling,
having drilled as of December 31, 1997 approximately 39 percent of all wells
ever drilled in water depths greater than 3,000 feet, 58 percent of all wells
ever drilled in water depths exceeding 4,000 feet and 90 percent of all wells
ever drilled in water depths greater than 5,000 feet. In June 1996, the
Company's drillship Discoverer 534 set a current water depth drilling record
of 7,612 feet.

Through implementation of its business strategy and as a result of improving
industry conditions (see "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Market Outlook"), the Company
increased net income in 1997 to $142 million or $1.38 per share, diluted, from
$78 million, or $1.07 per share, diluted, in 1996. Revenues increased to $892
million from $529 million and EBITDA to $331 million from $169 million for the
comparable periods. Total assets were $2,755 million at year-end 1997 as
compared to $2,443 million at year-end 1996. See "Item 6. Selected Financial
Data."

RECENT DEVELOPMENTS

In January 1998, the Company announced plans to construct a Discoverer
Enterprise-class ultra-deepwater drillship, to be named "Discoverer Spirit,"
which will initially be outfitted to drill in 8,500 feet of water, but with
additional riser will be capable of drilling in water depths up to 10,000
feet. The Company has received a contract commitment from Union Oil Company of
California for a firm period of five years plus up to five one-year options.
Estimated contract revenues over the five-year firm period are approximately
$372 million. The vessel's hull and major marine systems will be constructed
at the Astillero y Talleres del Noroeste SA ("Astano") shipyard in Ferrol,
Spain, where the Discoverer Enterprise is currently under construction, with
the derrick, derrick substructure, BOP and other modules to be constructed at
U.S. Gulf Coast facilities. The Discoverer Spirit is expected to become
operational in the first quarter of 2000. Total capital costs for the
drillship are estimated at $318 million, including capitalized interest and
other non-hardware costs.

In February 1998, the Company announced plans to construct another
Discoverer Enterprise-class ultra-deepwater drillship, which will be equipped
initially to drill in 8,000 feet of water, but like its sister drillships,
will be capable of drilling in water depths up to 10,000 feet with additional
riser. The Company has received a contract commitment from Chevron USA, Inc.
for a period of five years plus three one-year options. Estimated contract
revenues over the five-year firm period are approximately $374 million.
Initial operations in the U.S. Gulf of Mexico are expected to commence in the
third quarter of 2000. The vessel's hull and major marine systems will be
constructed at the Astano shipyard, with the derrick, derrick substructure,
BOP and other modules to be constructed at U.S. Gulf Coast facilities. The
drillship will be constructed at an estimated total capital cost in excess of
$300 million, including capitalized interest and other non-hardware costs.

In January 1998, the Company announced that it was discontinuing turnkey
drilling operations in the U.S. Gulf of Mexico after experiencing a period of
unsatisfactory operating performance. Financial results for the quarter ended
December 31, 1997 include a $12.6 million accrual for turnkey losses to cover
the estimated costs of abandoning one of the turnkey wells then in progress.
See "Item 7. Management's Discussion & Analysis of Financial Condition and
Results of Operations--Operating Results" and "--1997 Compared to 1996."

In March 1998, the Company reached a settlement with Global Marine, Inc.
("Global Marine") resolving various disputed matters under its cash flow
sharing agreement as of February 1, 1998 with Global Marine and terminating
such agreement as of February 1, 1998. Pursuant to the settlement, the parties
will have certain continuing rights to receive payments if any of the rigs
covered by the former agreement are sold within three years. The Company will
receive $18 million cash from Global Marine, resulting in an after tax gain of
approximately $12 million, or $.11 per share, diluted. The net cash proceeds
will be used to repay debt. See "--Drilling Rig Fleet--Jackup Rigs" and "Item
3. Legal Proceedings."

2
<PAGE>

DRILLING RIG FLEET

The Company principally uses three types of drilling rigs--semisubmersibles,
drillships and jackups--as described below.

Semisubmersibles

Semisubmersibles are floating vessels that can be submerged so that a
substantial portion of the lower hull is below the water surface during
drilling operations. They are well suited for operations in rough water
conditions. The Company operates five of the world's thirteen operational
fourth-generation semisubmersibles and has an approximate 25% equity interest
in two others. Fourth-generation semisubmersibles are those built after 1984
that have larger physical size than other semisubmersibles, harsh environment
capability, high variable load capability (greater than 4,000 metric tons),
15,000 psi blowout preventers and superior motion characteristics. Fourth-
generation semisubmersibles are frequently the most suitable for operations in
deep water and harsh environments or for development drilling that requires
larger variable loads and the ability to handle large pieces of subsea
equipment. Two of these units are operating in the U.S. Gulf of Mexico, three
are operating in the Norwegian sector of the North Sea and two are operating
in the U.K. sector of the North Sea. The Company also owns or operates
fourteen other semisubmersibles, including the Transocean Marianas, which is
currently in a Brownsville, Texas shipyard undergoing conversion. See "--
Drilling Rig Fleet--Fleet Additions and Upgrades."

Drillships

Drillships are generally self-propelled and designed to drill in deep water.
Shaped like conventional ships, they are the most mobile of the major rig
types. The Company owns two dynamically positioned drillships, which have
drilled in deeper water than any other offshore drilling rig. Dynamic
positioning allows a vessel to maintain a constant position through the use of
its onboard propulsion system. The Company's dynamically positioned drillship
Discoverer 534 set the world record for deepwater drilling at 7,612 feet in
1996. In addition, the Company is constructing a new technologically advanced,
dynamically positioned drillship, the Discoverer Enterprise, and has announced
plans to construct two additional Discoverer Enterprise-class drillships. See
"--Recent Developments" and "--Drilling Rig Fleet--Fleet Additions and
Upgrades." The Company also operates the drillship Discoverer 511 under a
bareboat charter agreement with the Ghana National Petroleum Corporation in
connection with a turnkey drilling project with Petroleos Mexicanos ("Pemex").

Jackup Rigs

The Company operates six jackup rigs. Jackup rigs stand on the ocean floor
with their hull and drilling equipment elevated above the water on connected
support legs. They are best suited for water depths of 350 feet or less.
Additionally, the Company and Global Marine were parties to a cash flow
sharing agreement pursuant to which the Company participated in the cash flow
from three jackup rigs owned and operated by Global Marine, and Global Marine
participated in the cash flow from the Company's jackup rig, Transocean
Nordic. In March 1998, the Company reached a settlement with Global Marine
resolving various disputed matters under the cash flow sharing agreement and
terminating such agreement as of February 1, 1998. Pursuant to the settlement,
the parties will have certain continuing rights to receive payments if any of
the rigs covered by the former agreement are sold within three years. The
Company will receive $18 million cash from Global Marine, resulting in an
after tax gain of approximately $12 million, or $.11 per share, diluted. The
net cash proceeds will be used to repay debt. See "Item 3. Legal Proceedings."

Fleet Additions and Upgrades

In May 1996, the Company announced plans to construct the Discoverer
Enterprise. The rig will initially be outfitted to drill in 7,000 feet of
water, but with additional riser will be capable of exploration and
development drilling in water depths up to 10,000 feet. The Discoverer
Enterprise will be a dynamically

3
<PAGE>

positioned drillship equipped with the Company's proprietary dual-activity
drilling system, which is designed to allow certain steps in drilling a well
to be performed simultaneously, which should reduce the time required to drill
the well and result in cost savings to the customer. The Company has prepared
and filed an application for a patent with the U.S. Patent and Trademark
Office with respect to this system, which patent is still pending. The rig is
being built at the Astano shipyard in Spain, and will commence working for
Amoco under a five-year contract upon completion. The Company's obligation to
accept delivery and ownership of the rig is subject to various contingencies,
including the rig's meeting certain performance criteria and the shipbuilder's
completing the rig within the contract time period.

In January 1998, the Discoverer Enterprise sustained damage to its hull when
it separated from its moorings during a severe windstorm while undergoing
construction in the Astano shipyard. Repairs to the drillship are expected to
delay delivery approximately six weeks, and as a result, commencement of
operations is now expected in the fourth quarter of 1998. During 1997, $111.6
million was spent on the Discoverer Enterprise construction project, and the
Company expects to spend approximately $144 million on this project during
1998, excluding amounts related to the hull damage, which the Company believes
to be fully covered by Astano under the construction contract. The Company has
purchased an insurance policy covering a portion of lost revenues in the event
of significant delays in the delivery of the Discoverer Enterprise caused by
covered physical events, subject to certain deductibles and other conditions.

In February 1996, the Company contracted to purchase the Transocean
Marianas. The vessel is being upgraded and converted at a Brownsville, Texas
shipyard to an ultra-deepwater semisubmersible drilling rig with a water depth
capability of 7,000 feet. The Transocean Marianas was damaged by a fire during
the third quarter 1997 while it was in the shipyard. The fire damaged the
rig's electrical system but resulted in no major structural damage to the rig
and no injury to personnel. The Transocean Marianas conversion project was
expected to have been completed during the fourth quarter of 1997, and the rig
was to then commence a five-year contract with Shell Deepwater Development. As
a result of the fire, however, it is expected that completion of the project
will be delayed until the second half of 1998. The Company believes that the
costs to repair the physical damage caused by the fire are fully insured.
Through 1997, the Company had spent approximately $174 million on this project
and expects to spend approximately $52 million in 1998 to complete conversion
of the rig, excluding amounts related to the fire damage.

During 1997, the Company also performed major capital upgrades on the
Discoverer Seven Seas, the Transocean Leader and the Transocean Amirante, for
an aggregate expenditure of $133.5 million. In May 1997, the Company entered
into a contract with a consortium of operators led by Petro-Canada to upgrade
the Transocean Explorer with capital expenditures of approximately $64 million
for operations offshore Canada. The Company's net portion of the capital cost
is expected to be approximately $10 million. The capital upgrade is expected
to commence in 1999 following completion of the rig's current contract
commitment.

Capital expenditures for these fleet additions and upgrades are being funded
through cash flow, public debt and borrowings under the Company's revolving
credit and project financing facilities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."

Arcade Drilling

In December 1990, the Company contributed one of its fourth-generation,
harsh-environment semisubmersibles, the Henry Goodrich, to Arcade Drilling as
("Arcade Drilling"), a Norwegian company, for cash and an equity interest in
Arcade Drilling, which owned another fourth-generation, harsh-environment
drilling rig, the Paul B. Loyd, Jr. Arcade Drilling entered into management
agreements with the Company for both of the rigs. In August 1991, Reading &
Bates Corporation ("R&B"), a competitor of the Company, acquired effective
control of Arcade Shipping as ("Arcade Shipping"), which at that time owned a
substantial interest in Arcade Drilling. R&B's control of Arcade Shipping,
together with the shares of Arcade Drilling that it owned outright, gave R&B
control of Arcade Drilling. In August 1991, R&B, Arcade Shipping and the
Company entered into a standstill agreement providing that R&B and Arcade
Shipping would not during the

4
<PAGE>

standstill period, subject to certain exceptions, enter into a business
combination with Arcade Drilling, engage in any transaction with Arcade
Drilling on terms less favorable to it than those which might be obtained from
an unaffiliated third party, acquire the Paul B. Loyd, Jr. or the Henry
Goodrich or permit Arcade Drilling to dispose of any interest in such rigs
except for a cash sale of its entire interest at an appraised price. This
standstill period continues (as to R&B and its affiliates) until September 1,
1998, barring an earlier disposition of interest by the Company or Arcade
Shipping. Pursuant to the standstill agreement, the Company, Arcade Shipping
and R&B have agreed not to buy or sell any of their respective shares in
Arcade Drilling from or to the Company, Arcade Shipping, R&B or their
respective affiliates (other than Arcade Drilling), unless the acquiring party
affords both non-acquiring parties the opportunity to sell all their shares to
the acquiring party on substantially identical terms and at the same time. The
management agreements have expired, and the rigs are now managed by R&B.

The following table provides certain information about the Company's
drilling rig fleet as of March 12, 1998:

<TABLE>
<CAPTION>
YEAR WATER DRILLING ESTIMATED
ENTERED DEPTH DEPTH CONTRACT
TYPE AND NAME SERVICE CAPABILITY CAPABILITY LOCATION CUSTOMER EXPIRATION(1)
------------- --------- ---------- ---------- ------------------- -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FOURTH-GENERATION (FEET) (FEET)
SEMISUBMERSIBLES
Polar Pioneer........... 1985 1,500 25,000 Norwegian North Sea Norsk Hydro February 1999
Transocean Arctic (2)... 1986 1,650 25,000 Norwegian North Sea Statoil February 2002
Henry Goodrich (3)...... 1985 2,000 30,000 U.K. North Sea British Petroleum June 1999
Paul B. Loyd, Jr. (3)... 1991 2,000 25,000 U.K. North Sea British Petroleum June 1999
Transocean Leader....... 1987 4,500 25,000 Norwegian North Sea Amerada Hess August 1999
Transocean Rather....... 1988 4,500 25,000 U.S. Gulf of Mexico Shell Deepwater Dev. July 1999
Transocean Richardson... 1988 5,000 25,000 U.S. Gulf of Mexico Shell Deepwater Dev. February 2001
OTHER SEMISUBMERSIBLES
Transocean Explorer..... 1976 1,250 25,000 U.K. North Sea Marathon January 1999
Canada PetroCanada June 2001
Transocean Discoverer... 1977 1,250 25,000 U.K. North Sea Talisman July 1999
Transocean Wildcat (2).. 1977 1,300 25,000 Norwegian North Sea Statoil December 1999
Transocean Winner (2)... 1983 1,500 25,000 Norwegian North Sea Statoil December 1999
Transocean Searcher (2). 1983 1,500 25,000 Norwegian North Sea Statoil June 2002
Transocean Prospect (2). 1983 1,500 25,000 Norwegian North Sea Statoil June 1999
Kan Tan IV (4).......... 1983 2,000 25,000 U.K. North Sea Amerada Hess December 2000
Transocean John Shaw.... 1982 2,000 25,000 U.K. North Sea Shell U.K. March 1999
Sonat D-F 96............ 1975 2,300 25,000 U.S. Gulf of Mexico Texaco May 1998
Sonat D-F 97............ 1977 2,300 25,000 U.S. Gulf of Mexico Texaco December 1998
Trinidad
Transocean Driller...... 1991 2,600 25,000 Brazil Petrobras June 2000
Treasure Legend......... 1983 3,500 25,000 Brazil Petrobras June 1998
Amerada Hess December 2002
Transocean Amirante..... 1978/1997 3,500 25,000 U.S. Gulf of Mexico Amoco July 2002
Transocean Marianas (5). 1979/1998 7,000 25,000 U.S. Gulf of Mexico Shell Deepwater Dev. (5)
DRILLSHIPS
Discoverer 511 (6)...... 1976 2,000 25,000 Mexico Pemex March 1999
Discoverer Seven Seas 1976 7,000 25,000 U.S. Gulf of Mexico Exxon July 1999
(7)....................
Discoverer 534 (7)...... 1975 7,800 25,000 U.S. Gulf of Mexico Amoco February 2000
Discoverer Enterprise 1998 10,000 35,000 U.S. Gulf of Mexico Amoco October 2003
(7)(8).................
Discoverer Spirit 2000 10,000 35,000 U.S. Gulf of Mexico Unocal (9)
(7)(9).................
Discoverer Enterprise 2000 10,000 35,000 U.S. Gulf of Mexico Chevron (10)
III (7)(10)............
JACKUP RIGS
Transocean Jupiter(11).. 1981 170 16,000 Arab Gulf Hardy October 1998
Offshore Comet.......... 1980 250 20,000 Gulf of Suez, Egypt GUPCO October 1999
Offshore Mercury........ 1969 250 20,000 Gulf of Suez, Egypt GUPCO October 1999
Interocean III.......... 1978 300 20,000 India Enron December 1998
Shelf Explorer.......... 1982 300 25,000 Danish North Sea Maersk May 1999
Transocean Nordic....... 1984 300 25,000 U.K. North Sea Amoco October 1998
Elf April 1999
</TABLE>

5
<PAGE>

- --------
(1) Expiration dates represent the Company's current estimate of the earliest
date the contract for each rig is likely to expire. Many contracts permit
the customer to terminate early or to extend the contract.
(2) Participating in a cooperation agreement with Statoil. See "--Contracts."
(3) Owned by a Norwegian company in which the Company has a 25% interest and
which is controlled by a competitor; managed by the competitor.
(4) Operated pursuant to a management contract.
(5) Originally constructed in 1979, with upgrade and conversion to drilling
mode expected to be completed in 1998. The Company has a letter agreement
with Shell Deepwater Development for a five-year contract expected to
commence in the second half of 1998. See "--Drilling Rig Fleet--Fleet
Upgrades and Additions."
(6) Operated pursuant to a bareboat charter with Ghana National Petroleum
Company. Originally converted to drilling status in 1976, with upgrade
completed in March 1997.
(7) Dynamically positioned.
(8) The Discoverer Enterprise is currently under construction in the Astano
shipyard in Ferrol, Spain, and is expected to be operational in the
fourth quarter of 1998. The rig will initially be equipped with
sufficient riser to drill in 7,000 feet of water, but will be capable of
operating at 10,000 feet of water with additional riser.
(9) The Company announced plans to build the Discoverer Spirit in January
1998. The rig will be constructed at the Astano shipyard and is expected
to be operational in the first quarter of 2000, working under a five-year
contract for Unocal. The rig will initially be equipped with sufficient
riser to drill in 8,500 feet of water, but will be capable of operating
at 10,000 feet of water with additional riser.
(10) The Company announced plans to build a third Discoverer Enterprise-class
drillship in February 1998, which is referred to in the table above as
the Discoverer Enterprise III. The rig will be constructed at the Astano
shipyard and is expected to be operational in the third quarter of 2000,
working under a five-year contract for Chevron. The rig will initially be
equipped with sufficient riser to drill in 8,000 feet of water, but will
be capable of operating at 10,000 feet of water with additional riser.
(11) Mobilizing to the Bay of Cambay, India.

Upon the expiration of existing contracts, there can be no assurance that
such contracts will be renewed or extended, that new contracts will be
available or, if contracts are available, that they will provide revenues
adequate to cover all fixed and variable costs associated with the rigs.

All of the Company's drilling equipment is suitable for both exploration and
development drilling, and the Company is normally engaged in both types of
drilling activity. The Company's drilling rigs are mobile and can be moved to
new locations in response to customer demand. All of the Company's offshore
drilling units are designed for operations away from port for extended periods
of time and have living quarters for the crews, a helicopter landing deck and
storage space for pipe and drilling supplies.

The Company's fleet is currently located in the Gulf of Mexico, the North
Sea, the Middle East and offshore Brazil and India. The Company also maintains
offices, land bases and other facilities worldwide, including in Houston,
Texas; Metairie, Amelia and Morgan City, Louisiana; Macae and Rio de Janeiro,
Brazil; Aberdeen, Scotland; Cairo and Ras Shukhair, Egypt; Bergen, Harstad and
Tananger, Norway; Ciudad Del Carmen, Mexico; Bombay and Bhavnagar, India; and
Trinidad. Most of these facilities are leased by the Company.

DRILLING SERVICES

The Company uses its engineering and operating expertise to provide turnkey
drilling and well engineering and planning services to customers. These
services are provided through service teams generally consisting of Company
personnel and third-party subcontractors, with the Company frequently serving
as lead contractor. The work generally consists of individual contractual
agreements to meet specific customer needs and may be provided on either a
dayrate or fixed price basis. As of March 1, 1998, the Company was performing
such services under contracts in the U.K. sector of the North Sea, the Bay of
Cambay, India, and the Bay of

6
<PAGE>

Campeche, Mexico. In addition, the Company operates the platform drilling unit
on Shell Offshore's Auger production platform, which is located in the U. S.
Gulf of Mexico in approximately 3,000 feet of water.

The Company also provides coiled tubing services to customers in the
Norwegian and U.K. sectors of the North Sea, primarily for well intervention.
Unlike conventional drilling units, which use sections of straight pipe
connected together to form the drillstring, coiled tubing units utilize a coil
of flexible steel tubing mounted on a reel. The tubing spools off the reel
continuously into the wellbore behind the bottom-hole assembly and drill bit,
in contrast to conventional rotary units, which must cease drilling to add
each new section of pipe. Transocean has also developed proprietary technology
to increase the efficiency of coiled tubing operations by mounting the tubing
reel directly above the rotary table. The reduction in stress on the coil
achieved by this technique is expected to increase the life of the coil and
thereby reduce the cost of coiled tubing operations. The Company currently
owns one drilling unit utilizing this technology for onshore operations, and
has signed a letter of commitment to perform a drilling contract for ARCO
Alaska, Inc. on the North Slope of Alaska and further develop the technology
for eventual usage in offshore drilling operations.

In May 1997, the Company divested certain non-core activities and associated
assets within its drilling services line of business originally acquired in
the Combination by selling the shares of a new corporate entity, Procon
Offshore ASA, to investors in Norway. The net proceeds from the sale were
approximately $106 million, goodwill was reduced by approximately $69 million
and no gain or loss was recognized on the sale. The proceeds of the sale were
used to repay debt.

DRILLING CONTRACTS

The Company's contracts to provide offshore drilling services are
individually negotiated and vary in their terms and provisions. The Company
obtains most of its contracts through competitive bidding against other
contractors. In some cases, the Company may be awarded drilling contracts for
its deepwater and harsh-environment units without competitive bidding.
Drilling contracts generally provide for payment on a dayrate basis, with
higher rates while the drilling unit is operating and lower rates for periods
of mobilization or when drilling operations are interrupted or restricted by
equipment breakdowns, adverse environmental conditions or other conditions
beyond the control of the Company. The Company also performs drilling services
under turnkey contracts, which provide for payment of a fixed price per well.
Revenues from dayrate contracts have historically accounted for substantially
more of the Company's revenues than turnkey contracts. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Operating Results."

A dayrate drilling contract generally extends over a period of time covering
either the drilling of a single well or group of wells or covering a stated
term and may be terminated by the customer in the event the drilling unit is
destroyed or lost or if drilling operations are suspended for a specified
period of time as a result of a breakdown of major equipment or, in some
cases, due to other events beyond the control of either party. Many of the
Company's contracts permit the customer to terminate the contract early by
giving notice and in some circumstances may require the payment of an early
termination fee by the customer. In addition, the contract term in many
instances may be extended by the customer exercising options for the drilling
of additional wells or for an additional term.

Under turnkey contracts, the Company agrees to drill a well to a specified
depth for a fixed price. In general, no payment is received by the Company
unless the well is drilled to the specified depth. The Company must bear the
costs of performing drilling services until the well has been drilled and,
accordingly, such projects may require significant cash commitments by the
Company. In addition, profitability of the contract is dependent upon keeping
expenses within the estimates used by the Company in determining the contract
price. In performing a turnkey project, the Company employs a drilling unit
from its own fleet or from another contractor under a dayrate contract.
Drilling a well under a turnkey contract offers the possibility of financial
gains or losses that are substantially greater than those which would
ordinarily result from drilling such well under a conventional

7
<PAGE>

dayrate contract, since the Company retains any excess of the fixed price over
its expenses (including the drilling unit dayrate) but must pay any excess of
expenses over such price. The financial results of turnkey contracts depend
upon the performance of the drilling unit, drilling conditions and other
factors.

The Company and Statoil are parties to a cooperation agreement extending
through 2005. Under the cooperation agreement, the Company originally had
committed four semisubmersibles--the Transocean Prospect, Transocean Searcher,
Transocean Wildcat and Transocean Winner--for contract periods ranging from 2
1/2 to 4 years, with Statoil having options to extend the contracts at market
rates in minimum one-year intervals for the remainder of the term. In October
1997, the Company and Statoil amended the cooperation agreement to add the
Transocean Arctic and to make certain other changes, including the lengthening
of notice periods for Statoil to extend the existing contracts and the
determination of dayrates in the event of such extensions.

During the past five years, the Company has engaged in offshore drilling for
most of the leading international oil companies (or their affiliates) in the
world, as well as for many government-controlled and independent oil
companies. During this period, the Company's principal customers have included
the Royal Dutch Shell Group, Statoil, Texaco, British Petroleum, Pemex, Gulf
of Suez Petroleum Company ("GUPCO"), Amoco, Petrobras and Norsk Hydro. The
Company's largest unaffiliated customers in 1997 were Statoil, Royal Dutch
Shell Group and Amoco, accounting for 18.7 percent, 17.2 percent and 10.2
percent, respectively, of the Company's 1997 consolidated operating revenues.

INDUSTRY CONDITIONS AND COMPETITION

Historically, the offshore contract drilling industry has been highly
competitive and cyclical, with periods of high demand, short rig supply and
high dayrates followed by periods of low demand, excess rig supply and low
dayrates. The industry is characterized by high capital costs, long lead times
for construction of new rigs and numerous competitors. The offshore contract
drilling business is influenced by many factors, including the current and
anticipated prices of oil and gas (which affect the expenditures by oil
companies for exploration and production) and the availability of drilling
units. Drilling contracts are traditionally awarded on a competitive bid
basis. While an operator selecting a rig may consider, among other things,
quality of service and equipment, intense price competition is often the
primary factor in determining which qualified contractor is awarded a job.

Domestically, oil and natural gas prices have been directly affected by such
factors as natural gas production, availability of new oil and gas leases and
governmental laws and regulations regarding, among other things, environmental
protection and taxation. Factors that influence demand for the Company's
services include worldwide demand for oil and gas, the ability of the
Organization of Petroleum Exporting Countries ("OPEC") to set and maintain
production levels and prices, the level of production by non-OPEC countries,
contractual terms imposed by governments with respect to exploration and
development of oil and gas resources, and advances in the technology relating
to the exploration and development of hydrocarbon reserves. In addition,
worldwide political and economic events, including initiatives by OPEC, are
likely to cause price volatility. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Market Outlook."

8
<PAGE>

personnel exists. This shortage may become more acute over the next several
years as a number of new drilling units are expected to become operational. In
response, the Company has initiated an aggressive recruitment and training
program to meet its anticipated personnel needs.

As of March 1, 1998, the Company had two rigs in shipyards undergoing
conversion or construction, and had three additional rigs scheduled to begin
construction or upgrade. Because of the increase in demand for offshore
drilling rigs, as well as offshore equipment, shipyards are experiencing
difficulty in hiring qualified workers and in procuring materials for
outfitting vessels under construction. Shipyards and suppliers to the offshore
petroleum industry are operating at or near capacity, resulting in the delay
of ordered materials and equipment. These factors may contribute to cost
variations and delays in the delivery of the Company's newly converted or
constructed drilling units. Delays in delivery could result in delays in
contract commencements for these units, resulting in a loss of revenue to the
Company.

OPERATING RISKS

The Company's operations are subject to the usual hazards inherent in the
drilling of oil and gas wells, such as blowouts, reservoir damage, loss of
production, loss of well control, cratering or fires, the occurrence of which
could result in the suspension of drilling operations, damage to or
destruction of the equipment involved and injury or death to rig personnel.
Damage to the environment could also result from the Company's operations,
particularly through oil spillage or extensive uncontrolled fires. In
addition, offshore drilling operations are subject to perils peculiar to
marine operations, including capsizing, grounding, collision and loss or
damage from severe weather.

The Company maintains broad insurance coverage, including insurance against
general and marine public liability. The Company's offshore drilling equipment
is covered by physical damage insurance policies against marine and other
perils, including losses due to capsizing, grounding, collision, fire,
lightning, hurricanes, wind, storms, action of waves, cratering, blowouts and
explosions, and by policies against war risks to its rigs located in foreign
countries. The Company also carries employer's liability and other insurance
customary in the drilling business.

The Company believes it is adequately insured in accordance with industry
standards against normal risks in its operations; however, such insurance
coverage may not in all situations provide sufficient funds to protect the
Company from all liabilities that could result from its drilling operations.
Although the Company's current practice is to insure its drilling units for at
least the net book value of the units, the Company's insurance would not cover
the costs that would be required to replace certain of its units, including
certain of its fourth-generation semisubmersibles and drillships. Moreover,
the Company's insurance coverage in most cases does not protect against loss
of revenues. Accordingly, the occurrence of a casualty or loss against which
the Company is not fully insured could have a material adverse effect on the
Company's financial position and results of operations.

The Company is subject to liability under various environmental laws and
regulations. See "--Regulation." The Company has generally been able to obtain
some degree of contractual indemnification pursuant to which the Company's
customer agrees to protect and indemnify the Company from liability for
pollution and environmental damages; however, there is no assurance that the
Company can obtain such indemnities in all of its contracts or that, in the
event of extensive pollution and environmental damages, the customer will have
the financial capability to fulfill its contractual obligation to the Company.
Also, these indemnities may not be enforceable in all instances. No such
indemnification is typically available for turnkey operations.

INTERNATIONAL OPERATIONS

The Company has derived a majority of its revenues from its foreign
operations in each of the past three years. The Company cannot predict whether
foreign drilling operations will account for a greater or lesser percentage of
such revenues in future periods. See Note 16 to the Company's consolidated
financial statements.

9
<PAGE>

In some areas, the Company's foreign operations are subject to certain
political and other uncertainties not encountered in domestic operations,
including risks of war, expropriation of equipment, renegotiation or
modification of existing contracts, taxation policies and the general hazards
associated with foreign sovereignty over certain areas in which operations are
conducted. The Company is protected to a substantial extent against capital
loss (but generally not loss of revenue) from most of such risks through
insurance, indemnity provisions in its drilling contracts or both, but usually
not risk of expropriation or other political risks. See "--Operating Risks."
The Company's operations are also subject to extensive regulation by foreign
governments. See "--Regulation."

The Company's ability to compete in the international drilling market may be
adversely affected by foreign governmental practices which favor or
effectively require the awarding of drilling contracts to local contractors or
require foreign contractors to employ citizens of, or purchase supplies from,
a particular jurisdiction. The Company expects to continue to structure
certain of its operations through joint ventures or other appropriate means in
order to remain competitive in the world market.

Other risks inherent in foreign operations are the possibility of currency
exchange losses where revenues are received and expenses are paid in
currencies other than United States dollars. Losses can also result from an
inability to collect dollar revenues because of a shortage of convertible
currency available to the foreign country. Generally, the Company seeks to
limit these risks by structuring contracts such that compensation is paid in
United States dollars or freely convertible foreign currencies and, to the
extent possible, by limiting acceptance of blocked currencies to amounts which
match its expense requirements in local currency. See "Item 7A. Quantitative
and Qualitative Disclosures About Market Risk--Foreign Exchange Risk."

REGULATION

The Company's operations are affected from time to time in varying degrees
by governmental laws and regulations. The drilling industry is dependent on
demand for services from the oil and gas exploration industry and,
accordingly, is affected by changing tax and other laws relating to the energy
business generally.

Foreign contract drilling operations are subject to various laws and
regulations in countries in which the Company operates. Such laws and
regulations regulate various aspects of foreign operations, including the
equipping and operation of drilling units, currency conversions and
repatriation, oil exploration and development, taxation of foreign earnings
and earnings of expatriate personnel and use of local employees and suppliers
by foreign contractors. Governments in some foreign countries have become
increasingly active in regulating and controlling the ownership of concessions
and companies holding concessions, the exportation of oil and other aspects of
the oil industries in their countries. In addition, government action,
including initiatives by OPEC, may continue to cause oil price volatility. In
some areas of the world, this governmental activity has adversely affected the
amount of exploration and development work done by major oil companies and may
continue to do so.

In the United States, regulations applicable to the Company's operations
include certain regulations controlling the discharge of materials into the
environment, requiring removal and cleanup of materials that may harm the
environment or otherwise relating to the protection of the environment. For
example, the Company, as an operator of mobile offshore drilling units in
navigable United States waters and certain offshore areas, may be liable for
damages and costs incurred in connection with oil spills for which it is held
responsible, subject to certain limitations. Laws and regulations protecting
the environment have become more stringent in recent years, and may in certain
circumstances impose "strict liability," rendering a person liable for
environmental damage without regard to negligence or fault on the part of such
person. Such laws and regulations may expose the Company to liability for the
conduct of or conditions caused by others, or for acts of the Company which
were in compliance with all applicable laws at the time such acts were
performed. The application of these requirements or the adoption of new
requirements could have a material adverse effect on the Company's financial
position and results of operations.

The Oil Pollution Act of 1990 ("OPA") and regulations promulgated pursuant
thereto impose a variety of requirements on "responsible parties" related to
the prevention of oil spills and liability for damages resulting

10
<PAGE>

from such spills. Few defenses exist to the liability imposed by the OPA, and
such liability could be substantial. A failure to comply with ongoing
requirements or inadequate cooperation in a spill event could subject a
responsible party to civil or criminal enforcement action.

The Outer Continental Shelf Lands Act authorizes regulations relating to
safety and environmental protection applicable to lessees and permittees
operating on the Outer Continental Shelf. Specific design and operational
standards may apply to Outer Continental Shelf vessels, rigs, platforms,
vehicles and structures. Violations of environmental related lease conditions
or regulations issued pursuant to the Outer Continental Shelf Lands Act can
result in substantial civil and criminal penalties, as well as potential court
injunctions curtailing operations and canceling leases. Such enforcement
liabilities can result from either governmental or citizen prosecution.

Certain of the foreign countries in whose waters the Company is presently
operating or may operate in the future have regulations covering the discharge
of oil and other contaminants in connection with drilling operations.

The Company believes that it has conducted its operations in substantial
compliance with applicable environmental laws and regulations governing its
activities. Although significant capital expenditures may be required to
comply with such governmental laws and regulations, such compliance has not
materially adversely affected the earnings or competitive position of the
Company. In 1992, regulations relating to offshore drilling rigs were issued
in the U.K. which required a comprehensive review of the technical
characteristics of and operating procedures for each rig in the U.K. sector of
the North Sea. It is possible that such laws and regulations in the future may
add to the cost of operating offshore drilling equipment or may significantly
limit drilling activity.

EMPLOYEES

As of December 31, 1997, the Company had approximately 3,500 employees. The
Company requires highly skilled personnel to operate its drilling units. As a
result, the Company conducts extensive personnel training and safety programs.
The Company believes that in light of increased demand for drilling services,
the possibility of a shortage of qualified personnel exists. The Company has
initiated a training and recruitment program to address this issue; however,
these increases in demand for drilling services may make retention of
qualified personnel more difficult at current compensation levels.

On a worldwide basis, the Company had approximately 28 percent of its
employees working under collective bargaining agreements at December 31, 1997.
The majority of these employees are represented by Norwegian unions. Of these
represented employees, all are working under agreements that are subject to
negotiation in 1998. In September 1997, a work stoppage by offshore workers
represented by a Norwegian union affected three of the Company's rigs
operating in Norway, resulting in a loss of dayrate revenues on the affected
rigs. Work resumed on the affected rigs in October, and the dispute, which
affected all offshore drilling companies in the Norwegian sector of the North
Sea, was resolved through mandatory arbitration ordered by the Norwegian
Parliament, with the union losing on all points in February 1998. The Company
does not have any other collective bargaining agreements that are material to
the Company and considers relations with its employees to be good.

ITEM 2. PROPERTIES

The description of the Company's property included under "Item 1. Business"
is incorporated by reference herein.

11
<PAGE>

ITEM 3. LEGAL PROCEEDINGS

The Company and Global Marine were parties to an agreement pursuant to which
the Company participated in the cash flow from three jackup drilling rigs
owned and operated by Global Marine and Global Marine participated in the cash
flow from one of the Company's jackup drilling rigs, the Transocean Nordic.
During April 1997, Global Marine initiated arbitration proceedings against the
Company in the United Kingdom with respect to various disputed matters under
the agreement, including the distribution of revenues from the rigs and
whether the Company's acquisition of Transocean ASA may have given rise to a
right of first refusal on the part of Global Marine to purchase the Transocean
Nordic. In March 1998, the Company reached a settlement with Global Marine
resolving the disputed matters under the cash flow sharing agreement and
terminating such agreement as of February 1, 1998. Pursuant to the settlement,
the parties will have certain continuing rights to receive payments if any of
the rigs covered by the former agreement are sold within three years. The
Company will receive $18 million cash from Global Marine, resulting in an
after tax gain of approximately $12 million, or $.11 per share, diluted. The
net cash proceeds will be used to repay debt.

During 1997, Kvaerner Installasjon a.s ("Kvaerner") in Norway performed
modification and refurbishment work on one of the Company's fourth-generation
semisubmersible drilling rigs, the Transocean Leader. Disputes have arisen
with respect to the work performed and the amount owed with respect to such
work. The amount in dispute is approximately $40 million. The Company has
posted a letter of credit for approximately $30 million pending the resolution
of the dispute by agreement between the parties or by final judgment under the
Norwegian judicial process. The parties are continuing to discuss the matter,
and the Company is unable to predict at this time the ultimate outcome of such
discussions or any resulting judicial process; however, the Company believes
Kvaerner's claims are without merit and that the outcome of the dispute will
have no material adverse effect on the Company's operations or financial
position.

In 1990 and 1991, two of the Company's subsidiaries were served with
assessments totaling approximately $11 million from the municipality of Rio de
Janeiro, Brazil to collect a municipal tax on services ("ISS"). The Company
believes that neither subsidiary is liable for the taxes and has contested the
assessments in the Brazilian administrative and court systems. The proceedings
with respect to the 1991 assessment, which was for approximately $9 million,
have reached the first level Brazilian state court, which rejected the
Company's arguments. The Company has appealed that decision to the second
level court. The legal and administrative decisions as to the 1990 assessments
are still pending. If the Company's defenses are ultimately unsuccessful, the
Company believes that the Brazilian government-controlled oil company,
Petrobras, has a contractual obligation to reimburse the Company for ISS
payments required to be paid by them. The Company believes the outcome of
these assessments will have no material adverse affect on the Company's
operations or financial position.

The Company and its subsidiaries are involved in a number of other lawsuits,
all of which have arisen in the ordinary course of the Company's business. The
Company does not believe that ultimate liability, if any, resulting from any
pending litigation will have a material adverse effect on its operations or
financial position.

12
<PAGE>

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company did not submit any matter to a vote of its security holders
during the fourth quarter of 1997.

EXECUTIVE OFFICERS OF THE REGISTRANT

<TABLE>
<CAPTION>
AGE AS OF
OFFICER OFFICE MARCH 1, 1998
------- ------ -------------
<C> <S> <C>
J. Michael Talbert............... Chairman of the Board and 51
Chief Executive Officer
W. Dennis Heagney................ Director, President and 50
Chief Operating Officer
Jon C. Cole...................... Senior Vice President 45
Robert L. Long................... Senior Vice President, 52
Chief Financial Officer
and Treasurer
Donald R. Ray.................... Senior Vice President 51
Alan A. Broussard................ Vice President 52
Eric B. Brown.................... Vice President, General 46
Counsel and Secretary
Paul A. King..................... Vice President 46
Barbara S. Koucouthakis.......... Vice President and 39
Controller
Dennis R. Long................... Vice President 50
</TABLE>

The officers of the Company are elected annually by the Board of Directors.
There is no family relationship between any of the above-named executive
officers.

J. Michael Talbert was elected a director and Chairman of the Board and
Chief Executive Officer of the Company effective September 1, 1994 and
currently serves in those capacities. Prior to assuming his current position
with the Company, Mr. Talbert was President and Chief Executive Officer of
Lone Star Gas Company, a division of Enserch Corporation, since May 1993, and
served as President and Chief Operating Officer of Lone Star Gas Company from
January 1991 to May 1993.

W. Dennis Heagney was elected a director of the Company effective June 12,
1997 and President of the Company effective April 1, 1986 and currently serves
in those capacities and as Chief Operating Officer, with direct responsibility
for operations of the Company's mobile offshore drilling units and drilling
services throughout the world other than Europe. He has been employed by the
Company since 1969 and was elected Vice President in 1983 and Senior Vice
President in 1984.

Jon C. Cole was elected Senior Vice President of the Company effective April
1, 1993 and currently serves in that capacity, with responsibility for
operations of the Company's mobile offshore drilling units and drilling
services in Europe. Mr. Cole joined the Company in 1978 and was elected Vice
President in 1990.

Robert L. Long was elected Senior Vice President of the Company effective
May 1, 1990 and Treasurer of the Company effective September 1, 1997 and
currently serves in those capacities and as Chief Financial Officer. Mr. Long
has been employed by the Company since 1976 and was elected Vice President in
1987.

Donald R. Ray was elected Senior Vice President of the Company effective
December 1, 1996 and currently serves in that capacity, with responsibility
for technical services. Mr. Ray has been employed by the Company since 1972
and has served as a Vice President of the Company since 1986.

Alan A. Broussard was elected Vice President of the Company effective
February 12, 1998 and currently serves in that capacity, with responsibility
for worldwide marketing. He has been employed by the Company since 1975.

Eric B. Brown was elected Vice President and General Counsel of the Company
effective February 1, 1995 and Secretary effective September 29, 1995 and
currently serves in those capacities. During the past five years,

13
<PAGE>

prior to assuming his current position with the Company, Mr. Brown served as
General Counsel of Coastal Gas Marketing Company.

Paul A. King was elected Vice President of the Company effective December 1,
1996 and currently serves in that capacity, with responsibility for
operations. He has been employed by the Company since 1975.

Barbara S. Koucouthakis was elected Controller of the Company effective
January 1, 1990 and Vice President effective April 1, 1993 and currently
serves in those capacities. She has been employed by the Company since 1982.

Dennis R. Long was elected Vice President of the Company effective July 1,
1997 and currently serves in that capacity, with responsibility for human
resources and management information systems. Prior to assuming his current
position with the Company, Mr. Long was Senior Vice President, Administration,
since May 1995, of Enserch Corporation, and previously served Lone Star Gas
Company, a division of Enserch Corporation, as Vice President, Human Resources
and Services, from January 1986 to May 1995.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common stock is listed on the New York Stock Exchange (the
"NYSE") and on the Oslo Stock Exchange under the symbol "RIG." The following
table sets forth the high and low sales prices of the Company's common stock
for the periods indicated as reported on the NYSE Composite Tape.

<TABLE>
<CAPTION>
PRICE
--------------
HIGH LOW
---- ----
<S> <C> <C>
1996
First Quarter....................................... $26 1/2 $20 9/16
Second Quarter...................................... 29 1/2 23 1/4
Third Quarter....................................... 30 7/8 24 7/16
Fourth Quarter...................................... 35 11/16 28 5/16
1997
First Quarter....................................... 35 11/16 26 1/8
Second Quarter...................................... 37 5/16 27 3/16
Third Quarter....................................... 50 7/16 36 5/16
Fourth Quarter...................................... 60 1/2 39 3/8
1998
First Quarter (through February 27)................. 48 3/16 35
</TABLE>

On February 27, 1998, the last reported sales price of the Company's common
stock on the NYSE Composite Tape was $43 per share. On such date, there were
approximately 350 holders of record of the Company's common stock and
99,943,804 shares of common stock outstanding.

In September 1997, the Company effected a two-for-one split of its common
stock in the form of a 100 percent stock dividend. All references in this
annual report to number of shares, per share amounts and market prices of the
Company's common stock have been retroactively restated to reflect the
increased number of shares of common stock issued and outstanding as a result
of the dividend.

The Company has paid quarterly cash dividends of $0.03 per share of its
common stock since the fourth quarter of 1993. Any future declaration and
payment of dividends will be (i) dependent upon the Company's results of
operations, financial condition, cash requirements and other relevant factors,
(ii) subject to the discretion of the Board of Directors of the Company, (iii)
subject to restrictions contained in the Company's bank credit agreement (see
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources") and (iv) payable only
out of the Company's surplus or current net profits in accordance with
Delaware law.

14
<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31, 1997 has been
derived from the audited consolidated financial statements of the Company
included elsewhere herein. The selected consolidated financial data as of
December 31, 1995, 1994 and 1993 and for each of the two years in the period
ended December 31, 1994 has been derived from audited consolidated financial
statements of the Company not included herein. The following data should be
read in conjunction with "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the Company's consolidated
financial statements and the notes thereto included under "Item 8. Financial
Statements and Supplementary Data." The statement of operations data for the
year ended December 31, 1996 includes the operating results of Transocean ASA
since September 1, 1996, the effective date of the Combination for accounting
purposes.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1997 1996 1995 1994 1993
------ ------ ----- ----- -----
(IN MILLIONS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Operating Revenues............................ $ 892 $ 529 $ 323 $ 243 $ 271
Operating Income.............................. 217 108 52 21 24
Income Before Cumulative Effect of Accounting
Change(a).................................... 142 78 47 13 24
Income Before Cumulative Effect of Accounting
Change Per Share(b)(c)
Basic....................................... $ 1.40 $ 1.09 $0.83 $0.23 $0.50
Diluted..................................... 1.38 1.07 0.82 0.23 0.50
OTHER FINANCIAL DATA
EBITDA(d)..................................... $ 331 $ 169 $ 98 $ 45 $ 44
Cash Dividends Declared Per Share(b)(e)....... $ 0.12 $ 0.12 $0.12 $0.12 $0.03
Capital Expenditures(f)....................... $ 406 $ 213 $ 19 $ 59 $ 10
BALANCE SHEET DATA (at end of period)
Total Assets.................................. $2,755 $2,443 $ 542 $ 493 $ 472
Total Debt.................................... 733 420 30 30 --
Stockholders' Equity.......................... 1,621 1,628 364 321 314
</TABLE>
- --------
(a) 1993 excludes a $10 million charge ($7 million after tax) which was
recognized as a cumulative effect of accounting change relating to
recording the transition obligation in connection with the adoption of
SFAS No. 106, Employers' Accounting for Postretirement Benefits Other than
Pensions, in January 1993 and includes $24 million ($16 million after tax)
of interest income relating to the settlement of Sonat Inc.'s (the
Company's former parent) consolidated federal income tax case for the
years 1983 to 1985.
(b) Income Before Cumulative Effect of Accounting Change Per Share and Cash
Dividends Declared Per Share have been retroactively restated to reflect
the increased number of shares of common stock issued and outstanding as a
result of a two-for-one stock split effected in the form of a 100 percent
stock dividend, which was paid in September 1997.
(c) Income Before Cumulative Effect of Accounting Change Per Share amounts
prior to 1997 have been restated to comply with SFAS No. 128, Earnings Per
Share (see Note 1 to the Company's consolidated financial statements).
(d) EBITDA (earnings before interest, taxes, depreciation and amortization) is
presented here because it is a widely accepted financial indication of a
company's ability to incur and service debt. EBITDA is not a measurement
presented in accordance with generally accepted accounting principles
("GAAP") and is not intended to be used in lieu of GAAP presentations of
results of operations and cash provided by operating activities. The 1993
amount excludes the cumulative effect of accounting change referred to in
note (a) above.
(e) 1993 excludes $106 million paid to Sonat Inc. prior to the Company's
initial public offering.
(f) Excludes the business combination with Transocean ASA.

15
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following information should be read in conjunction with the information
contained in the Company's consolidated financial statements and the notes
thereto included under "Item 8. Financial Statements and Supplementary Data"
elsewhere in this annual report.

OVERVIEW

Transocean Offshore Inc. is a leading international provider of deepwater
and harsh-environment contract drilling services for oil and gas wells. The
Company currently owns, has ownership interests in or operates 30 mobile
offshore drilling rigs (including one unit not yet in service). Transocean's
fleet consists of seven fourth-generation semisubmersibles, fourteen second-
and third-generation semisubmersibles, three drillships and six jackup rigs.
In addition, the Company has under construction a new technologically
advanced, ultra-deepwater drillship, to be named the "Discoverer Enterprise,"
and has announced contract commitments to construct two additional Discoverer
Enterprise-class drillships. The Company contracts these drilling rigs,
related equipment and work crews primarily on a dayrate basis to drill
offshore wells. The Company also provides additional drilling services,
including turnkey drilling, coiled tubing drilling and well engineering and
planning.

The Company acquired over 99 percent of outstanding capital shares of
Transocean ASA, a Norwegian company, pursuant to an exchange offer for Company
common stock and cash completed in September 1996 and subsequent purchases of
Transocean ASA shares in November and December 1996 (the "Combination"). All
remaining outstanding shares were purchased in July 1997. The total purchase
price was approximately $1.5 billion. The Combination was deemed effective for
accounting purposes as of September 1, 1996. In May 1997, the Company divested
certain non-core activities and associated assets within its drilling services
line of business originally acquired in the Combination. The divestiture had
no material effect on the financial results of the Company.

16
<PAGE>

OPERATING RESULTS

Comparative data relating to the Company's operating revenues and operating
income by segment and geographic area follows. In the table and related
discussion below, the "Mobile Units" segment consists of the results of
operations for drilling rigs contracted to customers primarily on a dayrate
basis. The "Drilling Services" segment includes results of all other drilling
services provided by the Company, including turnkey operations. The operating
results of Transocean ASA are included from September 1, 1996. Prior period
amounts have been reclassified to conform with the current presentation.

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES
Mobile Units
U.S. Gulf of Mexico............................. $214,418 $141,210 $ 95,771
North Sea and Europe............................ 361,045 179,865 88,885
Other Western Hemisphere........................ 19,884 29,193 24,365
Other Eastern Hemisphere........................ 84,233 31,035 29,894
-------- -------- --------
679,580 381,303 238,915
-------- -------- --------
Drilling Services
U.S. Gulf of Mexico............................. 56,335 37,567 33,295
North Sea and Europe............................ 117,211 61,723 10,914
Other Western Hemisphere........................ 38,397 31,120 36,711
Other Eastern Hemisphere........................ 439 17,420 4,976
-------- -------- --------
212,382 147,830 85,896
-------- -------- --------
Intersegment Eliminations(a)...................... -- (230) (2,153)
-------- -------- --------
Total Operating Revenues.......................... $891,962 $528,903 $322,658
======== ======== ========
OPERATING INCOME (LOSS)(b)
Mobile Units
U.S. Gulf of Mexico............................. $124,893 $ 74,062 $ 28,709
North Sea and Europe............................ 80,982 32,348 20,032
Other Western Hemisphere........................ 5,514 5,981 3,908
Other Eastern Hemisphere........................ 41,606 4,952 8,290
Other........................................... (10,791) (5,632) (5,542)
-------- -------- --------
242,204 111,711 55,397
-------- -------- --------
Drilling Services
U.S. Gulf of Mexico............................. (14,206) (355) 5,480
North Sea and Europe............................ 11,402 5,895 3,280
Other Western Hemisphere........................ 5,750 5,761 4,247
Other Eastern Hemisphere........................ 267 2,538 161
Other........................................... (1,220) (1,131) (1,147)
-------- -------- --------
1,993 12,708 12,021
-------- -------- --------
Corporate Expenses................................ (26,721) (16,805) (15,330)
-------- -------- --------
Operating Income.................................. $217,476 $107,614 $ 52,088
======== ======== ========
</TABLE>
- --------
(a) Intersegment eliminations reflect the elimination of operating revenues
earned when one of the Company's business segments provides services to
another of the Company's business segments.
(b) Amounts shown are after applicable depreciation and amortization.

17
<PAGE>

1997 COMPARED TO 1996

Net income for the year ended December 31, 1997 was $141.9 million or $1.38
per share, diluted, compared to $78.0 million or $1.07 per share, diluted, for
1996, an increase of $63.9 million or $0.31 per share, diluted. The increase
in 1997 resulted primarily from increased dayrates and the inclusion of the
Transocean ASA results for the entire year, partially offset by a decrease in
other income. The diluted weighted-average number of shares of common stock
was 102.8 million and 73.1 million for the years ended December 31, 1997 and
1996, respectively. The increase was primarily due to the shares of common
stock issued in the Combination.

Revenues were $892.0 million for the year ended December 31, 1997, compared
to $528.9 million for the prior year, an increase of $363.1 million or 69
percent. Operating income was $217.5 million in 1997 compared to $107.6
million for the year ended December 31, 1996, an increase of $109.9 million or
102 percent.

Revenues and operating income from Mobile Units increased significantly in
1997 compared to the prior year. In the U.S. Gulf of Mexico, the increases
resulted primarily from higher dayrates earned and the inclusion during the
third and fourth quarters of operations of (i) a drillship that operated in
Other Western Hemisphere in the prior year and (ii) a newly upgraded
semisubmersible that commenced operations in the third quarter. In the North
Sea and Europe, the increases in revenues and operating income resulted
primarily from the inclusion of the Transocean ASA results following the
Combination. The decreases in revenues and operating income for Other Western
Hemisphere were due to the moving of the drillship referred to above to the
U.S. Gulf of Mexico in early 1997 for an upgrade and to commence operations,
partially offset by operations added through the Combination. The increases in
Other Eastern Hemisphere were due primarily to the results of a
semisubmersible added through the Combination, higher dayrates earned during
1997 and full utilization of two jackup rigs that were stacked during a
portion of 1996.

Revenues from Drilling Services increased during the year ended December 31,
1997 compared to 1996, while operating income decreased during the same
period. In the U.S. Gulf of Mexico, the increase in revenues resulted
primarily from a higher number of turnkey wells completed during the current
period compared to the prior year. Operating losses in the U.S. Gulf of Mexico
increased in 1997 compared to the prior year primarily due to higher losses
from turnkey drilling services, including an estimated loss on one well in
progress at the end of 1997. In January 1998, the Company announced that it
was closing down the operations of its U.S. Gulf of Mexico turnkey drilling
services. In the North Sea and Europe, the increases in revenues and operating
income resulted primarily from the inclusion of the Transocean ASA results
following the Combination. The decreases in Other Eastern Hemisphere resulted
primarily from services provided in Qatar and Senegal during 1996 that were
not performed in 1997. Revenues increased and operating income decreased
slightly in Other Western Hemisphere in 1997. During 1997, the Company
completed the first well of a $124 million three-well turnkey drilling package
offshore Mexico, while the Company completed the final two wells of a $64
million five-well turnkey drilling package offshore Mexico during the prior
year.

Corporate expenses increased $9.9 million, from $16.8 million in 1996 to
$26.7 million in the current year primarily due to increased costs to
integrate and manage a larger organization. The corporate organization
expanded to accommodate the overall growth of the Company as a result of the
Combination and the increased activity in the industry, including major new
construction programs, increased recruiting and training activity and upgrade
and expansion of communication and data processing systems.

Depreciation and amortization expense was $103.0 million in 1997 compared to
$46.6 million in 1996. The increased expense was primarily due to additional
depreciation on property and equipment acquired in the Combination and
amortization of goodwill relating to the Combination.

Other income (expense), net, decreased from income of $14.0 million in 1996
to expense of $10.2 million in the current year. During 1997, the Company
recognized lower interest income due to lower average cash balances and higher
net interest expense due primarily to increased debt relating to the
Combination and the Public Debt Offering. See "--Liquidity and Capital
Resources." Other expense in 1997 included $1.6 million

18
<PAGE>

in realized losses on foreign exchange derivative instruments, while 1996
included a $6.6 million pre-tax gain on the disposal of a jackup rig. Higher
equity in earnings of joint ventures resulted primarily from higher dayrates
earned on the two rigs partially owned by the Company through Arcade Drilling.
See Note 15 to the Company's consolidated financial statements.

Income tax expense increased by $21.7 million due primarily to higher pre-
tax earnings during 1997 as compared to 1996, partially offset by a decrease
in earnings of foreign subsidiaries subject to tax. The decrease in the
Company's effective tax rate below the U.S. statutory rate is primarily due to
the permanent reinvestment of earnings of certain foreign subsidiaries.

1996 COMPARED TO 1995

Net income for the year ended December 31, 1996 was $78.0 million, or $1.07
per share, diluted, compared to $46.9 million or $0.82 per share, diluted, in
1995, an improvement of $31.1 million or $0.25 per share, diluted. The
increase for 1996 reflects the continuation of the high rig utilization rates
experienced in 1995, along with inclusion of the results of Transocean ASA
following the September 1996 Combination. The diluted weighted-average number
of shares was 73.1 million and 57.3 million for the years ended December 31,
1996 and 1995, respectively. The increase in the weighted-average number of
shares was primarily due to shares of common stock issued in the Combination
in September 1996.

Revenues were $528.9 million in 1996 compared to $322.7 million in 1995, an
increase of $206.2 million or 64 percent. Transocean ASA operations resulted
in $148.6 million of revenues for the period from September 1, 1996, the
effective date of the Combination, of which $102.0 million was related to
Mobile Units and $46.6 million was related to Drilling Services. The remaining
increase in revenues was primarily attributed to improved dayrates during the
year.

Revenues and operating income from Mobile Units increased significantly in
1996 compared to 1995. The increases in the U.S. Gulf of Mexico resulted
primarily from higher dayrates earned and from the relocation of one rig from
Europe where it worked during a portion of 1995. Partially offsetting these
increases were lower revenues and operating income in 1996 due to the sale of
five bottom-supported rigs in the third quarter of 1995. The increases in
revenues and operating income from the North Sea and Europe resulted primarily
from the inclusion of Transocean ASA results following the Combination.
Although dayrates increased in the North Sea and Europe in 1996 over 1995, the
effect of the increase was offset by the relocation of one rig to the U.S.
Gulf of Mexico in the third quarter of 1995. The increases in Other Western
Hemisphere resulted primarily from the inclusion of Transocean ASA results
following the Combination.

Revenues from Drilling Services increased in 1996 compared to 1995, while
operating income remained relatively constant. The largest increases in
Drilling Services were in the North Sea and Europe, principally due to the
inclusion of Transocean ASA results following the Combination and the
expansion of drilling services provided. Revenues and operating income
increases in Other Eastern Hemisphere resulted from services performed in
Qatar and Senegal during 1996. The operating loss in the U.S. Gulf of Mexico
resulted primarily from losses in 1996 on five turnkey wells.

Corporate expenses increased $1.5 million, from $15.3 million in 1995 to
$16.8 million in 1996 primarily due to increased costs to integrate and manage
a larger organization. The corporate organization expanded to accommodate the
overall growth of the Company as a result of the Combination and the increased
activity in the industry, including major new construction programs, increased
recruiting and training activity and upgrade and expansion of communication
and data processing systems.

Other income decreased primarily due to the non-recurring pre-tax gain of
$16.6 million from the sale of six bottom-supported rigs in 1995 and higher
interest expense in 1996 due to debt incurred related to the Combination.
Partially offsetting these decreases were higher interest income earned due to
higher average cash balances, increased equity in earnings of joint ventures
in 1996 over 1995, and a non-recurring pre-tax gain of $6.6 million on the
disposal of a rig in 1996.

19
<PAGE>

Income tax expense increased in 1996 to $43.6 million from $28.2 million,
primarily due to the increase in pre-tax income.

OTHER FACTORS AFFECTING OPERATING RESULTS

The Company requires highly-skilled personnel to operate and provide
technical services and support for its drilling units. During the industry
downturn in the mid- to late-1980s and early- to mid-1990s, the industry's
ability and need to recruit and train new personnel were severely curtailed.
Because of the increased worldwide demand for offshore drilling services and
the resulting higher utilization of existing rigs, a shortage of qualified
personnel exists. This shortage may become more acute over the next several
years as a number of new drilling units are expected to become operational. In
response, the Company has initiated an aggressive recruitment and training
program to meet its anticipated personnel needs.

The general rate of inflation in the United States and the majority of the
foreign countries in which the Company operates has been moderate over the
past several years and has not had a material impact on the Company's results
of operations. However, due to the actual and expected increase in the demand
for offshore drilling rigs, the Company has experienced and may continue to
experience higher labor, transportation and other operating expenses as a
result of an increased need for qualified personnel and services.

The Company has derived a majority of its revenues from its foreign
operations in each of the past three years. The Company cannot predict whether
foreign operations will account for a greater or lesser percentage of such
revenues in future periods.

The Company's foreign operations are geographically dispersed and are
therefore subject to certain political and other uncertainties not encountered
in domestic operations, including risks of war, expropriation of equipment,
renegotiation or modification of existing contracts, taxation policies and the
general hazards associated with foreign sovereignty over certain areas in
which operations are conducted. The Company is protected to a substantial
extent against capital loss (but generally not loss of revenue) from most of
such risks through insurance, indemnity provisions in its drilling contracts,
or both. The necessity of insurance coverage for risks associated with
political unrest, expropriation and environmental remediation is evaluated on
an individual contract basis.

The Company's operations are also subject to extensive regulation by foreign
governments. The Company's ability to compete in the international drilling
market may be adversely affected by foreign governmental practices which favor
or effectively require the awarding of drilling contracts to local
contractors. The Company expects to continue to structure its operations
through appropriate means in order to remain competitive in the international
markets.

Other risks inherent in foreign operations are the possibility of currency
exchange losses where revenues are received and expenses are paid in
currencies other than United States dollars. Losses can also result from an
inability to collect dollar revenues because of a shortage of convertible
currency available to the foreign country. Generally, the Company seeks to
limit these risks by structuring contracts such that compensation is made in
United States dollars or freely convertible foreign currencies and, to the
extent possible, by limiting acceptance of blocked currencies to amounts which
match its expense requirements in local currency. See "--Liquidity and Capital
Resources."

20
<PAGE>

On a worldwide basis, the Company had approximately 28 percent of its
employees working under collective bargaining agreements at December 31, 1997.
Of these represented employees, all are working under agreements that are
subject to negotiation in 1998. The majority of these employees are
represented by Norwegian unions. In September 1997, a work stoppage by
offshore workers represented by a Norwegian union affected three of the
Company's rigs operating in Norway, resulting in a loss of dayrate revenues on
the affected rigs. Work resumed on the affected rigs in October, and the
dispute, which affected all offshore drilling companies in the Norwegian
sector of the North Sea, was resolved through mandatory arbitration ordered by
the Norwegian Parliament, with the union losing on all points in February
1998.

MARKET OUTLOOK

Higher utilization and higher dayrates for rigs in the deepwater and harsh-
environment markets continued throughout 1997. The improvements in these
markets are due in part to technological advances such as 3D seismic that have
improved the economics of offshore exploration and development, as well as the
greater availability of attractive concessions in markets throughout the
world. Operators continue to show more interest in deepwater areas worldwide,
including the U.S. Gulf of Mexico, West Africa and in some of the North Sea's
more demanding locations, particularly the harsh-environment areas west of
Shetlands and northern areas offshore Norway. As a result of the improved
market conditions, rigs are being contracted under longer term agreements at
higher dayrates, with customers often paying for upgrades to the rigs to
operate in more challenging conditions. In response to the demands of its
customers, the Company is also providing a variety of drilling services,
including coiled tubing drilling and services and well planning, engineering
and management.

Historically, the contract drilling market has been highly competitive and
cyclical. As a result, the Company cannot predict the extent to which the
current market conditions will continue. Oil prices began declining during the
latter part of 1997 continuing into the first quarter of 1998; if prices
remain at current levels or continue to decline for an extended period,
reduced demand for the Company's contract drilling services could result. In
addition, a number of drilling contractors commenced upgrading existing rigs
or constructing new rigs that will be capable of competing with the Company's
deepwater and harsh-environment rigs. Although most of these rigs are being
built pursuant to long-term contract commitments, there can be no assurance
that, upon the expiration of such contracts and the contracts for the
Company's rigs, the then-current market conditions will be favorable and that
current high utilization rates and dayrates will continue.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Cash flows provided by operations for 1997 were $163.6 million, compared to
$125.5 million for 1996, an increase of $38.1 million. The increase was
primarily due to a $63.9 million increase in net income and a $56.4 million
increase in depreciation and amortization resulting from the Combination and
rig upgrades, offset by a decrease due to changes in working capital
components.

Cash flows used in investing activities for 1997 were $305.4 million,
compared to $453.6 million for 1996, a decrease of $148.2 million. During the
current year, the Company significantly increased its capital expenditures
related to its rig construction and upgrades. The Company also received cash
proceeds from the divestiture of certain non-core drilling services activities
and assets, while in the prior year the Company used cash in the Combination.

Cash flows provided by financing activities for 1997 were $171.9 million,
compared to $239.2 million for 1996, a decrease of $67.3 million. During 1997,
the Company increased its borrowings through the $300 million Public Debt
Offering and the Project Financing Agreement (both of which are defined
below). This was partially offset by repayments on its Term Loan Facility and
Revolving Credit Facility (both of which are defined below) and from cash used
to repurchase 3,784,000 shares of the Company's common stock. During the prior
year, the

21
<PAGE>

Company increased its borrowings under the Term Loan Facility and Revolving
Credit Facility and repaid debt assumed in the Combination.

Capital Expenditures

The Company's investments in its existing fleet and fleet additions continue
to require significant capital expenditures. Capital expenditures totaled
$406.5 million in 1997 and are expected to be approximately $310 million in
1998, excluding amounts that may be spent in 1998 on the Company's recently
announced Discoverer Enterprise-class drillships.

In January 1998, the Discoverer Enterprise sustained damage to its hull when
it separated from its moorings during a severe windstorm while undergoing
construction in the Astano shipyard. Repairs to the drillship are expected to
delay delivery approximately six weeks, and as a result, commencement of
operations is now expected in the fourth quarter of 1998. During 1997,
approximately $111.6 million was spent on the Discoverer Enterprise
construction project, and the Company expects to spend approximately $144
million on this project during 1998, excluding amounts related to the hull
damage, which the Company believes to be fully covered by Astano under the
construction contract. The Company has purchased an insurance policy covering
a portion of lost revenues in the event of significant delays in the delivery
of the Discoverer Enterprise caused by covered physical events, subject to
certain deductibles and other conditions.

During the third quarter of 1997, the Transocean Marianas was damaged by a
fire while it was in the shipyard undergoing conversion. The fire damaged the
rig's electrical system but resulted in no major structural damage to the rig
and no injury to personnel. The Transocean Marianas conversion project was
expected to have been completed during the fourth quarter of 1997, and the rig
was to then commence a five-year contract with Shell Offshore Inc. As a result
of the fire, it is expected that completion of the project will be delayed
until the second half of 1998. The Company believes that the costs to repair
the damage caused by the fire are fully insured. During 1997, approximately
$108.2 million was spent on the conversion project, and the Company expects to
spend approximately $52 million in 1998 to complete conversion of the rig,
excluding amounts related to the fire damage.

The Company also performed major capital upgrades on the Discoverer Seven
Seas, the Transocean Leader and the Transocean Amirante during 1997, for an
aggregate expenditure of $133.5 million.

In January 1998, the Company announced plans to construct a Discoverer
Enterprise-class ultra-deepwater drillship, to be named "Discoverer Spirit,"
which will initially be outfitted to drill in 8,500 feet of water, but will be
capable of drilling in water depths up to 10,000 feet. The Company has
received a contract commitment from Union Oil Company of California for a firm
period of five years plus up to five one-year options. The vessel's hull and
major marine systems will be constructed at the Astano shipyard in Spain,
where the Discoverer Enterprise is currently under construction, with the
derrick, derrick substructure, BOP and other modules to be constructed at U.S.
Gulf Coast facilities, for an aggregate cost of approximately $318 million,
including capitalized interest and other non-hardware costs. The Discoverer
Spirit is expected to become operational in the first quarter of 2000. The
Company expects to spend approximately $82 million on this project during
1998.

In February 1998, the Company announced plans to construct another
Discoverer Enterprise-class ultra-deepwater drillship, which will be equipped
initially to drill in 8,000 feet of water, but like its sister drillships,
will be capable of drilling in water depths up to 10,000 feet. The Company has
received a contract commitment from Chevron USA, Inc. for a period of five
years plus three one-year options. Initial operations in the U.S. Gulf of
Mexico are expected to commence in the third quarter of 2000. The vessel's
hull and major marine systems will be constructed at the Astano shipyard in
Spain with the derrick, derrick substructure, BOP and other modules to be
constructed at U.S. Gulf Coast facilities, for an aggregate cost in excess of
$300 million, including capitalized interest and other non-hardware costs. The
Company expects to spend approximately $59 million on this project in 1998.

22
<PAGE>

As with any major construction project that takes place over an extended
period of time, actual costs and the timing of capital expenditures for the
Company's rig construction projects may vary from initial estimates based on
finalization of the design and actual terms of awarded contracts. See "--Other
Factors Affecting Operating Results." The Company intends to fund the cash
requirements relating to these capital commitments through available cash
balances, borrowings under the Credit Agreement and other commercial bank or
capital market financings, including potential public offerings under the
Company's shelf registration statement (discussed below), and in the case of
the Discoverer Enterprise, financing under the Project Financing Agreement.

Debt

Credit Agreement. In connection with the Combination, the Company entered
into a secured credit agreement dated as of July 30, 1996 with a group of
banks led by ABN AMRO Bank, N.V. (the "Credit Agreement"). Prior to the
amendment discussed below, the Credit Agreement provided for borrowing by the
Company under a six-year term loan facility in the amount of $200 million (the
"Term Loan Facility") and a six-year revolving credit facility in the amount
of $400 million (the "Revolving Credit Facility"). Loans under the Credit
Agreement bear interest, at the option of the Company, at a base rate or LIBOR
plus a margin (0.25 percent at December 31, 1997) that varies depending on the
Company's funded debt to total capital ratio or its public senior unsecured
debt rating. The Credit Agreement requires compliance with various restrictive
covenants and an interest coverage ratio which could limit the Company's
ability to pay dividends in the future. Quarterly principal payments began on
the Term Loan Facility on December 31, 1996. The Credit Agreement has a
maturity date of July 30, 2002.

In connection with the public offering of the debt securities discussed
below, the Credit Agreement was amended to, among other things, release all
security, convert $140 million of the term loans into revolving loans, and
change the applicable margins over LIBOR and the applicable commitment fees.
Following the amendment, the Credit Agreement provides for a $540 million
Revolving Credit Facility, with no Term Loan Facility. In December 1997, the
Credit Agreement was further amended to remove the restrictions on repurchase
of capital stock and the covenant regarding maintenance of a minimum
consolidated net worth. As of December 31, 1997, $206.4 million in borrowings
were outstanding under the Credit Agreement.

Project Financing Agreement. In connection with the construction of the
Discoverer Enterprise and upgrade of the Transocean Amirante, the Company's
wholly owned subsidiary, Transocean Enterprise Inc., entered into a bank
financing agreement dated as of December 27, 1996 with a group of banks led by
ABN AMRO Bank, N.V. (the "Project Financing Agreement"). Approximately $340
million is available for drawdowns during the construction period and is
available in two tranches. The first tranche of $66 million is to be repaid
upon completion of construction and acceptance of the two vessels (no later
than December 31, 1998) by Amoco Exploration and Production Company ("Amoco"),
which is contracting the rigs for a period of five years following completion.
It bears an interest rate of LIBOR plus 0.35 percent. The Company expects to
lend Transocean Enterprise Inc. the necessary funds to repay the $66 million
utilizing funds borrowed under the Revolving Credit Facility. The second
tranche of $274.5 million (of which $130.2 million in borrowings were
outstanding as of December 31, 1997) bears an interest rate of LIBOR plus 0.85
percent during the construction period and is convertible to term financing
upon completion of construction and acceptance of the two vessels by Amoco (no
later than December 31, 1998). The term financing would mature over a period
of five years. The term financing would also be divided into two tranches, the
relative amounts of which would depend on various factors. One tranche of the
term financing would be sized based upon and repaid from the net cash flows
generated from the Amoco contracts (the "Amoco Cash Flows"). The Company has
the option to accept term financing for the Amoco Cash Flows at LIBOR plus
0.65 percent or to enter into an uncommitted lease securitization program at
commercial paper rates plus approximately 0.28 percent. The second tranche of
the term facility would be repaid from Company cash flows to the extent the
Amoco Cash Flows do not cover scheduled repayments. The Company has the option
to accept term financing for the Company cash flows at LIBOR plus 1.125
percent for a period of three years and LIBOR plus 1.25 percent thereafter or
to enter into an

23
<PAGE>

uncommitted lease securitization program at commercial paper rates plus
approximately 0.58 percent (as long as the Company's credit rating is BBB- or
Baa3 or better). As of December 31, 1997, $196.2 million in borrowings were
outstanding under the Project Financing Agreement.

Public Debt Offering. In April 1997, the Company completed the public
offering and sale of $300 million aggregate principal amount of senior,
unsecured debt securities. The securities sold consisted of $100 million
aggregate principal amount of 7.45% Notes due April 15, 2027 (the "Notes") and
$200 million aggregate principal amount of 8.00% Debentures due April 15, 2027
(the "Debentures"). Holders of Notes may elect to have all or any portion of
the Notes repaid on April 15, 2007 at 100 percent of the principal amount. The
Notes, at any time after April 15, 2007, and the Debentures, at any time, may
be redeemed at the option of the Company at 100 percent of the principal
amount plus a make-whole premium, if any, equal to the excess of the present
value of future payments due under the Notes and Debentures using a discount
rate equal to the then-prevailing yield of U.S. Treasury notes for a
corresponding remaining term plus 20 basis points over the principal amount of
the security being redeemed. Interest is payable on April 15 and October 15 of
each year, commencing October 15, 1997. The indenture and supplemental
indenture relating to the Notes and the Debentures place limitations on the
Company's ability to (i) incur indebtedness secured by certain liens, (ii)
engage in certain sale/leaseback transactions and (iii) engage in certain
merger, consolidation or reorganization transactions. The net proceeds were
used to repay amounts outstanding under the Credit Agreement.

Notes Payable. In February 1994, the Company issued $30 million aggregate
principal amount of unsecured 6.90% notes due February 15, 2004 in a private
placement. The note purchase agreement underlying the notes requires
compliance with various restrictive covenants substantially the same as those
under the Credit Agreement, including an interest coverage ratio that could
limit the Company's ability to pay dividends in the future. In December 1997,
the note purchase agreement was amended to remove the restrictions on
repurchase of capital stock and the covenant regarding maintenance of a
minimum consolidated net worth. The notes mature as follows: 1998 through
2002-$4.6 million each year, and $7.0 million thereafter.

Letters of Credit. The Company had letters of credit outstanding at December
31, 1997 totaling $36.3 million, including $29.7 million relating to the legal
dispute with Kvaerner Installasjon a.s. See Note 11 to the Company's
consolidated financial statements. The remaining $6.6 million guarantees
various insurance and contract bidding activities.

Shelf Registration

In April 1997, the Company filed with the Securities and Exchange Commission
(the "SEC") a $750 million shelf registration statement on Form S-3 for the
proposed offering from time to time of debt securities, preferred stock,
common stock and warrants to purchase preferred stock or debt securities. The
registration statement was declared effective by the SEC on April 11, 1997.
The Company sold the Notes and Debentures under this registration statement.

Stock Repurchase

In February 1997, the Company repurchased 1,786,000 shares of its common
stock for $49.9 million pursuant to authority previously granted by the Board
of Directors. In May 1997, the Company's Board of Directors authorized the
repurchase of up to $200 million of its common stock from time to time on the
open market or in privately negotiated transactions. In September 1997, the
Company repurchased 1,000,000 shares of its common stock for a total of $46.4
million, and in November and December 1997, the Company repurchased 998,000
shares of its common stock for a total of $48.0 million. Borrowings under the
Revolving Credit Facility were used to fund the repurchases. The Board of
Directors regularly reviews the possibility of repurchasing common stock in
light of prevailing stock prices and the financial position of the Company.

Derivative Instruments

The Company enters into a variety of derivative financial instruments in
connection with the management of its exposure to fluctuations in foreign
exchange rates and interest rates. The Company does not enter into

24
<PAGE>

derivative transactions for speculative purposes; however, for accounting
purposes certain transactions may not meet the criteria for hedge accounting.

Gains and losses on foreign exchange derivative instruments, which qualify
as accounting hedges, are deferred and recognized when the underlying foreign
exchange exposure is realized. Gains and losses on foreign exchange derivative
instruments which do not qualify as hedges for accounting purposes, are
recognized currently based on the change in market value of the derivative
instruments. As of December 31, 1997, all foreign exchange derivative
instruments not qualifying as accounting hedges had expired. The Company
recognized a net pre-tax loss of $1.6 million on such instruments for the year
ended December 31, 1997.

The Company uses interest rate swap agreements to effectively convert a
portion of its floating rate debt to a fixed rate basis, reducing the impact
of interest rate changes on future income. Interest rate swaps are designated
as a hedge of underlying future payments. The interest rate differential to be
received or paid on the swaps is recognized over the lives of the swaps as an
adjustment to interest expense. At December 31, 1997, the net unrealized loss
on open interest rate swaps was $3.5 million, which has been deferred because
the Company intends to maintain the underlying debt through its maturity.
During the second quarter of 1997 the Company closed out certain interest rate
options and swaps when they ceased to be an effective hedge, recognizing a
loss of approximately $0.4 million.

Acquisitions

The Company regularly reviews possible acquisitions of businesses and
drilling units, and may from time to time in the future make significant
capital commitments for such purposes. Any such acquisition could involve the
payment by the Company of a substantial amount of cash and the issuance of a
substantial number of shares of common stock. The Company would expect to fund
the cash portion of any such acquisition through cash balances on hand, the
incurrence of additional debt, sales of assets or common stock, or a
combination thereof.

Sources of Liquidity

The Company believes that its cash and cash equivalents, cash generated from
operations, borrowings available under its Credit Agreement, Project Financing
Agreement and access to other financing sources will be adequate to meet its
anticipated short-term and long-term liquidity requirements, including
scheduled debt repayments and capital expenditures for new rig construction
and upgrade/conversion projects.

Asset Divestiture

Cash Settlement

In March 1998, the Company reached an agreement with Global Marine that
terminated the cash flow sharing agreement, effective February 1, 1998, with
certain continuing rights if any of the rigs are sold within three years, and
settled all disputed matters as more fully described in Notes 11 and 18 to the
Company's consolidated financial statements. Under the terms of this
agreement, the Company will receive $18 million in cash resulting in an after
tax gain of approximately $12 million, or $0.11 per share, diluted. The net
proceeds will be used to repay debt.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
This statement requires that all items that are recognized under accounting
standards as components of comprehensive income be displayed in a financial
statement with the same prominence as other financial statements. SFAS No. 130
is

25
<PAGE>

effective for fiscal years beginning after December 15, 1997. The Company will
adopt SFAS No. 130 during the first quarter of 1998. Adoption of this
statement is not expected to have a material effect on the Company's financial
statements.

Also in June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. This statement establishes standards
for the way public business enterprises report information about operating
segments in annual financial statements and requires those enterprises to
report selected information about operating segments in interim financial
reports issued to shareholders. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. The Company plans to adopt this standard in
the first quarter of 1998. Its adoption is not expected to have a material
effect on the Company's financial statements.

YEAR 2000 ISSUE

The Company uses a variety of computer information systems. It is possible
that certain of these systems will not be able to process dates beginning in
the year 2000, as many such systems are based on storing two digits to
identify a particular year rather than a full four digits and are not designed
to take into account the start of a new century. The Company has performed a
survey of all of its business, financial and engineering information systems
and identified and commenced replacement of software and hardware systems
determined not to be compliant. The Company expects to complete this process
during the first half of 1999. A plan has been developed to survey all rig
equipment utilizing program logic chips, identify those that are year 2000
compliant and replace or upgrade those that are not. This plan is in the
process of being implemented and the Company expects full implementation by
the second quarter of 1999; however, the Company is unable at this point in
the implementation process to predict the timing, extent or estimated cost of
any replacement or upgrades that may be required. There can be no assurance
that the Company will successfully be able to identify and remedy all
potential year 2000 problems in the operations area in advance of their
occurrence. Any such problems, if they arise, could cause downtime on the
Company's offshore drilling units leading to a loss of revenues, and depending
upon the extent of the problems, could have a material adverse effect upon the
operations or financial results of the Company.

FORWARD-LOOKING INFORMATION

The statements included in this annual report regarding future financial
performance and results of operations and other statements that are not
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. Statements to the effect that the Company or management
"anticipates," "believes," "estimates," "expects," "predicts," or "projects" a
particular result or course of events, or that such result or course of events
"should" occur, and similar expressions, are also intended to identify
forward-looking statements. Such statements are subject to numerous risks,
uncertainties and assumptions, including but not limited to uncertainties
relating to industry and market conditions, prices of crude oil and natural
gas, foreign exchange and currency fluctuations, political instability in
foreign jurisdictions, scheduled completion of construction projects, the
labor market for skilled personnel in the offshore drilling industry and other
factors discussed in this annual report and in the Company's other filings
with the Securities and Exchange Commission. Should one or more of these risks
or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those indicated.

26
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

INTEREST RATE RISK

The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations and interest rate swaps.
The tables below provide information about the Company's derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates.

For debt obligations, the table below presents expected cash flows and
related weighted-average interest rates expected by maturity dates. Weighted-
average variable rates are based on estimated LIBOR and commercial paper rates
as of December 31, 1997 plus applicable margins. The fair value of fixed rate
debt is based on the estimated yield to maturity for each debt issue as of
December 31, 1997.

EXPECTED MATURITY DATE
<TABLE>
<CAPTION>
FAIR VALUE
1998 1999 2000 2001 2002 THEREAFTER TOTAL 12/31/97
---- ----- ----- ----- ------ ---------- ------ ----------
(IN MILLIONS, EXCEPT INTEREST RATE PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT
Fixed Rate $4.8 $ 4.8 $ 4.8 $ 4.8 $ 4.8 $307.3(b) $331.3 $371.5
Average interest
rate................ 6.9% 6.9% 6.9% 6.9% 6.9% 7.8% 7.7%
Variable Rate.......... $ --(a) $26.0 $26.0 $26.0 $298.4 $ 26.2 $402.6 $402.6
Average interest
rate................ 6.0% 6.0% 6.0% 6.2% 6.0% 6.2%
</TABLE>
- --------
(a) Assumes $66 million in scheduled maturities are funded with other variable
rate debt with a maturity of 2002.
(b) Includes $0.8 million of unaccreted discount to be paid at maturity.

For interest rate swaps, the table below presents notional amounts and
weighted-average interest rates by contractual maturity dates. Notional
amounts are used to calculate the contractual payments to be exchanged under
the interest rate swaps. The average receive rate under the interest rate
swaps is based on estimated commercial paper rates. The fair value of the
interest rate swaps is based on the market value of similar swap arrangements
as of December 31, 1997.

EXPECTED MATURITY DATE
<TABLE>
<CAPTION>
FAIR VALUE
1998 1999 2000 2001 2002 THEREAFTER TOTAL 12/31/97
----- ----- ----- ----- ----- ---------- ------ ----------
(IN MILLIONS, EXCEPT INTEREST RATE PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
INTEREST RATE SWAPS
Pay fixed/receive
variable.............. $15.1 $59.4 $58.7 $47.2 $50.6 $40.2 $271.2 $(3.5)
Average pay rate..... 6.4% 6.4% 6.4% 6.4% 6.4% 6.4% 6.4%
Average receive rate. 5.7% 5.7% 5.7% 5.7% 5.7% 5.7% 5.7%
</TABLE>

FOREIGN EXCHANGE RISK

The Company operates internationally, resulting in exposure to foreign
exchange risk. The Company uses a variety of techniques to minimize the
exposure to foreign exchange risk, including customer contract terms and the
use of foreign exchange derivative instruments or spot purchases. The Company
does not enter into derivative transactions for speculative purposes. At
December 31, 1997 the Company had no material open foreign exchange contracts.

27
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
Transocean Offshore Inc.

We have audited the accompanying consolidated balance sheets of Transocean
Offshore Inc. and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Transocean Offshore Inc. and Subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

[ERNST & YOUNG LLP]

Houston, Texas
February 6, 1998, except for Note 18
as to which the date is March 18, 1998

28
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
OPERATING REVENUES................................ $891,962 $528,903 $322,658
-------- -------- --------
COSTS AND EXPENSES
Operating and maintenance....................... 546,025 358,729 228,539
Depreciation and amortization................... 103,017 46,587 26,995
General and administrative...................... 25,444 15,973 15,036
-------- -------- --------
674,486 421,289 270,570
-------- -------- --------
OPERATING INCOME.................................. 217,476 107,614 52,088
-------- -------- --------
OTHER INCOME (EXPENSE), NET
Equity in earnings of joint ventures............ 10,196 5,168 1,892
Interest income................................. 1,854 6,228 6,216
Interest expense, net of amounts capitalized.... (22,853) (7,220) (2,519)
Other, net...................................... 572 9,862 17,472
-------- -------- --------
(10,231) 14,038 23,061
-------- -------- --------
INCOME BEFORE INCOME TAXES........................ 207,245 121,652 75,149
Income Taxes...................................... 65,312 43,607 28,201
-------- -------- --------
NET INCOME........................................ $141,933 $ 78,045 $ 46,948
======== ======== ========
EARNINGS PER SHARE
Basic........................................... $ 1.40 $ 1.09 $ 0.83
======== ======== ========
Diluted......................................... $ 1.38 $ 1.07 $ 0.82
======== ======== ========
WEIGHTED-AVERAGE SHARES OUTSTANDING
Basic........................................... 101,234 71,678 56,509
Diluted......................................... 102,784 73,119 57,322
Dividends Paid Per Share.......................... $ 0.12 $ 0.12 $ 0.12
======== ======== ========
</TABLE>

See accompanying notes.

29
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
ASSETS ---------- ----------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Cash and Cash Equivalents............................... $ 54,225 $ 24,154
Accounts Receivable
Trade................................................. 175,486 150,546
Other................................................. 24,230 18,027
Deferred Income Taxes................................... 4,418 17,207
Materials and Supplies.................................. 30,917 26,556
Prepayments............................................. 9,389 8,913
Other Current Assets.................................... 8,425 6,843
---------- ----------
Total Current Assets................................ 307,090 252,246
---------- ----------
Property and Equipment.................................. 2,113,462 1,751,863
Less Accumulated Depreciation........................... 445,488 381,514
---------- ----------
Property and Equipment, net........................... 1,667,974 1,370,349
---------- ----------
Goodwill, net........................................... 693,154 763,173
Investments in and Advances to Joint Ventures........... 45,869 35,608
Other Assets............................................ 41,001 21,838
---------- ----------
Total Assets........................................ $2,755,088 $2,443,214
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts Payable
Trade................................................. $ 61,393 $ 63,124
Affiliates............................................ 1,604 3,908
Accrued Income Taxes.................................... 47,002 57,666
Current Portion of Long-Term Debt....................... 4,812 28,013
Other Current Liabilities............................... 70,381 78,767
---------- ----------
Total Current Liabilities........................... 185,192 231,478
---------- ----------
Long-Term Debt.......................................... 728,282 392,322
Deferred Income Taxes................................... 171,306 151,980
Other Long-Term Liabilities............................. 49,130 39,725
---------- ----------
Total Long-Term Liabilities......................... 948,718 584,027
---------- ----------
Commitments and Contingencies...........................
Preferred Stock, $0.10 par value; 50,000,000 shares
authorized, none issued and outstanding................ -- --
Common Stock, $0.01 par value; 150,000,000 shares
authorized; 103,700,638 shares issued, including shares
in treasury, and 99,916,638 shares outstanding at
December 31, 1997 and 103,045,970 shares issued and
outstanding at December 31, 1996....................... 1,037 515
Less Common Stock in Treasury, at cost; 3,784,000 shares
at December 31, 1997................................... (144,297) --
Additional Paid-in Capital.............................. 1,509,110 1,501,159
Retained Earnings....................................... 255,328 126,035
---------- ----------
Total Stockholders' Equity.......................... 1,621,178 1,627,709
---------- ----------
Total Liabilities and Stockholders' Equity.......... $2,755,088 $2,443,214
========== ==========
</TABLE>

See accompanying notes.

30
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK ADDITIONAL TOTAL
--------------- ----------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------- ------ ------ --------- ---------- -------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 56,722 $ 284 -- $ -- $ 304,807 $ 16,056 $ 321,147
Net income............ -- -- -- -- -- 46,948 46,948
Exercise of stock
options.............. 118 -- -- -- 1,172 -- 1,172
Restricted stock
grants, including
early vesting........ (10) -- -- -- 634 -- 634
Unrealized gain on
marketable security.. -- -- -- -- 141 -- 141
Tax benefit from
exercise of stock
options.............. -- -- -- -- 689 -- 689
Cost of secondary
offering............. -- -- -- -- (350) -- (350)
Cash dividends ($0.12
per share)........... -- -- -- -- -- (6,808) (6,808)
------- ------ ------ --------- ---------- -------- ----------
Balance at December 31,
1995................... 56,830 284 -- -- 307,093 56,196 363,573
------- ------ ------ --------- ---------- -------- ----------
Net income............ -- -- -- -- -- 78,045 78,045
Exercise of stock
options.............. 362 2 -- -- 3,479 -- 3,481
Restricted stock
grants, net of
forfeitures.......... 56 -- -- -- 491 -- 491
Reverse unrealized
gain on marketable
security sold during
the period........... -- -- -- -- (570) -- (570)
Stock issued for
Combination, net..... 45,842 229 -- -- 1,191,958 -- 1,192,187
Purchase and
cancellation of
common stock......... (44) -- -- -- (1,292) -- (1,292)
Cash dividends ($0.12
per share)........... -- -- -- -- -- (8,206) (8,206)
------- ------ ------ --------- ---------- -------- ----------
Balance at December 31,
1996................... 103,046 515 -- -- 1,501,159 126,035 1,627,709
------- ------ ------ --------- ---------- -------- ----------
Net income............ -- -- -- -- -- 141,933 141,933
Exercise of stock
options.............. 617 4 -- -- 7,177 -- 7,181
Restricted stock
grants, net of
forfeitures.......... 38 -- -- -- 774 -- 774
Stock split........... -- 518 -- -- -- (518) --
Treasury shares
purchased............ -- -- (3,784) (144,297) -- -- (144,297)
Cash dividends ($0.12
per share)........... -- -- -- -- -- (12,122) (12,122)
------- ------ ------ --------- ---------- -------- ----------
Balance at December 31,
1997................... 103,701 $1,037 (3,784) $(144,297) $1,509,110 $255,328 $1,621,178
======= ====== ====== ========= ========== ======== ==========
</TABLE>

See accompanying notes.

31
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income..................................... $141,933 $ 78,045 $ 46,948
Adjustments to reconcile net income to net cash
provided by operating activities..............
Depreciation and amortization................ 103,017 46,587 26,995
Deferred income taxes........................ 24,215 6,528 (4,337)
Equity in earnings of joint ventures......... (10,196) (5,168) (1,892)
Gain on disposal of assets................... (1,506) (8,441) (16,106)
Deferred income, net......................... 9,750 2,136 (710)
Deferred expenses, net....................... (12,986) 1,070 1,107
Other, net................................... (5,814) (318) (4,254)
Changes in operating assets and liabilities,
net of effects from Combination with
Transocean ASA and divestiture................
Accounts receivable.......................... (68,489) (15,477) (10,315)
Accounts payable............................. 9,021 16,045 330
Income taxes receivable/payable, net......... (10,616) 3,366 17,391
Other current assets......................... (7,022) (419) 2,332
Other current liabilities.................... (7,743) 1,567 2,053
-------- -------- --------
Net cash provided by operating activities...... 163,564 125,521 59,542
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................... (406,466) (212,959) (18,905)
Divestiture of non-core drilling services
activities and assets, net.................... 99,595 -- --
Combination with Transocean ASA................ (756) (305,548) --
Cash acquired in Transocean ASA Combination,
net........................................... -- 48,752 --
Proceeds from disposal of assets, net.......... 3,728 12,964 32,011
Joint ventures and other investments........... (1,499) 3,210 220
-------- -------- --------
Net cash provided by (used in) investing
activities.................................... (305,398) (453,581) 13,326
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds of public debt offering, net.......... 299,216 -- --
Net borrowings on revolving credit facility.... 12,639 193,761 --
Proceeds from project financing facility....... 196,210 -- --
Proceeds from (repayments on) term loan
facility...................................... (193,250) 200,000 --
Repayment of debt assumed in Transocean ASA
Combination................................... -- (139,307) --
Financing costs................................ (5,287) (8,789) --
Treasury shares purchased...................... (144,297) -- --
Sale of note receivable........................ 11,000 -- --
Exercise of stock options...................... 7,181 3,481 1,172
Dividends paid................................. (12,122) (8,206) (6,808)
Other, net..................................... 615 (1,698) (1,251)
-------- -------- --------
Net cash provided by (used in) financing
activities.................................... 171,905 239,242 (6,887)
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equiva-
lents........................................... 30,071 (88,818) 65,981
-------- -------- --------
Cash and Cash Equivalents at Beginning of Period. 24,154 112,972 46,991
-------- -------- --------
Cash and Cash Equivalents at End of Period....... $ 54,225 $ 24,154 $112,972
======== ======== ========
</TABLE>

See accompanying notes.

32
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1--NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations--Transocean Offshore Inc. and its consolidated
subsidiaries (the "Company") provides contract drilling services for oil and
gas wells located in offshore areas throughout the world through its two lines
of business--Mobile Units and Drilling Services. The Company currently owns,
has ownership interests in, or operates a total of 30 mobile offshore drilling
rigs, including one unit not yet in service (see Note 4). The Mobile Units
line of business operates drilling rigs for customers, primarily at a
contractually determined price per day (dayrate). Drilling Services involves
drilling wells to specified depths for a fixed price as well as providing
personnel and equipment other than rigs for oil and gas exploration and
production on either a dayrate or fixed price basis. Prior to September 1996,
the Company was known as Sonat Offshore Drilling Inc. As part of the
combination with Transocean ASA (see Note 2) the Company changed its name.

Principles of Consolidation--The consolidated financial statements include
the accounts of Transocean Offshore Inc. and its majority owned subsidiaries.
Intercompany transactions and accounts have been eliminated in consolidation.
The equity method of accounting is used for investments in joint ventures
owned 50 percent or less.

Accounting Estimates--The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
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 these estimates.

Earnings Per Share--In 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standard (SFAS) No. 128, Earnings per
Share. SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is
similar to fully diluted earnings per share which was previously not required
to be reported if the effect of the dilution was less than three percent.
Earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128 requirements.

Stock Split--In August 1997, the Board of Directors declared a two-for-one
stock split to be effected in the form of a 100 percent stock dividend. The
dividend was paid September 19, 1997 to stockholders of record on September 5,
1997. All references in the financial statements to number of shares, per
share amounts and market prices of the Company's common stock have been
retroactively restated to reflect the increased number of shares of common
stock issued and outstanding as a result of the dividend.

Cash and Cash Equivalents--Cash equivalents are stated at cost plus accrued
interest, which approximates fair value. Cash equivalents are highly liquid
debt instruments with an original maturity of three months or less and consist
of time deposits with a number of commercial banks with high credit ratings in
the United States, United Kingdom, Cayman Islands and Norway. The Company may
invest excess funds in a no-load, open-end, management investment trust
("mutual fund"). The mutual fund invests exclusively in high quality money
market instruments. Generally, the maturity date of the Company's investments
is the next day of business.

Materials and Supplies--Materials and supplies are carried at average cost
less an allowance for obsolescence. Materials and supplies obtained in the
combination with Transocean ASA (see Note 2) were recorded at fair value.

Property and Equipment--Property and equipment consisting primarily of
offshore drilling rigs and related equipment are carried at cost. Property and
equipment obtained in the combination with Transocean ASA (see

33
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Note 2) were recorded at fair value. The Company generally provides for
depreciation on the straight-line method after allowing for salvage values.
The estimated useful life of drilling units ranges from 20 to 33 years and 3
to 12 years for other drilling equipment. Effective July 1, 1996, the Company
extended the useful lives of nine of its existing rigs by an average of five
years, in light of the continued improvements in the market. The effect of
this change in accounting estimate for the year ended December 31, 1996 on
depreciation expense and net income was $4.1 million and $2.7 million ($0.04
per share, basic and diluted), respectively. Major renewals and upgrades to
existing Company assets are capitalized. Maintenance, repairs and minor
renewals are expensed as incurred. When assets are retired or otherwise
disposed of, related costs and accumulated depreciation are removed from the
accounts. Depreciation expense was $84.5 million, $40.2 million and $27.0
million in 1997, 1996 and 1995, respectively.

Goodwill--The excess of the purchase price over the estimated fair value of
net assets acquired is accounted for as goodwill and is amortized on a
straight-line basis over 40 years (the period when benefits are expected to be
derived). Accumulated amortization as of December 31, 1997 and 1996 totaled
$24.8 million and $6.4 million, respectively.

Impairment of Long-Lived Assets--The carrying value of long-lived assets,
principally goodwill and property and equipment, is reviewed for potential
impairment when events or changes in circumstances indicate that the carrying
amount of such assets may not be recoverable. The determination of
recoverability is made based upon the estimated undiscounted future net cash
flows of the related asset.

Operating Revenues and Expenses--Operating revenues are recognized as
earned, based on contractual daily rates or on a turnkey basis. Turnkey
profits are recognized on completion of the well and acceptance by the
customer; however, provisions for losses are made on contracts in progress
when losses are anticipated. In connection with drilling contracts, the
Company may receive lump sum fees for the mobilization of equipment and
personnel or for capital improvements to rigs. In connection with contracted
mobilizations, to the extent expenses exceed fees received, the net costs are
deferred and amortized over the appropriate periods of benefit, generally the
term of the contract. Profits are recognized based on contractual daily rates
or percentage of completion, depending upon the contract terms. Costs of
relocating drilling units without contracts to more promising market areas are
expensed as incurred. Upon completion of drilling contracts, any
demobilization fees received are reflected in income, as are any related
expenses. Capital upgrade fees received from the client are deferred and
recognized as revenue over the period of the drilling project. The actual cost
incurred for the capital upgrade is depreciated over the estimated useful life
of the asset. The Company incurs periodic survey and drydock costs in
connection with obtaining regulatory certification to operate its rigs on an
ongoing basis. Costs associated with these certifications are systematically
accrued as a liability prior to the actual survey and drydock.

Capitalized Interest--Interest costs for the construction and upgrade of
qualifying assets are capitalized. The Company capitalized interest costs on
construction work in progress of $18.2 million and $3.5 million for the years
ended December 31, 1997 and 1996, respectively. Interest costs were not
capitalizable during 1995.

Derivative Instruments--The Company enters into a variety of derivative
financial instruments in connection with the management of its exposure to
fluctuations in foreign exchange rates and interest rates. The Company does
not enter into derivative transactions for speculative purposes; however, for
accounting purposes certain transactions may not meet the criteria for hedge
accounting (see Note 6).

Foreign Currency Translation--The U.S. dollar is the functional currency for
the Company's foreign operations. Foreign currency exchange gains and losses
are included in other income as incurred. Net foreign currency gains (losses)
amounted to $(1.2) million, $2.1 million and $(0.3) million in 1997, 1996 and
1995, respectively.

34
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Income Taxes--Taxable income (loss) of the Company and its domestic
subsidiaries for taxable periods ended prior to June 5, 1993 is included in
the consolidated U.S. federal income tax return of Sonat Inc., the Company's
former parent ("Sonat"). Thereafter, the taxable income (loss) of the Company
and its domestic subsidiaries is included in the consolidated U.S. federal
income tax return of the Company and its affiliated group. The Company's
foreign income tax liabilities are based upon the results of operations of the
various companies in those foreign jurisdictions in which they are subject to
tax.

Stock-Based Compensation--In accordance with the provisions of the FASB's
Accounting for Stock-Based Compensation, SFAS No. 123, which the Company
adopted in 1996, the Company has elected to follow the Accounting Principles
Board's Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25"),
and related interpretations in accounting for its employee stock option plans.
Under APB 25, if the exercise price of the Company's employee stock options
equals or exceeds the fair value of the underlying stock on the date of grant
as determined by the Company's Board of Directors, no compensation expense is
recognized.

New Accounting Pronouncements--In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income. The statement requires that all items that are
recognized under accounting standards as components of comprehensive income be
displayed in a financial statement with the same prominence as other financial
statements. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The Company will adopt SFAS No. 130 in the first quarter of
1998. Adoption of this statement is not expected to have a material effect on
the Company's financial statements.

Reclassifications--Certain reclassifications have been made to prior period
amounts to conform with the current year presentation.

NOTE 2--BUSINESS COMBINATION AND DIVESTITURE

The Company acquired over 99 percent of the outstanding capital shares of
Transocean ASA, a Norwegian company, pursuant to an exchange offer for the
Company's common stock and cash completed on September 3, 1996 and subsequent
purchases of Transocean ASA shares in November and December 1996 (the
"Combination"). All remaining outstanding shares were purchased in July 1997.
The Combination was deemed effective for accounting purposes as of September
1, 1996; the financial activity of the intervening period was not material to
the financial statements. Transocean ASA is an offshore drilling company
which, at the time of the Combination, owned or managed thirteen mobile
offshore drilling rigs and provided a variety of drilling services.

In September 1996, Transocean ASA shares were acquired from the public
shareholders of Transocean ASA pursuant to an exchange offer (the "Exchange
Offer") providing for consideration of 1.06 shares of Company common stock for
each of 43,248,358 Transocean ASA shares (subject to payment of cash in lieu
of fractional shares) and $27.25 for each remaining Transocean ASA share. A
total of 45,841,680 shares of Company common stock and $207.4 million in cash
was delivered by the Company in exchange for the tendered Transocean ASA
shares pursuant to the Exchange Offer. In November 1996, the Company acquired
3,114,506 Transocean ASA shares at $28.74 per share or $89.5 million in
accordance with a mandatory offer (the

35
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

"Mandatory Offer") pursuant to the requirements of Norwegian law. The Company
then commenced a compulsory offer (the "Compulsory Offer") to acquire the
remaining publicly-held shares not previously tendered to the Company. All
remaining outstanding shares were purchased at an average price of
approximately $25 per share in July 1997 upon the conclusion of a judicial
hearing whereby a Norwegian court determined the price that the Company was
obligated to pay to purchase such shares.

The purchase price consists of the following:

<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Company common stock issued to Transocean ASA stockholders........ $1,198.2
Cash consideration paid to Transocean ASA stockholders............ 299.5
Direct transaction costs.......................................... 7.1
--------
Total Purchase Price............................................ $1,504.8
========
</TABLE>

The value of the common stock issued to Transocean ASA stockholders was
calculated based on the average of the closing prices of Company common stock
over the five-day period commencing two days before May 20, 1996, the date on
which the revised offering price for the Combination was announced.

The acquisition of Transocean ASA was accounted for as a purchase. The
purchase price included, at estimated fair value, current assets of $166.5
million, drilling and other property and equipment of $895.9 million, other
assets of $24.0 million and the assumption of current liabilities of $169.7
million, other net long-term liabilities of $18.1 million and long-term debt
of $98.6 million. In addition, a deferred tax liability of $79.8 million was
recorded primarily for the difference in the basis for tax and financial
reporting purposes of the net assets acquired. The excess of the purchase
price over the estimated fair value of net assets acquired amounted to $784.6
million, which has been accounted for as goodwill.

In May 1997, the Company divested certain non-core activities and associated
assets within its drilling services line of business originally acquired in
the Combination by selling the shares of a new corporate entity, Procon
Offshore ASA, to investors in Norway. The divestiture had no material effect
on the financial results of the Company. The net proceeds from the sale were
approximately $106 million, goodwill was reduced by $68.7 million and no gain
or loss was recognized on the sale.

36
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The accompanying Consolidated Statements of Operations include the operating
results of Transocean ASA since the effective date of the Combination.
Unaudited pro forma consolidated operating results of the Company and
Transocean ASA for the year ended December 31, 1996, assuming the acquisition
had been made as of January 1, 1996, are summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C>
Operating revenues........................................ $785,254
========
Income from continuing operations......................... $ 51,934
Income from discontinued operations....................... 32,936
--------
Net income.............................................. $ 84,870
========
Basic earnings per share:
Income from continuing operations....................... $ 0.51
Income from discontinued operations..................... 0.32
--------
Net income.............................................. $ 0.83
========
Diluted earnings per share:
Income from continuing operations....................... $ 0.50
Income from discontinued operations..................... 0.32
--------
Net income.............................................. $ 0.82
========
</TABLE>

The pro forma information for the year ended December 31, 1996 includes
adjustments for additional depreciation based on the fair market value of the
drilling and other property and equipment acquired, the amortization of
goodwill arising from the transaction, increased interest expense for
additional borrowings under the Credit Agreement (see Note 5) as if they were
incurred at the beginning of the period and related adjustments for income
taxes. Pro forma net income from discontinued operations for the twelve months
ended December 31, 1996 includes a $51 million pre-tax gain on the sale of a
Transocean ASA discontinued business segment, which was disposed of in June
1996 prior to the Combination. The pro forma information is not necessarily
indicative of the results of operations had the transaction been effected on
the assumed date or the results of operations for any future periods.

NOTE 3--SALE OF DRILLING RIGS

In 1996, the Offshore Bahram sank while under tow offshore Egypt. The
Company disposed of the rig and recognized a net pre-tax gain of approximately
$6.6 million ($4.3 million after tax or $0.06 per share, basic and diluted).

In 1995, the Company sold six of its bottom-supported drilling rigs which
were not strategically aligned with the Company's long-term focus. Five of
these rigs were located in the U.S. Gulf of Mexico: the Offshore Taurus, the
Sonat D-F 77, the Sonat D-F 84, the Sonat D-F 85, and the Sonat D-F 86. In a
separate transaction, the Company sold the Offshore Aquarius which was located
in the Middle East. A net gain of $16.6 million ($10.8 million after tax or
$0.19 per share, basic and diluted) was recorded relating to these
transactions.

37
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 4--UPGRADE AND EXPANSION OF DRILLING FLEET

In February 1996, the Company purchased a semisubmersible multi-service
vessel, the Transocean Marianas, which is being converted to a deepwater
drilling rig. The rig was damaged by a fire during the third quarter 1997
while it was in the shipyard undergoing conversion. The fire damaged the rig's
electrical system but resulted in no major structural damage to the rig and no
injury to personnel. The Transocean Marianas conversion project was expected
to have been completed during the fourth quarter of 1997, and the rig was to
then commence a five-year contract with Shell Offshore Inc. As a result of the
fire, it is expected that completion of the project will be delayed until the
second half of 1998. The Company believes that the costs to repair the damage
caused by the fire are fully insured. The purchase and conversion of this rig
is expected to result in capital spending of approximately $224 million.
Through December 31, 1997 the Company spent $174 million on this construction
project, including $108.2 million spent during 1997.

In May 1996, the Company announced plans to construct a deepwater mobile
offshore drilling rig, to be named the "Discoverer Enterprise," which will
initially be outfitted to drill in 7,000 feet of water but will be capable of
being outfitted for exploration and development drilling in water depths up to
10,000 feet. The Company and Amoco Exploration and Production Company
("Amoco") have entered into an agreement under which the Company will provide
the Discoverer Enterprise and a second-generation semisubmersible to Amoco for
five years each. The drillship is expected to be operational in the fourth
quarter of 1998. The required capital commitment for this project is estimated
to be approximately $292 million. The Company spent $111.6 million and $36.6
million during 1997 and 1996, respectively, on this project.

In June 1996, the Company purchased, for $32 million, a second-generation
semisubmersible, the Transocean Amirante, to meet the requirements of the
Amoco agreement. The Company spent $54.2 million and $46.2 million during 1997
and 1996, respectively, in the purchase and upgrade of this rig, which is now
operating in the U.S. Gulf of Mexico.

The Company negotiated a $340 million project financing arrangement relating
to the Discoverer Enterprise and Transocean Amirante projects (see Note 5).
Additionally, the Company spent $29.0 million and $50.3 million during 1997 on
the upgrade of the drillship Discoverer Seven Seas and semisubmersible
Transocean Leader, respectively.

In January 1998, the Company announced plans to construct a Discoverer
Enterprise-class ultra-deepwater drillship to be named the "Discoverer
Spirit," which will initially be outfitted to drill in 8,500 feet of water but
will be capable of drilling in water depths up to 10,000 feet. The Company
received a contract commitment from Union Oil Company of California (Unocal)
for a period of five firm years plus up to five one-year options. The
drillship is expected to be operational in the first quarter of 2000. The
drillship's hull and major marine systems will be constructed at the Astano
shipyard in Spain, where the Discoverer Enterprise is currently under
construction, with the derrick, derrick substructure, BOP and other modules to
be constructed at U.S. Gulf Coast facilities, for an aggregate cost of
approximately $318 million, including capitalized interest and other non-
hardware costs.

In February 1998, the Company announced plans to construct another
Discoverer Enterprise-class ultra-deepwater drillship. The Company received a
contract commitment from Chevron USA, Inc. for a period of five years plus
three one-year options. Initial operations in the U.S. Gulf of Mexico are
expected to commence in the third quarter of 2000. The drillship's hull and
major marine systems will be constructed at the Astano shipyard in Spain, with
the derrick, derrick substructure, BOP and other modules to be constructed at
U.S. Gulf Coast facilities. The drillship will be constructed at an estimated
total cost in excess of $300 million, including capitalized interest and other
non-hardware costs.

38
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 5--DEBT

Debt is comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Debentures, net....................................... $199,216 $ --
Notes................................................. 100,000 --
Revolving Credit Facility............................. 206,400 193,761
Term Loan Facility.................................... -- 193,250
Project Financing Agreement........................... 196,210 --
Notes Payable......................................... 30,000 30,000
Other................................................. 1,268 3,324
-------- --------
Total Debt.......................................... 733,094 420,335
Less Current Maturities............................... 4,812 28,013
-------- --------
Total Long-Term Debt................................ $728,282 $392,322
======== ========
</TABLE>

Public Debt Offering--In April 1997, the Company completed the public
offering and sale of $300 million aggregate principal amount of senior,
unsecured debt securities. The securities sold consisted of $100 million
aggregate principal amount of 7.45% Notes due April 15, 2027 (the "Notes") and
$200 million aggregate principal amount of 8.00% Debentures due April 15, 2027
(the "Debentures"). Holders of Notes may elect to have all or any portion of
the Notes repaid on April 15, 2007 at 100 percent of the principal amount. The
Notes, at any time after April 15, 2007, and the Debentures, at any time, may
be redeemed at the option of the Company at 100 percent of the principal
amount plus a make-whole premium, if any, equal to the excess of the present
value of future payments due under the Notes and Debentures, using a discount
rate equal to the then-prevailing yield of U.S. Treasury notes for a
corresponding remaining term plus 20 basis points over the principal amount of
the security being redeemed. Interest is payable on April 15 and October 15 of
each year, commencing October 15, 1997. The indenture and supplemental
indenture relating to the Notes and the Debentures place limitations on the
Company's ability to (i) incur indebtedness secured by certain liens, (ii)
engage in certain sale/leaseback transactions and (iii) engage in certain
merger, consolidation or reorganization transactions. The net proceeds were
used to repay amounts outstanding under the Credit Agreement (described
below). The estimated fair value of the Notes and Debentures as of December
31, 1997 was $115 million and $226 million, respectively, based on the
estimated yield to maturity for each issue as of December 31, 1997.

Credit Agreement--In connection with the Combination, the Company entered
into a secured credit agreement, dated as of July 30, 1996, with a group of
banks led by ABN AMRO Bank, N.V. (the "Credit Agreement"). The Credit
Agreement initially provided for borrowing by the Company under (i) a six-year
term loan facility in the amount of $200 million (the "Term Loan Facility")
and (ii) a six-year revolving credit facility in the amount of $400 million
(the "Revolving Credit Facility"). In connection with the public offering of
the Notes and Debentures, the Credit Agreement was amended to, among other
things, release all security, convert $140 million of the term loans into
revolving loans, and renegotiate the applicable margins over LIBOR and the
applicable commitment fees. Following the amendment, the Credit Agreement
provides for a $540 million Revolving Credit Facility, with no Term Loan
Facility. Loans under the Credit Agreement bear interest, at the option of the
Company, at a base rate or LIBOR plus a margin (0.25 percent at December 31,
1997) that varies depending on the Company's funded debt to total capital
ratio or its public senior unsecured debt rating. In December 1997, the Credit
Agreement was further amended to remove the restrictions on the repurchase of
capital stock and the covenant regarding maintenance of a minimum consolidated
net worth. The Credit Agreement requires compliance with various restrictive
covenants and an interest coverage ratio which could

39
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

limit the Company's ability to pay dividends in the future. The Revolving
Credit Facility has a maturity date of July 30, 2002. The carrying amount of
borrowings under the Credit Agreement approximate fair value.

Project Financing Agreement--In connection with the construction of the
Discoverer Enterprise and upgrade of the Transocean Amirante, the Company's
wholly owned subsidiary, Transocean Enterprise Inc., entered into a bank
financing agreement dated as of December 27, 1996 with a group of banks led by
ABN AMRO Bank, N.V. (the "Project Financing Agreement"). Approximately $340
million is available for drawdowns during the construction period and is
available in two tranches. The first tranche of $66 million is to be repaid
upon completion of construction and acceptance of the two vessels (no later
than December 31, 1998) by Amoco Exploration and Production Company ("Amoco"),
which is contracting the rigs for a period of five years following completion.
It bears an interest rate of LIBOR plus 0.35 percent. The Company expects to
lend Transocean Enterprise Inc. the necessary funds to repay the $66 million
tranche utilizing funds borrowed under the Revolving Credit Facility;
accordingly, the $66 million due in 1998 was not classified as current because
it is the intent of management to refinance on a long-term basis. The second
tranche of $274.5 million (of which $130.2 million in borrowings were
outstanding as of December 31, 1997) bears an interest rate of LIBOR plus 0.85
percent during the construction period and is convertible to term financing
upon completion of construction and acceptance of the two vessels by Amoco (no
later than December 31, 1998). The term financing would mature over a period
of five years. The term financing would also be divided into two tranches, the
relative amounts of which would depend on various factors. One tranche of the
term financing would be sized based upon and repaid from the net cash flows
generated from the Amoco contracts (the "Amoco Cash Flows"). The Company has
the option to accept term financing for the Amoco Cash Flows at LIBOR plus
0.65 percent or to enter into an uncommitted lease securitization program at
commercial paper rates plus approximately 0.28 percent. The second tranche of
the term facility would be repaid from Company cash flows to the extent the
Amoco Cash Flows do not cover scheduled repayments. The Company has the option
to accept term financing for the Company cash flows at LIBOR plus 1.125
percent for a period of three years and LIBOR plus 1.25 percent thereafter or
to enter into an uncommitted lease securitization program at commercial paper
rates plus approximately 0.58 percent (as long as the Company's credit rating
is BBB- or Baa3 or better). In the lease securitization program, Transocean
Enterprise Inc. would secure bank liquidity facilities to act as backup lines
of credit for the commercial paper program. The carrying amount of borrowings
under the Project Financing Agreement approximates fair value.

Transocean Enterprise Inc. has pledged all of its assets, consisting
primarily of the two rigs, to the banks for the Project Financing Agreement,
the lease securitization facility (if entered into) and the interest rate swap
transactions described below. In addition, during the construction period, the
Company has entered into a completion guarantee so that if for any reason the
vessels are not completed and accepted by Amoco, the Company will repay the
indebtedness under the construction financing facility, has guaranteed the
obligations of Transocean Enterprise Inc. with respect to the $66 million
tranche of the Project Financing Agreement, and has guaranteed certain other
obligations of Transocean Enterprise Inc. The Company has also entered into
operations and maintenance agreements with Transocean Enterprise Inc. pursuant
to which it will operate and maintain the Discoverer Enterprise and Transocean
Amirante for a fixed fee while they are subject to the Project Financing
Agreement or the lease securitization facility.

Transocean Enterprise Inc. entered into two interest rate swap transactions
in connection with its Project Financing Agreement for an initial notional
amount of $271.2 million with the agent of the Project Financing Agreement.
Under these agreements, Transocean Enterprise Inc. will pay interest at an
average fixed rate of 6.4 percent and will receive interest payments at the
one month commercial paper rate beginning in 1998 when the related
construction financing converts to term financing.

Notes Payable--In February 1994, the Company issued $30 million principal
amount of notes payable (the "Notes Payable") in a private placement. The
Notes Payable bear interest at 6.9 percent per annum payable

40
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

semiannually every February 15 and August 15. The terms of the Notes Payable
require the Company to comply with certain restrictive covenants and maintain
certain financial ratios that could limit the Company's ability to pay
dividends in the future. In December 1997, the terms of the Notes Payable were
amended to remove the restrictions on repurchase of capital stock and the
covenant regarding maintenance of a minimum consolidated net worth. The Notes
Payable mature over the next five years and thereafter as follows: 1998
through 2002--$4.6 million each year, and $7.0 million thereafter. The fair
value of the Notes Payable at December 31, 1997 was approximately $31 million
based on the estimated yield to maturity as of December 31, 1997.

Letters of Credit--The Company had letters of credit outstanding at December
31, 1997 totaling $36.3 million, including $29.7 million relating to a legal
dispute with Kvaerner Installasjon a.s (see Note 11). The remaining $6.6
million guarantees various insurance and contract bidding activities.

NOTE 6--FINANCIAL INSTRUMENTS AND RISK CONCENTRATION

Foreign Exchange Risk--The Company operates internationally, resulting in
exposure to foreign exchange risk. This risk is primarily associated with
compensation costs denominated in currencies other than the U.S. dollar and
with purchases from foreign suppliers. The Company uses a variety of
techniques to minimize the exposure to foreign exchange risk, including
customer contract payment terms and the use of foreign exchange derivative
instruments.

The Company's primary foreign exchange risk management strategy involves
structuring customer contracts to provide for payment in both U.S. dollars and
local currency. The payment portion denominated in local currency is based on
anticipated local currency requirements over the contract term. Foreign
exchange derivative instruments, specifically, foreign exchange forward
contracts, may be used to minimize foreign exchange risk in instances where
the primary strategy is not attainable. A foreign exchange forward contract
obligates the Company to exchange predetermined amounts of specified foreign
currencies at specified exchange rates on specified dates or to make an
equivalent U.S. dollar payment equal to the value of such exchange.

Gains and losses on foreign exchange derivative instruments, which qualify
as accounting hedges, are deferred and recognized when the underlying foreign
exchange exposure is realized. At December 31, 1997 and 1996, there were no
material unrealized gains or losses on open foreign exchange derivative
hedges. Gains and losses on foreign exchange derivative instruments which do
not qualify as hedges for accounting purposes, are recognized currently based
on the change in market value of the derivative instruments. At December 31,
1996, the net market value of open foreign exchange derivative instruments not
qualifying as accounting hedges was approximately $1.6 million. As of December
31, 1997, all foreign exchange derivative instruments not qualifying as
accounting hedges had expired. The Company recognized a net pre-tax loss of
$1.6 million and a net pre-tax gain of $1.0 million on such instruments
recorded as exchange gains/losses for the years ended December 31, 1997 and
1996, respectively. The Company did not utilize foreign exchange derivative
instruments in 1995.

Interest Rate Risk--The Company uses interest rate swap agreements to
effectively convert a portion of its floating rate debt to a fixed rate basis,
reducing the impact of interest rate changes on future income. Interest rate
swaps are designated as a hedge of underlying future payments. These
agreements involve the exchange of amounts based on variable interest rates
for amounts based on a fixed interest rate over the life of the agreement
without an exchange of the notional amount upon which the payments are based.
The interest rate differential to be received or paid on the swaps is
recognized over the lives of the swaps as an adjustment to interest expense.
Gains and losses on terminations of interest rate swap agreements are deferred
as an adjustment to interest expense related to the debt over the remaining
term of the original contract life of the terminated swap agreement. In the
event of the early extinguishment of a designated debt obligation, any
realized or unrealized gain or loss from the swap would be recognized in
income. The fair value of the interest rate swap agreements and option

41
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

contracts obtained in connection with the Transocean ASA Combination was
recorded as of the effective date of the Combination. During the second
quarter of 1997, the Company closed out certain interest rate options and
swaps when they ceased to be an effective hedge, recognizing a loss of
approximately $0.4 million. At December 31, 1997 and 1996, the net unrealized
loss on open interest rate swaps was $3.5 million and $0.9 million,
respectively, which has been deferred because the Company intends to maintain
the underlying debt through its maturity (see Note 5).

Credit Risk--Financial instruments which potentially subject the Company to
concentrations of credit risk are primarily cash and cash equivalents and
trade receivables. It is the Company's practice to place its cash and cash
equivalents in time deposits at commercial banks with high credit ratings or
mutual funds which invest exclusively in high quality money market
instruments. In foreign locations, local financial institutions are generally
utilized for local currency needs. The Company limits the amount of exposure
to any one institution and does not believe it is exposed to any significant
credit risk.

The Company derives the majority of its revenue from services to
international oil companies and government-owned and government-controlled oil
companies. There are concentrations of receivables in the United States,
Norway and the United Kingdom (see Note 16). The Company had no significant
credit losses in any of the years in the three-year period ended December 31,
1997. The Company is not aware of any significant credit risks relating to its
customer base and does not generally require collateral or other security to
support customer receivables.

Labor Agreements--On a worldwide basis, the Company had approximately 28
percent of its employees working under collective bargaining agreements at
December 31, 1997. Of these represented employees, all are working under
agreements that are subject to negotiation in 1998. The majority of these
employees are represented by five Norwegian unions, each of which participates
in one or several nationwide agreements concerning salary and other specific
terms and conditions. These nationwide agreements are established as a result
of bi-annual negotiations between the various employers' nationwide
associations and the respective employees' unions. In September 1997, a work
stoppage by offshore workers represented by one of these Norwegian unions
affected three of the Company's rigs operating in Norway, resulting in a loss
of dayrate revenues on the affected rigs. Work resumed on the affected rigs in
October, and the dispute, which affected all offshore drilling companies in
the Norwegian sector of the North Sea, was resolved through mandatory
arbitration ordered by the Norwegian Parliament, with the union losing on all
points, in February 1998. The loss of dayrate revenues did not have a
significant effect on the Company's operating results.

NOTE 7--OTHER CURRENT LIABILITIES

Other current liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accrued Drydock.......................................... $14,498 $22,099
Accrued Payroll.......................................... 13,393 11,769
Accrued Workers' Insurance............................... 8,526 5,324
Accrued Taxes, Other Than Income......................... 8,176 13,282
Accrued Interest......................................... 7,839 2,619
Incentive Compensation and Bonus Accruals................ 5,799 3,944
Accrued Turnkey Costs.................................... 5,787 4,234
Other.................................................... 6,363 15,496
------- -------
$70,381 $78,767
======= =======
</TABLE>

42
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 8--OTHER LONG-TERM LIABILITIES

Other long-term liabilities are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred Income................................................ $15,488 $ 5,738
Accrued Retiree Life Insurance and Medical Benefits............ 12,276 11,771
Accrued Pension and Early Retirement........................... 4,931 10,934
Minority Interest.............................................. 4,637 3,654
Long-Term Portion of Accrued Workers' Insurance................ 3,524 3,524
Other.......................................................... 8,274 4,104
------- -------
$49,130 $39,725
======= =======
</TABLE>

NOTE 9--SUPPLEMENTAL CASH FLOW INFORMATION

Non-cash financing activities for the twelve months ended December 31, 1996
included $1.198 billion for the issuance of 45.8 million shares of common
stock in connection with the Combination between the Company and Transocean
ASA. Non-cash investing activities for the twelve months ended December 31,
1996 included $1.439 billion of net assets acquired in the Combination with
Transocean ASA (see Note 2).

Cash payments for interest were $35.1 million, $10.6 million and $2.5
million for the years ended December 31, 1997, 1996 and 1995, respectively.
Cash payments for income taxes, net, were $51.9 million, $34.4 million and
$15.3 million for the years ended December 31, 1997, 1996 and 1995,
respectively.

NOTE 10--INCOME TAXES

The Company carries out its operations through both domestic and foreign
corporations. Income before income taxes for these corporations is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic............................................. $118,046 $108,222 $73,705
Foreign.............................................. 89,199 13,430 1,444
-------- -------- -------
Income Before Income Taxes......................... $207,245 $121,652 $75,149
======== ======== =======
</TABLE>

43
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The Company is subject to both U.S. and foreign income taxes. Provisions for
income taxes represent estimates of expense which will ultimately be paid. An
analysis of the Company's income taxes is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT:
Federal............................................. $30,727 $30,400 $24,548
Foreign............................................. 10,995 6,619 7,887
State............................................... (625) 60 103
------- ------- -------
41,097 37,079 32,538
------- ------- -------
DEFERRED:
Federal............................................. 3,426 2,873 (4,337)
Foreign............................................. 20,789 3,655 --
------- ------- -------
24,215 6,528 (4,337)
------- ------- -------
Income Taxes.......................................... $65,312 $43,607 $28,201
======= ======= =======
</TABLE>

Unremitted earnings of foreign subsidiaries of the Company, before provision
for income taxes, as of December 31, 1997 and 1996 aggregated approximately
$88.0 million and $17.6 million, respectively. There were no unremitted
earnings of foreign subsidiaries as of December 31, 1995. Foreign and federal
income taxes aggregating approximately $28.4 million have been paid or accrued
on such earnings as of December 31, 1997 as compared to $6.2 million as of
December 31, 1996. A portion of accumulated unremitted earnings of foreign
subsidiaries is considered indefinitely reinvested in foreign operations and,
accordingly, no federal tax has been provided on such unremitted earnings.

44
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Deferred tax assets and liabilities are comprised of the following:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX ASSETS--CURRENT
Accrued drydock.......................................... $ 3,235 $ 3,064
Accrued personnel taxes.................................. 1,415 1,417
Accrued workers' compensation insurance.................. 1,899 1,070
Other accruals........................................... 3,924 9,386
Retirement and benefit plan accruals..................... 1,260 448
Insurance accruals....................................... 1,145 762
Other.................................................... 961 1,060
--------- ---------
Total Current Deferred Tax Assets...................... 13,839 17,207
========= =========
DEFERRED TAX LIABILITIES--CURRENT
Deferred turnkey costs................................... (6,769) --
Other.................................................... (2,652) --
--------- ---------
Total Current Deferred Tax Liabilities................. (9,421) --
--------- ---------
Net Current Deferred Tax Assets........................ $ 4,418 $ 17,207
--------- ---------
DEFERRED TAX ASSETS--NONCURRENT
Net operating loss carry forward......................... $ 45,897 $ 59,955
Retirement and benefit plan accruals..................... 1,264 15,822
Other accruals........................................... 6,154 8,656
Deferred income.......................................... 5,303 291
Net deferred foreign tax credits 3,677 --
Other.................................................... 1,060 846
--------- ---------
Total Noncurrent Deferred Tax Assets................... 63,355 85,570
========= =========
DEFERRED TAX LIABILITIES--NONCURRENT
Depreciation and amortization............................ (154,795) (231,873)
Deferred gains........................................... (74,885) (5,292)
Deferred mobilization.................................... (3,564) (250)
Other.................................................... (1,417) (135)
--------- ---------
Total Noncurrent Deferred Tax Liabilities.............. (234,661) (237,550)
--------- ---------
Net Noncurrent Deferred Tax Liabilities................ $(171,306) $(151,980)
========= =========
</TABLE>

The Company has not provided a valuation allowance to offset the deferred
tax assets because, in the opinion of management, it is more likely than not
that all deferred tax assets will be realized. The Company has net loss carry
forwards relating to foreign tax jurisdictions resulting from the Combination
with Transocean ASA totaling $163.9 million. These net loss carry forwards
expire in the year 2000 and thereafter.

45
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Income taxes differ from the amount computed by applying the U.S. federal
income tax rate to the income before income taxes. The reasons for these
differences are as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income Taxes at Statutory Federal Income Tax Rate... $72,536 $42,578 $26,302
Increases (Decreases) in Tax Resulting From
Equity in foreign investments...................... (2,797) (832) (439)
Detriment (benefit) from losses of foreign
subsidiaries...................................... (545) 1,623 26
Foreign income taxed at rates different from the
U.S. statutory rate (3,839) -- --
Nondeductible expenses............................. 364 297 386
Other.............................................. (407) (59) 1,926
------- ------- -------
Income Taxes........................................ $65,312 $43,607 $28,201
======= ======= =======
</TABLE>

The Company has been and will be included in the consolidated federal income
tax returns filed by Sonat during all periods in which Sonat ownership was
greater than 80 percent (the "Affiliation Years"). The Company and Sonat have
entered into a Tax Sharing Agreement providing for the manner of determining
payments with respect to federal income tax liabilities and benefits arising
in Affiliation Years. Under the Tax Sharing Agreement, the Company will pay to
Sonat an amount equal to the Company's share of the Sonat consolidated federal
income tax liability, generally determined on a separate return basis. In
addition, Sonat will pay the Company for utilization by Sonat of deductions,
losses and credits which are attributable to the Company and in excess of that
which would be utilized on a separate return basis.

In 1995 Sonat and the Company reached an agreement with the United States
Internal Revenue Service (the "IRS") on adjustments asserted in connection
with the examination of Sonat's consolidated U.S. federal income tax returns
for the years 1986 through 1988. Pursuant to the Tax Sharing Agreement between
Sonat and the Company, a portion of this final tax settlement along with the
associated interest was allocated to the Company. Accordingly, the Company
received a refund of federal income tax and the associated interest from Sonat
totaling $7.0 million. The accompanying consolidated financial statements for
the year ended December 31, 1995 reflect an increase in net interest income of
$1.8 million, related to the settlement of this examination. In the year ended
December 31, 1996, the Company received $1.0 million of additional interest
income from Sonat related to the prior settlement of an examination of the
years 1983 through 1985.

The IRS is currently auditing the years 1989 through 1991. In addition,
certain foreign tax authorities have questioned the amounts of income and
expense subject to tax in their jurisdiction for prior periods. The Company is
currently contesting additional assessments which have been asserted and may
contest any future assessments. In the opinion of management, the ultimate
resolution of these asserted income tax liabilities will not have a material
adverse effect on the Company's consolidated financial statements.

46
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 11--COMMITMENTS AND CONTINGENCIES

Leases--The Company has operating lease commitments expiring at various
dates, principally for office space and office equipment. In addition to
rental payments, some leases provide that the Company pay a pro rata share of
operating costs applicable to the leased property. The Company had no
significant capital leases as of December 31, 1997 or 1996. At December 31,
1997, future minimum payments for noncancellable operating leases are as
follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998....................................................... $11,500
1999....................................................... 4,412
2000....................................................... 2,556
2001....................................................... 2,227
2002....................................................... 1,925
Thereafter................................................. 14,538
-------
Total.................................................... $37,158
=======
</TABLE>

Rental expense for all operating leases, including leases with terms of less
than one year, was $12.8 million, $3.1 million, and $2.4 million for the years
ended December 31, 1997, 1996, and 1995, respectively.

Upgrade and Expansion of Drilling Fleet--At December 31, 1997, the Company
had firm commitments related to the construction of the Discoverer Enterprise
(see Note 4) totaling $53.3 million. In March 1997, the Company began
operations under a bareboat charter agreement with the rig owner for the
drillship being used for a three-well turnkey project with Petroleos Mexicanos
("Pemex"). The charter agreement guarantees the rig owner a minimum charter
hire of $8.8 million over two years. As of December 31, 1997, the Company had
entered into agreements with various suppliers to purchase $5.2 million in
materials to upgrade the other rigs in the fleet. Delivery of these materials
is expected in 1998.

Legal Proceedings--The Company and Global Marine Inc. ("Global Marine") are
parties to an agreement pursuant to which the Company participates in the cash
flow from three jackup drilling rigs owned and operated by Global Marine and
Global Marine participates in the cash flow from one of the Company's jackup
drilling rigs, the Transocean Nordic. Global Marine has initiated arbitration
proceedings against the Company in the United Kingdom with respect to various
disputed matters under the agreement, including the distribution of revenues
from the rigs and whether the Company's acquisition of Transocean ASA may have
given rise to a right of first refusal on the part of Global Marine to
purchase the Transocean Nordic (see Note 18).

The Company is party to a contract with Kvaerner Installasjon a.s
("Kvaerner") in Norway pursuant to which Kvaerner performed modification and
refurbishment work on one of the Company's fourth-generation semisubmersible
drilling rigs, the Transocean Leader. Disputes have arisen with respect to the
work performed and the amount owed with respect to such work. The amount in
dispute is approximately $40 million. The Company has posted a letter of
credit for $29.7 million pending the resolution of the dispute by agreement
between the parties or by final judgment under the Norwegian judicial process.
The parties are continuing to discuss the matter, and the Company is unable to
predict at this time the ultimate outcome of such discussions or any resulting
judicial process; however, the Company believes Kvaerner's claims are without
merit and that the outcome of the dispute will have no material adverse effect
on the Company's results of operations or financial position.

47
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

administrative and court systems. The proceedings with respect to the 1991
assessment, which was for approximately $9 million, have reached the first
level Brazilian state court, which rejected the Company's arguments. The
Company has appealed that decision to the second level court. The legal and
administrative decisions as to the 1990 assessments are still pending. If the
Company's defenses are ultimately unsuccessful, the Company believes that the
Brazilian government-controlled oil company, Petrobras, has a contractual
obligation to reimburse the Company for ISS payments required to be paid by
them. The Company believes the outcome of these assessments will have no
material adverse effect on the Company's results of operations or financial
position.

Other--The Company has other contingent liabilities resulting from
litigation, claims and commitments incidental to the ordinary course of
business. Management believes that the probable resolution of such
contingencies will not have a material adverse effect on the financial
position or results of operations of the Company.

NOTE 12--LONG-TERM INCENTIVE PLAN

In 1993 the Company adopted an incentive plan for key employees and outside
directors (the "Incentive Plan") in which it is authorized to grant up to 4.1
million shares of common stock. In 1996, the Incentive Plan was amended so
that an additional 2 million shares of common stock were authorized for
issuance. Under the plan, awards can be in the form of stock options,
restricted stock, stock appreciation rights (SARs) issued in tandem with such
options, and tax-offset supplemental payments in connection with the exercise
of options or SARs or the vesting of restricted stock. Options issued under
the Incentive Plan have a ten-year term and become exercisable in three equal
annual installments after the date of grant. At December 31, 1997, there were
2.4 million shares available for future grants.

The following table summarizes option activities of the Incentive Plan:

<TABLE>
<CAPTION>
NUMBER OF
SHARES WEIGHTED-AVERAGE
UNDER OPTION EXERCISE PRICE
------------ ----------------
<S> <C> <C>
Outstanding at December 31, 1994.................. 1,636,732 $ 9.30
Granted........................................... 533,800 10.57
Exercised......................................... (116,726) 10.06
Forfeited......................................... (3,334) 9.77
--------- ------
Outstanding at December 31, 1995.................. 2,050,472 9.59
Granted........................................... 587,400 23.58
Exercised......................................... (362,074) 9.62
Forfeited......................................... (9,012) 9.85
--------- ------
Outstanding at December 31, 1996.................. 2,266,786 13.21
Granted........................................... 422,800 28.86
Exercised......................................... (617,162) 10.99
Forfeited......................................... (27,140) 24.47
--------- ------
Outstanding at December 31, 1997.................. 2,045,284 $16.96
========= ======
Exercisable at December 31, 1995.................. 1,044,042 $ 9.41
Exercisable at December 31, 1996.................. 1,150,560 $ 9.55
Exercisable at December 31, 1997.................. 1,080,794 $11.13
</TABLE>

48
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table summarizes information about stock options outstanding
at December 31, 1997:

<TABLE>
<CAPTION>
RANGE OF WEIGHTED-AVERAGE
EXERCISE NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 8.38--$13.50 1,123,888 6.6 years $ 9.57 950,975 $ 9.39
$23.44--$36.94 921,396 8.6 years $26.01 129,819 $23.74
</TABLE>

During 1997, 40,600 restricted shares were granted at a weighted-average
fair value of $31.22 per share. The Company granted 57,200 and 52,340
restricted shares at a weighted-average fair value of $23.45 and $10.47 per
share in 1996 and 1995, respectively. Also during 1997, the Company granted
18,000 stock appreciation rights at a weighted-average exercise price of
$28.85 per share. On December 31, 1997, there were 252,308 restricted shares
and 18,000 stock appreciation rights outstanding under the Incentive Plan.

As discussed in Note 1, the Company applies APB 25 and related
interpretations in accounting for the Incentive Plan. Expenses related to
restricted stock, stock appreciation rights and stock options recognized
during the years ended December 31, 1997, 1996 and 1995 were $2.3 million,
$1.2 million and $2.1 million, respectively. If compensation expense for stock
options granted under the Incentive Plan was recognized using the alternative
fair value method of accounting under SFAS No. 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net Income:
As Reported......................................... $141,933 $78,045 $46,948
Pro Forma........................................... $140,806 $77,089 $46,692
Basic earnings per share:
As Reported......................................... $ 1.40 $ 1.09 $ 0.83
Pro Forma........................................... $ 1.39 $ 1.08 $ 0.83
Diluted earnings per share:
As Reported......................................... $ 1.38 $ 1.07 $ 0.82
Pro Forma........................................... $ 1.37 $ 1.05 $ 0.81
</TABLE>

The above pro forma information is not indicative of future pro forma
amounts. SFAS No. 123 does not apply to awards prior to 1995 and additional
awards in future years are anticipated. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997, 1996
and 1995, respectively: dividend yields of 0.19, 0.34 and 0.34 percent;
expected volatility of 30.8, 29.4 and 24.8 percent; risk free interest rates
of 6.3, 5.6 and 7.0 percent; and expected lives of four years for all three
years. The weighted-average fair value of options granted was $9.98, $7.30 and
$3.22 for the years ended December 31, 1997, 1996 and 1995, respectively.

49
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 13--EARNINGS PER SHARE

The reconciliation of the numerator and denominator used for the computation
of basic and diluted earnings per share is as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1996 1995
-------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net Income for basic and diluted earnings per share.... $141,933 $78,045 $46,948
======== ======= =======
Weighted-average shares for basic earnings per share... 101,234 71,678 56,509
Effect of dilutive securities:
Employee stock options and unvested stock grants..... 1,550 1,441 813
-------- ------- -------
Adjusted weighted-average shares and assumed
conversions for diluted earnings per share............ 102,784 73,119 57,322
======== ======= =======
Basic earnings per share............................... $ 1.40 $ 1.09 $ 0.83
======== ======= =======
Diluted earnings per share............................. $ 1.38 $ 1.07 $ 0.82
======== ======= =======
</TABLE>

NOTE 14--RETIREMENT PLANS AND OTHER POSTEMPLOYMENT BENEFITS

Retirement Plans--The Company has a qualified defined benefit pension plan
(the "Retirement Plan") which covers substantially all domestic employees of
the Company. The Company has also adopted a plan (the "Supplemental Benefit
Plan") to provide its eligible participants with benefits in excess of those
allowed under the Retirement Plan (together the "Domestic Plans"). Annual
retirement benefits under the Domestic Plan are based on a combination of
years of service and compensation. The Company determines the amount of
funding to the Retirement Plan on a year-to-year basis, with amounts
consistent with minimum and maximum funding requirements established by
various governmental bodies. The Company does not fund the Supplemental
Benefit Plan.

As a result of the Combination, the Company has assumed the assets and
obligations of various retirement plans of Transocean ASA and its subsidiaries
(the "Foreign Plans"). These include several defined benefit plans, primarily
group pension schemes with life insurance companies. These plans apply to a
majority of Transocean ASA's onshore and offshore personnel. Benefits are
based on compensation once eligibility is reached. Certain of the pension
schemes are financed in part by contributions from employees. Company
contributions are determined primarily by the respective life insurance
companies based upon plan terms. In addition to pension obligations covered
through the insurance schemes, Transocean ASA has pension obligations to
several employees and former employees, which are financed directly from
operations. Employer's social security tax is included in the obligation for
unfunded schemes. For insurance-based schemes, annual premium payments are
considered to represent a reasonable approximation of the service costs of
benefits earned during the period, and the amounts owed for the employer's
portion of the social security tax are expensed in the period of payment. The
results of the Foreign Plans are included from September 1, 1996. The pension
obligations and assets of certain plans relating to Procon Offshore ASA (see
Note 2) were divested in May 1997.

50
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The components of net pension expense (income) follow:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Service Cost--Benefits Earned During the Period.... $ 4,063 $ 3,791 $ 1,162
Interest Cost on Projected Benefit Obligation...... 5,350 4,843 3,284
(Gain) Loss on Assets--Actual...................... (19,710) (9,062) (14,811)
Net Amortization and Deferral...................... 10,937 880 8,380
Employee Contributions (205) (316) --
-------- ------- --------
$ 435 $ 136 $ (1,985)
======== ======= ========
</TABLE>

The funded status of the plans follow:

<TABLE>
<CAPTION>
PLAN WITH
PLAN WITH OBLIGATIONS IN
OBLIGATIONS LESS EXCESS OF
THAN ASSETS ASSETS
----------------- ----------------
DECEMBER 31, DECEMBER 31,
----------------- ----------------
1997 1996(C) 1997 1996(C)
-------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Actuarial Present Value of Benefit
Obligations
Vested Benefit Obligations................ $ 67,174 $73,470 $ 2,977 $ 5,213
Non-vested Benefit Obligations............ 1,584 1,286 309 170
-------- ------- ------- -------
Accumulated Benefit Obligations........... 68,758 74,756 3,286 5,383
Effect of Projected Future Salary Increas-
es....................................... 10,575 13,965 2,370 3,511
-------- ------- ------- -------
Projected Benefit Obligations............. 79,333 88,721 5,656 8,894
Plan Assets at Fair Value (a)............. 110,655 108,294 900 3,414
-------- ------- ------- -------
Projected Benefit Obligations Less Than or
(In Excess of) Plan Assets............... 31,322 19,573 (4,756) (5,480)
Unrecognized Net (Assets) or Obligations
at Transition (b)........................ (6,086) (7,194) 23 29
Unrecognized Net (Gain) Loss.............. (13,205) (5,449) 2,537 1,330
Unrecognized Prior Service Cost........... (293) (957) (1,117) (633)
-------- ------- ------- -------
Net Pension Asset (Liability) Recognized
in the Consolidated Balance Sheets....... $ 11,738 $ 5,973 $(3,313) $(4,754)
======== ======= ======= =======
</TABLE>
- --------
(a) Plan assets of Domestic Plans consist of equity securities, commingled
funds and debt securities. Plan assets of Foreign Plans are managed by
insurance companies and are principally invested in fixed income
securities, marketable equity securities and real estate.
(b) Amortization periods for unrecognized net (asset) or obligation are 16.5
years for the Retirement Plan and 15 years for the Supplemental Plan.
(c) Certain reclassifications between plans with obligations less than (in
excess of) assets have been made based on additional actuarial information
obtained on certain plans; however, there was no significant effect on the
net assets (liabilities) disclosed in the 1996 financial statements.

51
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The assumed rates used to measure the projected benefit obligations and the
expected earnings of plan assets follow:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted-Average Discount Rate:
Domestic Plans........................................ 7.0% 7.25% 7.0%
Foreign Plans......................................... 6.0% 7.0% --
Long-Term Rate of Return:
Domestic Plans........................................ 9.0% 9.0% 9.0%
Foreign Plans......................................... 7.0% 8.0% --
Increase in Future Compensation Levels:
Domestic Plans........................................ 5.5% 5.5% 5.5%
Foreign Plans......................................... 3.5% 3.5% --
</TABLE>

The Company sponsors defined contribution pension and savings plans covering
senior non-American field employees working outside the United States.
Contributions and costs are determined as 4.5 percent to 6.5 percent of each
covered employee's salary, based on years of service. The Company also
sponsors a defined contribution savings plan covering domestic employees.
Contributions by the Company are limited to no more than 4.5 percent of each
covered employee's salary, based on the employee's contribution. As a result
of the Combination, the Company also assumed various defined contribution
plans of Transocean ASA and its subsidiaries. Costs of these plans have been
included from September 1, 1996. Costs for the Company's defined contribution
plans were $5.7 million, $3.5 million and $1.7 million in 1997, 1996 and 1995,
respectively.

Postretirement Benefits Other than Pensions--The Company provides non-
contractual limited health care and life insurance benefits to domestic office
employees and certain other domestic field employees when they retire from the
Company.

The components of net benefit cost for postretirement benefits other than
pensions follow:

<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1997 1996 1995
----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Service Cost.......................................... $ 256 $250 $ 178
Interest Cost......................................... 767 764 744
Return on Plan Assets--Actual......................... (83) (82) (82)
Net Amortization and Deferral......................... (128) (17) (218)
----- ---- -----
Net Annual Benefit Cost............................... $ 812 $915 $ 622
===== ==== =====
</TABLE>

52
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

The following table sets forth the funded status for the Company's
postretirement benefit plans.

<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation
Retirees................................................ $ 7,396 $ 7,668
Fully eligible active plan participants................. 760 506
Other active plan participants.......................... 3,353 2,952
------- -------
11,509 11,126
Plan Assets at Fair Value (a)............................. 1,070 1,149
------- -------
Accumulated Postretirement Benefit Obligation in Excess of
Plan Assets.............................................. 10,439 9,977
Unrecognized Prior Service Cost........................... 32 37
Unrecognized Net Gain..................................... 1,805 1,757
------- -------
Net Benefit Liability Recognized in the Consolidated Bal-
ance Sheet............................................... $12,276 $11,771
======= =======
</TABLE>
- --------
(a) Plan assets are held in a life insurance reserve account and consist of
fixed income securities. The Company does not intend to fund its
postretirement benefit plans in the future.

The assumptions used to measure the projected benefit obligation and the
expected earnings of plan assets follow:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount Rate............................................. 7.0% 7.25% 7.0%
Return on Assets (a)...................................... 7.0% 7.0% 7.0%
Salary Increase (b)....................................... 5.5% 5.5% 5.5%
</TABLE>
- --------
(a) After tax for life insurance benefit assets.
(b) For life insurance benefits.

The rate of increase in the per capita costs of covered health care benefits
is assumed to be 10.2 percent in 1998, decreasing gradually to 6.0 percent by
the year 2003. Increasing the assumed health care cost trend rate by one
percentage point would increase the accumulated postretirement benefit
obligation as of January 1, 1998 by $737,000 and increase estimated net
periodic postretirement benefit cost by $62,000.

NOTE 15--INVESTMENTS IN AND ADVANCES TO JOINT VENTURES

The Company holds a 24.89 percent interest in Arcade Drilling as ("Arcade"),
a Norwegian offshore drilling company. Arcade owns two fourth-generation
semisubmersible rigs, the Henry Goodrich and the Paul B. Loyd, Jr. At December
31, 1997, the Company's net investment in Arcade was $44.4 million. The
Company's cumulative equity in earnings of Arcade through December 31, 1997
was $11.9 million.

In December 1990 the Company contributed the Henry Goodrich to Arcade. The
Company received $70.0 million in cash and common stock representing a 21.75
percent interest in Arcade. This sale resulted in a pre-tax gain of $28.8
million of which $18.8 million was recognized as other income in 1990. The
remaining $10.0 million of the gain was deferred and is being amortized to
income over the remaining depreciable life of the Henry Goodrich. The deferred
income has been offset against the Company's investment in Arcade. The net
unamortized balance of the deferred gain was $6.5 million at December 31,
1997.

53
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 16--SEGMENTS, GEOGRAPHICAL ANALYSIS AND MAJOR CUSTOMERS

Comparative data relating to the Company's operating revenues, operating
income and identifiable assets by segment and geographic area follows. In the
table and related discussion below, the "Mobile Units" segment consists of
results of operations for drilling rigs contracted to customers, primarily on
a dayrate basis. The "Drilling Services" segment includes results of all other
drilling services provided by the Company including turnkey operations. The
operating results of Transocean ASA are included from September 1, 1996. Prior
period amounts have been reclassified to conform with the current
presentation.

<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING REVENUES
Mobile Units
U.S. Gulf of Mexico.............................. $214,418 $141,210 $ 95,771
North Sea and Europe............................. 361,045 179,865 88,885
Other Western Hemisphere......................... 19,884 29,193 24,365
Other Eastern Hemisphere......................... 84,233 31,035 29,894
-------- -------- --------
679,580 381,303 238,915
-------- -------- --------
Drilling Services
U.S. Gulf of Mexico.............................. 56,335 37,567 33,295
North Sea and Europe............................. 117,211 61,723 10,914
Other Western Hemisphere......................... 38,397 31,120 36,711
Other Eastern Hemisphere......................... 439 17,420 4,976
-------- -------- --------
212,382 147,830 85,896
-------- -------- --------
Intersegment Eliminations (a) -- (230) (2,153)
-------- -------- --------
Total Operating Revenues........................... $891,962 $528,903 $322,658
======== ======== ========
</TABLE>
- --------
(a) Intersegment eliminations reflect the elimination of operating revenues
earned when one of the Company's business segments provides services to
another of the Company's business segments.

54
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING INCOME (LOSS)
Mobile Units
U.S. Gulf of Mexico..... $ 124,893 $ 74,062 $ 28,709
North Sea and Europe.... 80,982 32,348 20,032
Other Western
Hemisphere............. 5,514 5,981 3,908
Other Eastern
Hemisphere............. 41,606 4,952 8,290
Other................... (10,791) (5,632) (5,542)
---------- ---------- --------
242,204 111,711 55,397
---------- ---------- --------
Drilling Services
U.S. Gulf of Mexico..... (14,206) (355) 5,480
North Sea and Europe.... 11,402 5,895 3,280
Other Western
Hemisphere............. 5,750 5,761 4,247
Other Eastern
Hemisphere............. 267 2,538 161
Other................... (1,220) (1,131) (1,147)
---------- ---------- --------
1,993 12,708 12,021
---------- ---------- --------
Corporate Expenses........ (26,721) (16,805) (15,330)
---------- ---------- --------
Operating Income.......... $ 217,476 $ 107,614 $ 52,088
========== ========== ========
IDENTIFIABLE ASSETS (at
end of period)
Mobile Units
U.S. Gulf of Mexico..... $ 565,242 $ 292,788 $176,684
North Sea and Europe.... 1,770,814 1,640,691 134,776
Other Western
Hemisphere............. 83,568 129,786 22,112
Other Eastern
Hemisphere............. 125,476 119,338 27,192
---------- ---------- --------
2,545,100 2,182,603 360,764
---------- ---------- --------
Drilling Services
U.S. Gulf of Mexico..... 6,609 8,808 4,706
North Sea and Europe.... 57,609 150,603 2,774
Other Western
Hemisphere............. 15,232 2,780 2,321
Other Eastern
Hemisphere............. 208 407 1,854
---------- ---------- --------
79,658 162,598 11,655
---------- ---------- --------
General Corporate......... 84,461 62,405 137,954
---------- ---------- --------
Investment In and Advances
To Joint Ventures........ 45,869 35,608 31,891
---------- ---------- --------
Total Assets.............. $2,755,088 $2,443,214 $542,264
========== ========== ========
</TABLE>

55
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1996 1995
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
CAPITAL EXPENDITURES (A)
Mobile Units....................................... $397,074 $196,129 $17,466
Drilling Services.................................. 6,271 10,814 --
General Corporate.................................. 3,121 6,016 1,439
-------- -------- -------
$406,466 $212,959 $18,905
-------- -------- -------
DEPRECIATION AND AMORTIZATION
Mobile Units....................................... $ 95,150 $ 42,636 $26,325
Drilling Services.................................. 6,589 3,027 380
General Corporate.................................. 1,278 924 290
-------- -------- -------
$103,017 $ 46,587 $26,995
======== ======== =======
</TABLE>
- --------
(a) Excludes the Combination (see Note 2).

Operating income consists of operating revenues less operating expenses,
including depreciation and amortization, and does not include interest income,
other income (including gains on the disposal of rigs--see Note 3), interest
expense, income taxes and equity in earnings of joint ventures.

A substantial portion of the Company's assets are mobile. Asset locations at
the end of the period are not necessarily indicative of the geographic
distribution of the earnings generated by such assets during the periods. The
Arcade joint venture operates in the North Sea and Europe. General Corporate
assets are principally cash and cash equivalents and other nonoperating
assets.

The foreign assets include cash and cash equivalents of $56.4 million, $21.4
million and $5.7 million at December 31, 1997, 1996 and 1995, respectively.

Revenues from the following major unaffiliated customers of the Company
exceeded 10% or more of operating revenues:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1997 1996 1995
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Statoil (a)............................................ $167,162 $67,968 $ --
Royal Dutch Shell Group (a)............................ 153,824 146,769 74,072
Amoco (a).............................................. 90,933 (c) (c)
Petroleos Mexicanos (Pemex) (b)........................ (c) (c) 36,712
Norsk Hydro (a)........................................ (c) (c) 35,260
</TABLE>
- --------
(a) Revenues earned by both business segments.
(b) Revenues earned by Drilling Services.
(c) Amounts were below 10% for the years indicated.

The loss of significant customers could have a materially adverse effect on
the Company's results of operations.

56
<PAGE>

TRANSOCEAN OFFSHORE INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE 17--QUARTERLY RESULTS (UNAUDITED)

Shown below are selected unaudited quarterly data.

<TABLE>
<CAPTION>
QUARTER
-----------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
1997
Operating Revenues........................ $219,616 $208,093 $223,201 $241,052
Operating Income (a)...................... 44,583 42,106 60,939 69,848
Net Income (a)............................ 27,709 27,916 39,119 47,189
Net Income Per Share (a)(d)
Basic................................... $ 0.27 $ 0.28 $ 0.39 $ 0.47
Diluted................................. 0.27 0.27 0.38 0.46
Weighted-average number of shares (d)
Basic................................... 102,188 101,167 101,280 100,323
Diluted................................. 103,610 102,640 102,807 101,888
1996(B)
Operating Revenues........................ $ 81,220 $108,881 $136,926 $201,876
Operating Income (c)...................... 13,951 30,234 32,601 30,828
Net Income (c)............................ 11,825 25,477 21,543 19,200
Net Income Per Share (c)(d)
Basic................................... $ 0.21 $ 0.45 $ 0.31 $ 0.19
Diluted................................. 0.20 0.44 0.30 0.18
Weighted-average number of shares (d)
Basic..................................... 56,688 56,731 70,203 102,763
Diluted................................... 57,969 58,156 71,653 104,271
</TABLE>
- --------
(a) Fourth quarter 1997 included losses from turnkey drilling services of
$10.8 million ($7.0 million after taxes). The effect of these losses on
earnings per share was $0.07, basic and diluted.
(b) Includes the operating results of Transocean ASA since September 1, 1996,
the effective date of the Combination for accounting purposes.
(c) Fourth quarter 1996 included losses from turnkey drilling services of $5.0
million ($3.3 million after taxes). The effect of these losses on earnings
per share, basic and diluted, was $0.03.
(d) 1997 and 1996 earnings per share amounts and weighted-average number of
shares have been restated to comply with SFAS No. 128, Earnings Per Share,
and to reflect the increased number of shares issued and outstanding as a
result of the stock split.

NOTE 18--SUBSEQUENT EVENT

In March 1998, the Company reached an agreement with Global Marine that
terminated the cash flow sharing agreement, effective February 1, 1998, with
certain continuing rights if any of the rigs are sold within three years, and
settled all disputed matters (see Note 11). Under the terms of this agreement,
the Company will receive $18 million in cash resulting in an after tax gain of
approximately $12 million, or $0.11 per share, diluted.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

The Company has not had a change in or disagreement with its accountants
within twenty-four months prior to the date of its most recent financial
statements or in any period subsequent to such date.

57
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information required by Items 10, 11, 12 and 13 is incorporated herein
by reference to the Company's definitive proxy statement for its annual
meeting of stockholders to be held May 14, 1998, which will be filed with the
Securities and Exchange Commission pursuant to Regulation 14A under the
Securities Exchange Act of 1934 within 120 days of December 31, 1997. Certain
information with respect to the executive officers of the Company is set forth
in Item 4 of this annual report under the caption "Executive Officers of the
Registrant."

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Index to Financial Statements, Financial Statement Schedules and
Exhibits

(1) Financial Statements

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Included in Part II of this report:
Report of Independent Auditors..................................... 28
Consolidated Statements of Operations.............................. 29
Consolidated Balance Sheets........................................ 30
Consolidated Statements of Shareholders Equity..................... 31
Consolidated Statements of Cash Flows.............................. 32
Notes to Consolidated Financial Statements......................... 33
</TABLE>

Financial statements of 50 percent or less owned joint ventures are not
presented herein because such joint ventures do not meet the significance
test.

(2) Financial Statement Schedules

Schedules are omitted either because they are not required or are not
applicable, or because the required information is included in the financial
statements or notes thereto.

(3) Exhibits

The following exhibits are filed in connection with this Report:

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company, including
amendments dated September 3, 1996 (filed as Exhibit 4(a) to the
Company's Registration Statement on Form S-8 Registration No. 333-
12475 dated September 20, 1996)
3.2 Amendment dated September 3, 1996 to Restated Certificate of
Incorporation of the Company to change the Company's name (filed as
Exhibit 4(b) to the Company's Registration Statement on Form S-8
Registration No. 333-12475 dated September 20, 1996)
3.3 Amendment dated September 3, 1996 to Restated Certificate of
Incorporation of the Company to increase authorized shares of common
stock (filed as Exhibit 4(c) to the Company's Registration Statement
on Form S-8 Registration No. 333-12475 dated September 20, 1996)
</TABLE>

58
<PAGE>

<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
3.4 By-Laws of the Company (filed as Exhibit 3-(2) to the Company's Form
10-K for the year ending December 31, 1993)
4.1 Secured Credit Agreement dated as of January 17, 1997 among
Transocean Enterprise Inc., the Lenders party thereto, ABN Amro Bank,
as Agent, and the Co-Agents listed therein (filed as Exhibit 4-(1) to
the Companys Form 10-K for the year ending December 31, 1996)
4.2 Secured Credit Agreement dated as of July 30, 1996 among Sonat
Offshore Drilling Inc., the Lenders party thereto, ABN Amro Bank, as
Agent, and the Co-Agents listed therein (the "Credit Agreement")
(filed as Exhibit 10-(1) to the Company's Form 10-Q for the quarter
ending June 30, 1996)
4.3 First Amendment to the Credit Agreement dated as of April 24, 1997
(filed as Exhibit 4.1 to the Companys Form 10-Q for the quarter
ending March 31, 1997)
+4.4 Second Amendment to the Credit Agreement dated as of December 19,
1997
4.5 Indenture dated as of April 15, 1997 between the Company and Texas
Commerce Bank National Association, as trustee (filed as Exhibit 4.1
to the Companys Form 8-K dated April 29, 1997)
4.6 First Supplemental Indenture dated as of April 15, 1997 between the
Company and Texas Commerce Bank National Association, as trustee,
supplementing the Indenture dated as of April 15, 1997 (filed as
Exhibit 4.2 to the Companys Form 8-K dated April 29, 1997)
4.7 Form of Note (filed as Exhibit 4.3 to the Companys Form 8-K dated
April 29, 1997).
4.8 Form of Debenture (filed as Exhibit 4.4 to the Companys Form 8-K
dated April 19, 1997).
10.1 Tax Sharing Agreement between Sonat Inc. and Sonat Offshore Drilling
Inc. dated June 3, 1993 (filed as Exhibit 10-(3) to the Company's
Form 10-Q for the quarter ending June 30, 1993)
*10.2 Performance Award and Cash Bonus Plan of Sonat Offshore Drilling Inc.
(filed as Exhibit 10-(5) to the Company's Form 10-Q for quarter
ending June 30, 1993)
*10.3 Form of Sonat Offshore Drilling Inc. Executive Life Insurance program
Split Dollar Agreement and Collateral Assignment Agreement with
schedule identifying the persons participating in Program (filed as
Exhibit 10-(9) to the Company's Form 10-K for the year ending
December 31, 1993)
10.4 Purchase Agreement dated as of April 1, 1987 among Sonat Offshore
Drilling Inc., Sonat Offshore Ventures Inc., Dixilyn-Field Drilling
Company and Panhandle Eastern Corporation (filed as Exhibit 10-(9) to
the Company's Form S-1 Registration No. 33-60992 dated April 13,
1993)
10.5 Agreement dated as of June 14, 1995, among Sonat Offshore Ventures
Inc., Sonat Offshore Drilling Inc., Dixilyn-Field Drilling Company
and Panhandle Eastern Corporation (filed as Exhibit 10-(8) to the
Company's Form 10-K for the year ending December 31, 1995)
10.6 Letter Agreement dated August 31, 1991 among Sonat Offshore Drilling
Inc., Arcade Shipping as and Reading and Bates Corporation (filed as
Exhibit 10-(12) to the Company's Form S-1 Registration No. 33-60992
dated April 13, 1993)
*10.7 Employment Agreements between J. Michael Talbert, W. Dennis Heagney,
Robert L. Long, Jon C. Cole, Donald R. Ray, Eric B. Brown and Barbara
S. Koucouthakis, individually, and Transocean Offshore Inc. dated
December 6, 1995 (filed as Exhibit 10-(18) to the Company's Form 10-K
for the year ending December 31, 1995)
*10.8 Long-Term Incentive Plan of Transocean Offshore Inc., as amended and
restated effective March 13, 1997 (filed as Exhibit 10.1 to the
Companys Form 10-Q for the quarter ending March 31, 1997)
*10.9 Employment Agreement dated as of August 14, 1997 between Dennis R.
Long and Transocean Offshore Inc. (filed as Exhibit 10.1 to the
Companys Form 10-Q for the quarter ending September 30, 1997)
+21 Subsidiaries of the Company
+23 Consent of Ernst & Young LLP
+24 Powers of Attorney
</TABLE>

59
<PAGE>

- --------
* Compensatory plan or arrangement.
+ Filed herewith.

Exhibits listed above as previously having been filed with the Securities
and Exchange Commission are incorporated herein by reference pursuant to Rule
12b-32 under the Securities Exchange Act of 1934 and made a part hereof with
the same effect as if filed herewith.

Certain instruments relating to long-term debt of the Company and its
subsidiaries have not been filed as exhibits since the total amount of
securities authorized under any such instrument does not exceed 10 percent of
the total assets of the Company and its subsidiaries on a consolidated basis.
The Company agrees to furnish a copy of each such instrument to the Commission
upon request.

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the quarter ending December
31, 1997.

60
<PAGE>

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON MARCH 20,
1998.

TRANSOCEAN OFFSHORE INC.

By: /s/ Robert L. Long
----------------------------------

ROBERT L. LONG
SENIOR VICE PRESIDENT

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES INDICATED ON MARCH 20, 1998.

<TABLE>
<S> <C>
SIGNATURE TITLE

/s/ Michael Talbert Chairman of the Board and Chief
- ----------------------------------- Executive Officer (Principal
MICHAEL TALBERT Executive Officer)

/s/ Robert L. Long Senior Vice President, Chief
- ----------------------------------- Financial Officer and Treasurer
ROBERT L. LONG (Principal Financial Officer)

/s/ Barbara S. Koucouthakis Vice President and Controller
- ----------------------------------- (Principal Accounting Officer)
BARBARA S. KOUCOUTHAKIS

* Director
- -----------------------------------
RICHARD D. KINDER

* Director
- -----------------------------------
RONALD L. KUEHN, JR.

* Director
- -----------------------------------
ROBERT J. LANIGAN

* Director
- -----------------------------------
MAX L. LUKENS

* Director
- -----------------------------------
MARTIN B. MCNAMARA

* Director
- -----------------------------------
KRISTIAN SIEM

* Director
- -----------------------------------
FRIDTJOF LORENTZEN

* Director, President and Chief
- ----------------------------------- Operating Officer
W. DENNIS HEAGNEY
</TABLE>

/s/ Eric B. Brown
*By: ______________________________

ERIC B. BROWN
(ATTORNEY-IN-FACT)

<PAGE>
EXHIBIT 4.4

SECOND AMENDMENT TO CREDIT AGREEMENT

THIS SECOND AMENDMENT TO CREDIT AGREEMENT (this "AMENDMENT") dated as of
December 19, 1997, is by and among Transocean Offshore Inc., a Delaware
corporation (the "BORROWER"), the lenders from time to time parties hereto (each
a "LENDER" and collectively, the "LENDERS"), ABN AMRO Bank N.V. ("ABN AMRO"), a
Netherlands chartered bank acting through its Houston agency, as agent for the
Lenders (in such capacity, the "AGENT"), SunTrust Bank, Atlanta, and Credit
Lyonnais New York Branch, as documentation agents for the Lenders (in such
capacity, each a "DOCUMENTATION AGENT" and together, the "DOCUMENTATION
AGENTS"), and Bank of Montreal, The Fuji Bank, Limited, Houston Agency, Royal
Bank of Canada, Wells Fargo Bank (Texas), National Association, and Bank of
Tokyo- Mitsubishi, Ltd., Houston Agency, as co-agents for the Lenders (in such
capacity, each a "CO-AGENT" and collectively, the "CO-AGENTS").

WITNESSETH
----------

WHEREAS, the Borrower, the Lenders, the Agent, the Documentation Agents and
the Co-Agents have entered into that certain Credit Agreement dated as of July
30, 1996, as amended by that certain First Amendment to Credit Agreement dated
as of April 18, 1997 (the "CREDIT AGREEMENT"), pursuant to which the Lenders
have made and agreed to make Loans to the Borrower and issued and agreed to
issue Letters of Credit for the account of the Borrower; and

WHEREAS, the Borrower, the Lenders, the Agent, the Documentation Agents and
the Co-Agents desire to further amend the Credit Agreement as hereinafter set
forth;

NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the Borrower, the Lenders, the Agent, the Documentation Agents
and the Co-Agents hereby agree as follows:

1. AMENDMENTS TO CREDIT AGREEMENT.

(a) Section 6.12(b) of the Credit Agreement is hereby amended by
deleting the first sentence thereof and inserting in its place the following
sentence: "The Borrower may redeem, purchase or otherwise acquire shares of its
capital stock at any time so long as no Default or Event of Default shall have
occurred and be continuing or would occur as a result of such redemption,
purchase or acquisition."

(b) Section 6.25 (Consolidated Net Worth) of the Credit Agreement is
hereby deleted in its entirety.

2. REAFFIRMATION OF REPRESENTATIONS AND WARRANTIES. To induce the
Lenders, the Agent, the Collateral Agent, the Documentation Agents and the Co-
Agents to enter into this Amendment, the Borrower hereby reaffirms, as of the
date hereof, that its representations and warranties contained in the Credit
Agreement are true and correct in all material respects (except to the extent
such representations and warranties (x) are not so true and correct in all
material respects
<PAGE>

as a result of the transactions expressly permitted hereunder or under the other
Credit Documents or (y) relate solely to an earlier date) and additionally
represents and warrants as follows:

(i) The execution and delivery by the Borrower of this
Amendment and the performance by the Borrower of its obligations under this
Amendment and the Credit Agreement, as amended hereby, are within the
Borrower's corporate powers, have been duly authorized by all necessary
corporate action of the Borrower and do not and will not contravene in any
material respect any provision of applicable law or contravene or conflict
with any provision of the certificate of incorporation, bylaws or any
material agreements binding upon the Borrower, and the execution and
delivery by the Borrower of this Amendment have received all necessary
governmental approvals or other consents (if any shall be required);

(ii) This Amendment and the Credit Agreement, as amended hereby,
are legal, valid and binding obligations of the Borrower enforceable
against the Borrower in accordance with their terms, subject as to
enforcement only to bankruptcy, insolvency, reorganization, moratorium or
other similar laws affecting the enforcement of creditors' rights generally
and equitable principles;

(iii) There are no actions, suits, proceedings or counterclaims
(including, without limitation, derivative or injunctive actions) pending
or, to the knowledge of the Borrower, threatened against the Borrower or
any of its Subsidiaries which purports to affect the legality, validity or
enforceability of this Amendment, the Credit Agreement, as amended hereby,
the replacement Revolving Notes or any other Credit Document;

(iv) No Default or Event of Default has occurred and is
continuing; and

(v) There have been no amendments to the certificate of
incorporation or bylaws of the Borrower since April 18, 1997.

3. REAFFIRMATION OF CREDIT AGREEMENT. This Amendment shall be deemed to
be an amendment to the Credit Agreement, and the Credit Agreement, as amended
hereby, is hereby ratified, approved and confirmed in each and every respect.
All references to the Credit Agreement in the Credit Agreement and the other
Credit Documents (excluding this Amendment) shall hereafter be deemed to refer
to the Credit Agreement, as amended hereby.

4. DEFINED TERMS. Terms used but not defined herein when defined in the
Credit Agreement shall have the same meanings herein unless the context
otherwise requires.

5. CONDITION PRECEDENT TO EFFECTIVENESS OF AMENDMENT. The effectiveness
of this Amendment is subject to the Agent's receipt of a consent to this
Amendment from each of the Guarantors in form and substance satisfactory to the
Agent.

-2-
<PAGE>

6. GOVERNING LAW; SUBMISSION TO JURISDICTION; WAIVER OF JURY TRIAL.

(A) THIS AMENDMENT AND THE OTHER CREDIT DOCUMENTS, AND THE RIGHTS AND
DUTIES OF THE PARTIES HERETO AND THERETO, SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK.

(B) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE PARTIES
HERETO AGREE THAT ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN
CONNECTION WITH, THIS AMENDMENT OR ANY OTHER CREDIT DOCUMENT, OR ANY COURSE OF
CONDUCT, COURSE OF DEALING, STATEMENT (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF
THE AGENT, THE DOCUMENTATION AGENTS, THE CO-AGENTS, THE COLLATERAL AGENT, THE
LENDERS OR THE BORROWER MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF THE STATE
OF NEW YORK SITTING IN THE BOROUGH OF MANHATTAN OR THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH
LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT
RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. TO THE FULLEST EXTENT
PERMITTED BY APPLICABLE LAW, THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE
SERVICE OF PROCESS, BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE
WITHIN OR WITHOUT THE STATE OF NEW YORK. TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, ANY
OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY
SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT
ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT
THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF
ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OF NOTICE,
ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH
RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, SUCH IMMUNITY IN RESPECT OF ITS
OBLIGATIONS UNDER THIS AMENDMENT AND THE OTHER CREDIT DOCUMENTS.

(C) TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY
HERETO WAIVES ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING TO
ENFORCE OR DEFEND ANY RIGHTS UNDER THIS AMENDMENT, THE CREDIT AGREEMENT OR UNDER
ANY AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH OR ARISING FROM ANY
BANKING RELATIONSHIP EXISTING IN CONNECTION WITH THIS AMENDMENT OR THE CREDIT
AGREEMENT, AND AGREES THAT ANY SUCH

-3-
<PAGE>

ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.

7. COUNTERPARTS. This Amendment may be executed in any number of
counterparts, and by the different parties on different counterpart signature
pages, each of which when executed shall be deemed an original, but all such
counterparts taken together shall constitute one and the same agreement.

8. SEVERABILITY. Any provision of this Amendment that is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

9. HEADINGS. Section headings used in this Amendment are for reference
only and shall not affect the construction of this Amendment.

10. NOTICE OF ENTIRE AGREEMENT. This Amendment, together with the other
Credit Documents, constitute the entire understanding among the Borrower, the
Lenders, the Agent, the Documentation Agents and the Co-Agents and supersede all
earlier or contemporaneous agreements, whether written or oral, concerning the
subject matter of the Credit Documents. THIS WRITTEN AMENDMENT, TOGETHER WITH
THE OTHER CREDIT DOCUMENTS, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.

IN WITNESS WHEREOF, the parties hereto have entered into this Second
Amendment to Credit Agreement as of the date first written above.

BORROWER:

TRANSOCEAN OFFSHORE INC.,
a Delaware corporation

By: /s/ R.L. LONG
-------------------------------
Name: Robert L. Long
-----------------------------
Title: Senior Vice President & CFO
----------------------------

-4-
<PAGE>

LENDERS:

ABN AMRO BANK N.V., Houston Agency, as Agent
and Collateral Agent and as a Lender

By: /s/ Cheryl I. Lipshutz
------------------------------------
Cheryl I. Lipshutz
Group Vice President and Director

By: /s/ Charles W. Randall
------------------------------------
Charles W. Randall
Senior Vice President and Managing Director

SUNTRUST BANK, ATLANTA, as Documentation
Agent and as a Lender

By: /s/ STEVEN J. NEWBY
--------------------------------
Name: Steven J. Newby
------------------------------
Title: Corporate Banking Officer
-----------------------------

By: /s/ JOHN A. FIELDS, JR.
--------------------------------
Name: John A. Fields, Jr.
------------------------------
Title: Vice President
-----------------------------

CREDIT LYONNAIS NEW YORK BRANCH, as
Documentation Agent and as a Lender

By: /s/ XAVIER RATOUIS
--------------------------------
Name: Xavier Ratouis
------------------------------
Title: Senior Vice President
-----------------------------

-5-
<PAGE>

BANK OF MONTREAL, as Co-Agent and as a
Lender

By: /s/ DONALD G. SKIPPER
--------------------------------
Name: Donald G. Skipper
------------------------------
Title: Director
-----------------------------

THE FUJI BANK, LIMITED, HOUSTON AGENCY,
as Co-Agent and as a Lender

By: /s/ NATE ELLIS
--------------------------------
Name: Nate Ellis
------------------------------
Title: Vice President & Manager
-----------------------------

ROYAL BANK OF CANADA, as Co-Agent and as
a Lender

By: /s/ J.D. FROST
--------------------------------
Name: J.D. Frost
------------------------------
Title: Senior Manager
-----------------------------

WELLS FARGO BANK (TEXAS), NATIONAL
ASSOCIATION, as Co-Agent and as a Lender

By: /s/ FRANK W. SCHAGEMAN
--------------------------------
Name: Frank W. Schageman
------------------------------
Title: Vice President
-----------------------------

BANK OF TOKYO - MITSUBISHI, LTD.,
HOUSTON AGENCY

By: /s/ MICHAEL WEISS
--------------------------------
Name: Michael Weiss
------------------------------
Title: Vice President
-----------------------------

-6-
<PAGE>

SKANDINAVISKA ENSKILDA BANKEN AB
(publ.)

By: /s/ HILDE KJELSBERG /s/ BJARTE BOE
--------------------------------------
Name: Hilde Kjelsberg Bjarte Boe
------------------------------------
Title: Head of Credits Head of Unit
-----------------------------------

WESTDEUTSCHE LANDESBANK
GIROZENTRALE

By: /s/ SALVATORE BATTINELLI /s/ THOMAS LEE
----------------------------------------
Name: Salvatore Battinelli Thomas Lee
--------------------------------------
Title: Vice President Associate
Credit Department
--------------------------------------

By: /s/ R.R. NEWMAN
--------------------------------
Name: R.R. Newman
------------------------------
Title: Vice President
-----------------------------

AUSTRALIA AND NEW ZEALAND BANKING
GROUP LIMITED

By: /s/ KYLE LOUGHLIN
--------------------------------
Name: Kyle Loughlin
------------------------------
Title: Vice President
-----------------------------

THE BANK OF NEW YORK

By: /s/ CATHERINE G. GOFF
--------------------------------
Name: Catherine G. Goff
------------------------------
Title: Vice President
-----------------------------

-7-
<PAGE>

THE BANK OF NOVA SCOTIA,
ATLANTA AGENCY

By: /s/ F.C.H. ASHBY
----------------------------------
Name: F.C.H. Ashby
--------------------------------
Title: Senior Manager Loan Operations
-------------------------------

DG BANK DEUTSCHE
GENOSSENSCHAFTSBANK, CAYMAN ISLAND
BRANCH

By: /s/ MARK CONNELLY
--------------------------------
Name: Mark Connelly
------------------------------
Title: Vice President
-----------------------------

By: /s/ LYNNE McCARTHY
--------------------------------
Name: Lynne McCarthy
------------------------------
Title: Asst. Vice President
-----------------------------

FIRST NATIONAL BANK OF COMMERCE

By: /s/ J. CHARLES FREEL, JR.
--------------------------------
Name: J. Charles Freel, Jr.
------------------------------
Title: Senior Vice President
-----------------------------

SOCIETE GENERALE, SOUTHWEST AGENCY

By: /s/ PAUL E. CORNELL
--------------------------------
Name: Paul E. Cornell
------------------------------
Title: First Vice President
-----------------------------

THE SANWA BANK, LIMITED

By: /s/ MATTHEW G. PATRICK
--------------------------------
Name: Matthew G. Patrick
------------------------------
Title: Vice President
-----------------------------

-8-
<PAGE>

THE SUMITOMO BANK, LIMITED

By: /s/ REIJI SATO
--------------------------------
Name: Reiji Sato
------------------------------
Title: Joint General Manager
-----------------------------

-9-
<PAGE>

CONSENT AND ACKNOWLEDGMENT

Each of the undersigned Guarantors, by its signature hereto, acknowledges
and agrees to the terms and conditions of that certain Second Amendment to
Credit Agreement (the "AMENDMENT") dated as of December 19, 1997, by and among
Transocean Offshore Inc., a Delaware corporation (the "BORROWER"), the lenders
from time to time parties thereto (collectively, the "LENDERS"), ABN AMRO Bank
N.V., a Netherlands chartered bank acting through its Houston agency, as agent
for the Lenders, SunTrust Bank, Atlanta, and Credit Lyonnais New York Branch, as
documentation agents for the Lenders, and Bank of Montreal, The Fuji Bank,
Limited, Houston Agency, Royal Bank of Canada, Wells Fargo Bank (Texas),
National Association, and Bank of Tokyo-Mitsubishi, Ltd., Houston Agency, as co-
agents for the Lenders. Each of the undersigned acknowledges and reaffirms its
obligations under its Subsidiary Guaranty dated September 6, 1996 (collectively,
the "GUARANTIES") and agrees that the Guaranties shall remain in full force and
effect. Although the undersigned Guarantors have been informed by the Borrower
of the matters set forth in the Amendment, and the undersigned have acknowledged
and agreed to same, the undersigned understand the Lenders have no duty to
notify any of the Guarantors of, or to seek any of the Guarantor's
acknowledgment or agreement to, the Amendment, and nothing contained herein
shall create such a duty as to any transactions hereafter.

Dated as of December 19, 1997.

TRANSOCEAN OFFSHORE NORWAY INC.
TRANSOCEAN OFFSHORE VENTURES INC.
TRANSOCEAN DRILLING SERVICES INC.
TRANSOCEAN OFFSHORE (U.K.) INC.

By: /s/ Eric B. Brown
----------------------------------
Name: Eric B. Brown
Title: Vice President and Secretary

-10-

<PAGE>

EXHIBIT 21

SUBSIDIARIES OF TRANSOCEAN OFFSHORE INC.

<TABLE>
<CAPTION>
JURISDICTION OF
NAME FORMATION
- ---- ----------------
<S> <C>
Offshore Petroleum Services LDC............................... Cayman Islands
Sonat Offshore Far East LDC................................... Cayman Islands
Sonat Offshore International LDC.............................. Cayman Islands
Transocean Offshore Limited................................... Cayman Islands
Transocean Offshore International Limited..................... Cayman Islands
Transocean Offshore (North Sea) Limited....................... Cayman Islands
Transocean Offshore Services Ltd.............................. Cayman Islands
Transocean Drilling Services Inc. (formerly Transocean
Offshore Turnkey Drilling Inc.).............................. Delaware
EPN-Sonat, S.A. de C.V........................................ Mexico
Offshore Turnkey Ventures..................................... Texas
Offshore Turnkey Ventures L.L.C............................... Delaware
Transocean Enterprise Inc..................................... Delaware
Transocean Offshore Drilling International Inc................ Delaware
Transocean Offshore Drilling Services Inc..................... Delaware
Transocean Offshore Norway Inc................................ Delaware
Transocean Offshore USA Inc................................... Delaware
Transocean Offshore Ventures Inc.............................. Delaware
Transocean Offshore (U.K.) Inc................................ Delaware
Transocean Offshore Caribbean Sea, L.L.C...................... Delaware
Sonat Offshore S.A............................................ Panama
Asie Sonat Offshore Sdn. Bhd.................................. Malaysia
Sonat Brasocean Servicos de Perfuracoes Ltda.................. Brazil
Sonat Offshore do Brasil Perfuracoes Maritimos Ltda........... Brazil
Transocean Brasil Ltda. (formerly Sonat Servicos Maritimos
Ltda.)....................................................... Brazil
Transocean Offshore Nigeria Ltd............................... Nigeria
Transhav AS................................................... Norway
Transocean ASA................................................ Norway
Transocean Petroleum Technology AS............................ Norway
Transocean Petroleum Technology Ltd........................... U.K.
Transocean-Ensign Technology Ltd.............................. Canada
Transocean I AS............................................... Norway
Transocean Drilling (U.S.A.) Inc. (formerly Wilrig (U.S.A.)
Inc.)........................................................ Texas
Transocean Drilling Co. Inc................................... Panama
Transocean Drilling ApS....................................... Denmark
Transocean Drilling Netherlands Ltd........................... Bahamas
Transocean Drilling (Nigeria) Ltd............................. Nigeria
Transnor Rig Ltd.............................................. U.K.
SDS Offshore Ltd.............................................. U.K.
Ross Offshore Ltd............................................. U.K.
Transocean Drilling Ltd....................................... U.K.
Shelf Drilling Ltd............................................ U.K.
Transocean Kan Tan Ltd........................................ U.K.
Transocean Sino Ltd........................................... U.K.
Wilrig Offshore (UK) Ltd...................................... U.K.
Wilrig Holdings (UK) Ltd...................................... U.K.
Wilrig (UK) Ltd............................................... U.K.
Wilrig Drilling (Canada) Inc.................................. Canada
SDS Offshore AS............................................... Norway
Wilrig Offshore Bahamas Inc................................... Bahamas
Transocean Drilling GmbH...................................... Germany
Pelerin Drilling AS........................................... Norway
Dynamic Drilling Partnership.................................. Marshall Islands
</TABLE>

<PAGE>

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

We consent to the incorporation by reference in the Registration Statement
(Form S-3 No. 333-24457) of Transocean Offshore Inc. and in the related
Prospectus and to the incorporation by reference in the Registration
Statements (Form S-8 No. 33-64776 and Form S-8 No. 333-12475) pertaining to
the Long Term Incentive Plan of Transocean Offshore Inc. (formerly Sonat
Offshore Drilling Inc.) and the Registration Statement (Form S-8 No. 33-66036)
pertaining to the Savings Plan of Transocean Offshore Inc. (formerly Sonat
Offshore Drilling Inc.) of our report dated February 6, 1998 (except Note 18,
as to which the date is March 18, 1998), with respect to the consolidated
financial statements of Transocean Offshore Inc. included in the Form 10-K for
the year ended December 31, 1997.

Ernst & Young LLP

Houston, Texas
March 18, 1998

<PAGE>

1997 Form 10-K

TRANSOCEAN OFFSHORE INC.

Power of Attorney
-----------------

WHEREAS, TRANSOCEAN OFFSHORE INC., a Delaware corporation (the "Company"),
intends to file with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Exchange Act of 1934, as amended, and the rules and
regulations of the Commission promulgated thereunder, an annual report on Form
10-K for the fiscal year ended December 31, 1997, together with any and all
exhibits and other instruments and documents necessary, advisable or appropriate
in connection therewith (the "Form 10-K");

NOW, THEREFORE, the undersigned, in his capacity as a director or officer
or both, as the case may be, of the Company, does hereby appoint J. Michael
Talbert, Robert L. Long, Eric B. Brown and Barbara S. Koucouthakis, and each of
them severally, his true and lawful attorney or attorneys with power to act with
or without the other, and with full power of substitution and resubstitution, to
execute in his name, place and stead, in his capacity as director, officer or
both, as the case may be, of the Company, the Form 10-K and any and all
amendments thereto, including any and all exhibits and other instruments and
documents said attorney or attorneys shall deem necessary, appropriate or
advisable in connection therewith, and to file the same with the Commission and
to appear before the Commission in connection with any matter relating thereto.
Each of said attorneys shall have full power and authority to do and perform in
the name and on behalf of the undersigned, in any and all capacities, every act
whatsoever necessary or desirable to be done in the premises, as fully and to
all intents and purposes as the undersigned might or could do in person, the
undersigned hereby ratifying and approving the acts that said attorneys and each
of them, or their or his substitutes or substitute, may lawfully do or cause to
be done by virtue hereof.

IN WITNESS WHEREOF, the undersigned has executed this power of attorney as
of the 12th day of March, 1998.

/s/ W. Dennis Heagney
--------------------------------
W. Dennis Heagney
<PAGE>

1997 Form 10-K

TRANSOCEAN OFFSHORE INC.

Power of Attorney
-----------------

IN WITNESS WHEREOF, the undersigned has executed this power of attorney as
of the 12th day of March, 1998.

/s/ Richard D. Kinder
-------------------------
Richard D. Kinder
<PAGE>

1997 Form 10-K

TRANSOCEAN OFFSHORE INC.

Power of Attorney
-----------------

IN WITNESS WHEREOF, the undersigned has executed this power of attorney as
of the 12th day of March, 1998.

/s/ Ronald L. Kuehn Jr.
---------------------------
Ronald L. Kuehn Jr.
<PAGE>

1997 Form 10-K

TRANSOCEAN OFFSHORE INC.

Power of Attorney
-----------------

IN WITNESS WHEREOF, the undersigned has executed this power of attorney as
of the 12th day of March, 1998.

/s/ Robert J. Lanigan
--------------------------
Robert J. Lanigan
<PAGE>

1997 Form 10-K

TRANSOCEAN OFFSHORE INC.

Power of Attorney
-----------------

IN WITNESS WHEREOF, the undersigned has executed this power of attorney as
of the 12th day of March, 1998.

/s/ Fridtjof Lorentzen
--------------------------
Fridtjof Lorentzen
<PAGE>

1997 Form 10-K

TRANSOCEAN OFFSHORE INC.

Power of Attorney
-----------------

IN WITNESS WHEREOF, the undersigned has executed this power of attorney as
of the 12th day of March, 1998.

/s/ Max L. Lukens
---------------------------
Max L. Lukens
<PAGE>

1997 Form 10-K

TRANSOCEAN OFFSHORE INC.

Power of Attorney
-----------------

IN WITNESS WHEREOF, the undersigned has executed this power of attorney as
of the 12th day of March, 1998.

/s/ Martin B. McNamara
-------------------------------
Martin B. McNamara
<PAGE>

1997 Form 10-K

TRANSOCEAN OFFSHORE INC.

Power of Attorney
-----------------

IN WITNESS WHEREOF, the undersigned has executed this power of attorney as
of the 12th day of March, 1998.

/s/ Kristian Siem
---------------------------
Kristian Siem

<PAGE>
<ARTICLE> 5

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 54,225
<SECURITIES> 0
<RECEIVABLES> 199,716
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 307,090
<PP&E> 2,113,462
<DEPRECIATION> 445,488
<TOTAL-ASSETS> 2,755,088
<CURRENT-LIABILITIES> 185,192
<BONDS> 728,282
0
0
<COMMON> 1,037
<OTHER-SE> 1,620,141
<TOTAL-LIABILITY-AND-EQUITY> 2,755,088
<SALES> 0
<TOTAL-REVENUES> 891,962
<CGS> 0
<TOTAL-COSTS> 674,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,853
<INCOME-PRETAX> 207,245
<INCOME-TAX> 65,312
<INCOME-CONTINUING> 141,933
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 141,933
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.38

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLILER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24,154
<SECURITIES> 0
<RECEIVABLES> 168,573
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 252,246
<PP&E> 1,751,863
<DEPRECIATION> 381,515
<TOTAL-ASSETS> 2,443,214
<CURRENT-LIABILITIES> 231,478
<BONDS> 392,322
0
0
<COMMON> 515
<OTHER-SE> 1,627,194
<TOTAL-LIABILITY-AND-EQUITY> 2,443,214
<SALES> 0
<TOTAL-REVENUES> 528,903
<CGS> 0
<TOTAL-COSTS> 421,289
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,220
<INCOME-PRETAX> 121,652
<INCOME-TAX> 43,607
<INCOME-CONTINUING> 78,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,045
<EPS-PRIMARY> 1.09<F1>
<EPS-DILUTED> 1.07<F1>
<FN>
<F1>Reflects adoption of SFAS No. 128, Earnings Per Share, and a two-for-one stock
split paid in September 1997.
</FN>

</TABLE>